Can a Med-Arb Serve in Two Processes?

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Med-Arb is a controversial hybrid of two processes in which parties first go to mediation, and if the process is not successful, they arbitrate. In the “pure” form, the same Neutral assists both processes. The main advantage of this practice is the time and money that can be saved. However, during caucus mediators receive confidential information that the other side may not have and this information could “improperly influence” the arbitrator award.1 How frank the parties are likely to be in the caucus session is doubtful when the mediator, in the event there is no settlement, would change hats and appear as an arbitrator. Therefore, one of the main advantages of mediation, which is the safe exploration of mutual gain without the risk of conveying confidential information to the party’s own detriment, is substantially weakened.2 Because there is a concern that during caucus sessions the mediator becomes privy to confidential information which would have never been disclosed to a pure arbitrator, the arbitrator is required to “do justice as he sees it, applying his own sense or law an equity to the facts as he finds them.”2 But how can an arbitration who has held discussions with the parties satisfy the requirements of “impartiality” and be a “fair arbitrator?”2

Therefore, the issues to be analyzed are if: 1) the same Neutral can fairly serve in the Med-Arb process, 2) the UNCINTRAL and ICC rules regarding the Med-Arb process will be covered, and 3) some recommendations will be addressed.

1) Can a Neutral serve two processes?

The main risk of Med-Arb is that a Neutral may not be able to effectively perform the roles of settler and arbitrator in the same case. Therefore, in order to maintain the integrity of the process, the Neutral must ensure her impartiality and flexibility as a settler.3 Concern for the Neutral’s objectivity is justified in the event if the Med-Arb engages caucus, she might invite the parties to discuss emotional issues important for the settlement, but not for resolution purposes. Ethical, legal and practical concerns arise with the change of hat.4

As a result, it is hard to believe that the Med-Arb will remain unaffected after intimate discussion with the parties as she could become empathetic towards a party. In acting as mediator, empathy might not be a problem; however, since the arbitrator has to make difficult decisions based on her subjective view, ignoring the information disclosed during the mediation stage is very difficult and could lead to partiality.

Given the fact that a party might challenge the arbitrator or her award on the basis that the arbitrator was influenced by information learned during the mediation stage, her impartiality must seriously be taken into account. Moreover, a party might claim that the mediator pre-judged the case during the settlement efforts while she was offering an evaluation of the case’s merits. Furthermore, there might be “complaint[s] that the arbitrator retaliated against the party in the arbitration proceeding for not heeding her advice during settlement discussions.”5 Thus, arbitrators must deal with initiatives that might disqualify them as arbitrators. Consequently, in order to reduce this risk, arbitrators might limit their use of techniques that otherwise would make the settlement efforts more effective.6

Despite this concern regarding the impartiality of the Med-Arb process, which would lead to an increase in challenged awards, very few institutions have included this issue under their rulings.7 The British CEDR (Centre for Effective Dispute Resolution) in 2009 released Rules for the Facilitation of Settlement in International Arbitration. Article 7 considers:

“If, as a consequence of his or her involvement in the facilitation of settlement, any arbitrator develops doubts as to his or her ability to remain impartial or independent in the future course of the arbitration proceeding, that arbitrator shall resign.”10

Therefore, in order to maintain impartiality, the disputing parties, or even the Neutral, may modify the process. Moreover, the CEDR Rules prohibit an Arb-Med to meet with any party without the other party being present. Consequently, to prevent impartiality, the caucus session is eliminated and the arbitrator cannot obtain information from any party which is not shared with the other.8

The possibility for parties to waive the impartiality requirement as a standard rule for international arbitrator is not clear. The questions to what extent, and at what stage, the parties should be allowed to waive their due process rights is still undetermined, if the information provided during private caucus is intended to remain confidential.9

The problem arises when the settler, for instance, solicits confidential information for settlement purposes, holds caucus, and engages in “reality testing” and evaluates the merits of claims. Even these initiatives may benefit the settlement process because they might expose the arbitration process as a legal attack.10 English lawyers assume that it would be not permissible for a Med-Arb to convene a private, confidential caucus and then preemptively decide the matter. However, one must recall that caucuses are less risky when the settlement effort is focused on forward-looking solutions, such as continuing business relationships, instead of backward-looking issues of the type that typically arise in the arbitration process.11

