By Robert C. (Bob) Leventhal, Partner, Foley & Lardner LLP
The vast majority of reinsurance disputes are decided by alternative dispute resolution methods. Binding arbitration is the most widely used method. Recently there has been increased interest in mediation. There is, however, a third alternative that has not traditionally been widely used in the reinsurance context but which may have advantages over both arbitration and mediation for the right cases. This third alternative is commonly referred to as binding mediation.
Binding mediation is a procedure under which a mediator is appointed and is responsible for attempting to get the parties to voluntarily settle their dispute. However, unlike in typical mediation, in the event that the parties are unable to settle their dispute, in a binding mediation, the mediator has the power to impose a resolution on the parties. The mediators' binding resolution is intended to be treated like an arbitration panel's decision and be binding on the parties and not subject to challenge in court (except on the limited grounds that an arbitration panel's decisions are subject to attack in court).
Binding mediation has a number of advantages over traditional mediation. First and foremost, since the mediator has the power to impose a resolution on the parties, the mediator has more leverage than a traditional mediator. A party must take the mediators' opinions on the issues very seriously. A party cannot simply disregard what the mediator is telling it and simply hope that an arbitration panel will have a different opinion. Binding mediation can therefore substantially increase the likelihood that the parties will make hard choices and voluntarily reach agreement.
Second, binding mediation is more cost effective than an unsuccessful mediation. Instead of educating a mediator and then, if no settlement is reached, having to start over with an arbitration panel, the mediator who is already familiar with the case is able to resolve the case. The parties are spared the expense and effort of educating an arbitration panel.
Third, in a binding mediation, the mediator can lock in those concessions that the parties are willing to make and can limit his or her rulings to those issues on which they are unable to agree. In traditional mediation, if the parties are unable to resolve the dispute in its entirety, any concessions that they made during the mediation are usually withdrawn and they end up arbitrating all the issues, as if the mediation never took place.
Binding mediation also may have some advantages over arbitration. First, it may be more cost effective than arbitration because, unlike the arbitration context, the mediator can give the parties feedback about the mediator's view of the strengths and weaknesses of their case as the mediation proceeds. The parties can focus their presentations on issues that the mediator is concerned with and can withdraw or compromise issues on which the mediator tells them that they are unlikely to win.
Second, a binding mediation is likely to result in a settlement or decision with which all parties can live. The parties are likely to agree on a mutually acceptable resolution of many of the issues in the case, and the mediator will only have to decide a few issues on which agreement is not possible. It is therefore less likely that the result will be one that one of the parties views as totally unreasonable.
Third, during the mediation the mediator will likely discuss his or her proposed resolution of the issues with the parties and give them an opportunity to comment. This will minimize the chances that the mediator's decision will have unintended consequences.
If the parties want to have a binding mediation, it is essential that they draft and sign a detailed binding mediation agreement that explicitly sets forth the procedures to be followed and the powers of the mediator. While courts are very familiar with arbitration agreements and routinely enforce them, binding mediation agreements are much less common. If the parties do not agree in writing and in detail on how the mediation will work and the scope of the mediator's power, there is a substantial risk that the court will not enforce any resolution that the mediator attempts to impose that all of the parties did not agree to. For example, if the phrase "binding mediation agreement" is used without defining what is meant, a court is likely to hold that it just refers to a binding agreement to participate in mediation prior to suing, not that it empowers the mediator to impose a binding decision on the parties. Questions can also arise as to whether sufficient due process was afforded the parties, or whether the mediator was required to recuse himself and not sit in judgment over the case if the parties fail to reach agreement because his or her objectivity was tainted by participating in the unsuccessful mediation.
The safest course of action is to clearly define the powers of the mediator in the written agreement, and to state that the parties agree that the mediator will sit as an arbitrator to resolve those issues on which the parties fail to reach agreement. It should also expressly state that the mediator's final award will constitute an arbitration award and will be enforceable under the Federal Arbitration Act.
It is als a good idea for the written binding mediation agreement to address key procedural issues. It should probably provide the parties with the right to conduct at least some limited discovery and to present evidence, testimony, and legal argument prior to the imposition of an award. The mediation can be structured with an initial pre-discovery phase to see if early settlement is possible, followed by a short period of discovery followed by additional mediation. Then, if the parties reach an impasse on certain issues, there can be an opportunity to present evidence and testimony prior to final resolution by the mediator acting in his or her capacity as an arbitrator.
A written agreement on these issues will minimize the chances that a court will believe that the mediator acted in excess of his authority or that the procedures adopted by the mediator deprived the parties of due process.
Binding mediation should be used only in those cases where the parties believe it is appropriate. It is likely to be most productive in cases where the parties have an ongoing business relationship and want to avoid the more confrontational environment of a typical arbitration. It is also probably better for smaller disputes where the money saved will be material compared to the amount in dispute and where the chances for an agreed upon resolution are stronger. Most parties probably prefer the more formal arbitration process where a large amount of money is in dispute and the greater costs associated with a full arbitration panel is much easier to justify.
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