Moreover, according to critics, Med-Arb may have the chilling effect on parties who know that the mediator might later become the arbitrator.12 Given the fact that there a caucus might still be involved in the process, parties might not reveal any weakness or let the Med-Arb explore the background of the case. Parties will not be as frank, as they should be, because they are aware that the Med-Arb has the decision-making power, so she can use any disclosures against them.13 Meanwhile, the excluded party will be concerned that the Neutral “played one party against the other during settlement efforts,” and that it may “become suspicious that the other party corrupted the Neutral’s view of the case under circumstances where the excluded party could not challenge the information.”14

Taking into consideration these concerns, if parties agree not to have caucus, they should work with their counsels before mediating and assess all their options. Therefore, if both sides arrive to the meeting prepared, the second stage, arbitration, might be even be skipped, which would not lead into the Med-Arb process, but rather focus on enlarging the pie as part of the mediation process.

Finally, the AAA/ABA Ethics for Arbitrators should be considered during the process. It states “[a]lthough it is not improper for an arbitrator to suggest to the parties that they discuss the possibility of settlement or the use of mediation, or other dispute resolution process, an arbitrator should not exert pressure on any party to settle or to utilize other dispute resolution process.”

2) Institutional Regulations

The UNCINTRAL rules included in the Model Law on Conciliation of 2002, article 12, says “[u]nless otherwise agreed by the parties, the conciliator shall not act as an arbitrator in respect of a dispute that was or is the subject of the conciliation proceeding or in respect of another dispute that has arisen from the same contract or legal relationship or any related contract or legal relationship.” The reason for excluding the conciliator from acting as arbitrator in respect to a dispute in which she either was, or is, the subject of the conciliation proceeding; is the concern for confidentiality. By contrast, in the Model Law, an arbitrator is not excluded from serving as a conciliator.15 Moreover, “the commission agreed that the Model Law was not intended to indicate whether or not an arbitrator could act or participate in conciliation proceeding relating to the dispute.”

It seems that the language used on this article might be redundant in regards to Article 3, which confirms the party’s freedom to exclude or modify any Model Law provision in order to best fit their needs. However, as in arbitration, conciliation is subject to party’s autonomy, so the agreement of the disputing parties should be respected.16 Meanwhile, other experts view the language employed as possibly leading to the conclusion that there are two different degrees of party autonomy, a higher and a lesser one. This provision can be applied to “a dispute that was or is the subject of the conciliation proceeding,” and hence covers not only past, but on-going conciliations as well. Moreover, the phrase “in respect of another dispute that has arisen from the same contract or legal relationship or any related contract or legal relationship” represents disputes arising under contracts that are distinct but commercially and factually closely related to the subject under the matter of the conciliation.17

However, we must bear in mind that the UNCINTRAL Conciliation Rules “authorize the Neutral to employ any method that he considers appropriate, by principles of objectivity, fairness and justice” and considering “the rights and obligations of the parties, the usages of the trade concerns and the surrounding circumstances.”18

Likewise, the ICC also contemplates this hybrid process in ADR Rules19, which stand for “Amicable Dispute Resolution” of the ICC “for parties who wish to settle their disputes or differences amicably with the assistance of a third party, the Neutral, within an institutional framework.” Art. 7(3) states “[u]nless all of the parties agree otherwise in writing, a Neutral shall not act nor shall have acted in any judicial, arbitration or similar proceedings relating to the dispute which is or was the subject of the ADR proceedings, whether as a judge, as an arbitrator, as an expert or as a representative or advisor of a party.”

Therefore, if parties contemplate this hybrid process in their initial agreement, a Neutral can, after performing his mediation role, change his hat and serve as an arbitrator. According to the ICC ADR Guide,20 such agreements shall be in writing. The ICC’s ADR Rules enable the parties to agree upon whatever settlement technique they consider best fits their needs to settle their dispute.21 In other words, the parties are able to agree in writing that an arbitrator will act as a Neutral in the same case under the ICC ADR. However, in the absence of an agreement, mediation is the default method used for the resolution.22

The ICC ADR Rules provide flexibility and emphasize autonomy to the parties, allowing them to choose any method of dispute that best suits them. Additionally, in the event that no agreement between the parties is reached, mediation shall be used.

According to the ICC, the process is confidential unless a party has to disclose any information as a requirement by any national law. In order to reinforce this confidentiality, parties can: (i) include into the ADR agreement a confidentiality clause, with or without penalty, (ii) exercise confidentiality by statue,23 (iii) reveal documents only in caucus (however this will lead to a impartiality conflict for the Neutral), or (iv) incorporate a set of rules for confidentiality into their contract, which is the optimal method.24

As both the ICC and UNCINTRAL are against the Med-Arb processes, a new person who did not serve as the mediator should be appointed as an arbitrator, which is the Co-Med-Arb. Even when all impartiality concerns are removed, the process loses efficiency. More fees must be paid to the subsequent arbitrator and the whole proceeding would again be repeated for her, losing all prior knowledge obtained from the mediation process. In addition, the take of evidence would also be repeated.25 Therefore, an overall increase of costs will take place, resulting in less efficiency.

The main reason why both the UNCINTRAL and ICC are against conciliators becoming arbitrators in subsequent proceedings is because she would be aware of inadmissible information as evidence for the arbitration,26 where a party might not be willing to introduce such evidence into the arbitration proceeding. It is believed that this prohibition will provide an additional safeguard, as the formal inadmissibility would not be enough to protect the party’s interests. Indeed, parties must consider the possibility that if the conciliation is unsuccessful, the conciliator could be appointed as an arbitrator, either by the other party or by the appointing authority. Moreover, as it was noted before, the concern of challenging the award by the “losing party” is also a reason why many institutions are against the Med-Arb process. Taking this into account, parties may be less willing to participate in the conciliation proceeding. However, the parties might regard that a Neutral acting as a mediator and arbitrator at the same proceeding is advantageous, i.e., conducting the case more efficiently. Given the circumstances in which the parties have evaluated the advantages and disadvantages, there are no reasons to prevent the parties to jointly appoint such person as an arbitrator.

3) Recommendations for both institutions.

Due to a lack of precedential guidelines in this subject, in order to maintain confidentiality, the author recommends both institutions make the parties execute a confidential agreement that prohibits introducing in the med-arb process any information disclosed or developed in the settlement process and that is otherwise not independently discoverable.27 For instance, the Arbitration Law of the People’s Republic of China28, any confidential information disclosed to the Med-Arb must be disclosed as well to the other party29.

Moreover, after weighing the risk and benefits of using caucus, it is suggested that these two governing institutions make the parties decide whether to use a caucus or not.30 The aim of this recommendation is to protect the fairness of the arbitration award and reduce the likelihood that the losing party would challenge the arbitration award. However, if the parties are sincerely acting on good faith, there is no need to make certain disclosures to the mediator in caucus sessions; those disclosures could be made directly to the party with whom she has a business relationship.

In addition, the two institutions should diminish the role of the Neutral to one merely of a settler that will not evaluate merits, evidence, or reasonableness of positions. Any evaluation of a settler risks impartiality, as it may seem that she has pre-judged the case when the arbitration proceeding resumes. However, “this restriction should not be interpreted to bar a mediator from helping the parties evaluate their case.” The ruling on this aspect will imitate the flexibility as the main advantage of the mediation process. Moreover, for both institutions it is worth including training in ethics, norms, and techniques for the Med-Arb processes.

4) Conclusion

It would be questionable whether an agreement to a Med-Arb is admissible, if it is not possible to obtain an arbitrator who is impartial throughout the process. At the same time, it is under doubt that if the mediator has failed, the same person with the same facts of the parties will be able to settle the case through arbitration. Noteworthy is that the cases in which mediation has failed, but the parties asked the mediation to continue as an arbitrator, “they agreed follow–up arbitration is likely to lead to a more efficient arbitration, if that is what the parties have jointly determined to be their Best Alternative to a Negotiated Agreement (BATNA).”31

In addition, different cultural experiences may shape participant’s attitudes towards one Neutral serving two processes. According to Harold Abramson, several Western European arbitrators and parties are more receptive to settling cases than U.S. participants. Scott Doahey32 compared the U.S. and Germany in a report of his that led to the conclusion that Germans “often encountered arbitrators participating in the settlement negotiations,” while in the U.S. this attitude was “very rarely” seen. Furthermore, 92% of Germans considered this attitude appropriate, while 71% of the U.S. sample group rejected that role of the arbitrator. In conclusion, Med-Arb is a figure that provides interesting advantages to the parties, however subject to the Neutral's ability to maintain impartiality, unless this weakness can be resolved, and given the lack of definitive ruling under governing institutions, the process’s validity remains questionable.

 

FOOTNOTES

 

1 Alternatives to the High Cost of Litigation: A DIFFERENT APPROACH TO CONDUCTING MED-ARB IN COMPLEX COMMERCIAL LITIGATION MATTERS. March, 2011.29 ALTHCL 65

2 Nigel Blackaby and Constantine Partasides with Alan Redfern and Martin Hunter, Redfern and Hunter on International Arbitration: 5th Edition. P 48.

3 Harold I. Abramson: Protocols for International Arbitrators who dare to settle cases, The American Review for International Arbitrator, 1999.

4 Prof. Stipanowich: Video `Along the borderline´ ; Pepperdine Law School, Straus Institute,

5 See supra note 3

6 Id.

7 As it will be later seen, nor UNCINTRAL or ICC regard this issue under its rules.

88See CEDR Rules for the Facilitation of Settlement in Arbitration, art 2 available at http://www. Cedr.co.uk

9 James T. Peter: Med-Arb in International Arbitration, American Review of International Arbitration, 1997

10 See supra note 3

11 Id

12 Robert L Ebe: A different approach to conducting Med. Arb in Complex Commercial Litigation Matters., ADR Produces, Alternatives to the High Cost of Litigation, March 2001.

13 See supra note9

14 See supra note 3

15 See supra note 1.

16 According to UNCINTRAL Conciliation Rules, if parties have not signed a conciliation agreement, and if the invited party rejects the invitation to conciliate; there will be no conciliation proceeding.

17“The UMA and UNCINTRAL Model Rule: An emerging Consensus on Mediation and Conciliation”. Journal of Dispute Resolution, Volume 2003, p193.

Meanwhile, the ICSID stipulates that a person who previously acted as either a conciliator or an arbitrator in proceeding to settle the same dispute brought to arbitration may not be appointed to the tribunal (Arbitration Rule 1(4)).

18 The surrounding circumstances include “any previous business practices between the parties”. See UNCINTRAL Conciliation Rules. Jack J. Coe Jr “Settlement of Investor State Disputes through Mediation – Preliminary Remarks on Process, Problems and Prospects” 19 As a consequence of the amicable nature of the ICC ADR, the ICC refers to this ruling as “amicable dispute resolution”, rather than using “alternative dispute resolution”, which was employed in the past. However the “ADR” developed by the ICC does not include arbitration, only proceedings that do not result indecisions enforced by law, apart from art.7.3 that will be covered in this paper.

See also, Rules of the ICC n.1 of the CMAP n.2 in Paris, of the CEPANI n.3 in Belgium, of the WIPO n.4 Arbitration and Mediation Centre in Geneva, or the Swiss Rules of Commercial Mediation of the Swiss Chambers of Commerce n.5, most rules on commercial mediation will be restrictive and will not allow, without special consent, the same person to be mediator and arbitrator.

20 The ICC ADR Guide provides an explanation of the rules; expressing that once a party has agreed to the ICC ADR process, they may not withdraw from the proceeding prior to the first encounter with the Neutral.

21 ‘Avoiding the Full Court Press: International Commercial Arbitration and Other Global Alternative Dispute Resolution Process’ Loyola of Los Angeles Law Review, Summer 2007.

22 Like the IC, both the AAA and the LCIA offer international mediation, however as opposed to the ICC their rules are expressly limited to mediation services.

23 I.e., the Uniform Mediation Act of the United States.

24 Dyalá Jiménez-Figueres “Amicable means to resolve dispute. How the ICC ADR Rule works”, online article.

25 Otto Sandrock, “The Choice between forum selection, mediation and arbitration clauses: European perspectives.” The American Review of International Arbitration, 2009, 20 Am. Rev. Int’l Arb 8.

26 See Article 10 for the Model Law.

27 Confidentiality agreements are standard practice in mediation, as it “promotes candor and risk taking in settlement discussions.” See supra note 3

28 In the Chinese model the arbitrator may become a conciliator, and then become an arbitrator again at any stage of the proceedings.

29 M. Scott Donahey, Seeking Harmony, Is the Asian Concept of the Conciliator/Arbitrator Applicable in the West? 50 Disp. Resol. J. 74 ,April 1995

30 Private meetings can create an environment in which parties reveal their interest to the Neutral, by this way the Neutral can use the information to arrive to mutually acceptable solutions. Moreover, this environment created by caucus may help the parties vent and release anger, clarify their positions and interests, and recognize their weakness and strengths.

31 Eric W. Fiechter: Casting Issues can or should the Same Person be Mediator, or Conciliator and Arbitrator? 2008 Croatian Chamber of Commerce, Croatian Arbitration Yearbook.

32See supra note 29.