Norton Rose Australia 2010 Franchising Workshop Series

June 2010

Introduction

The Alternative Dispute Resolution Landscape

Alternative Dispute Resolution (ADR) is an umbrella term for processes, other than judicial determination, in which an impartial third party assists those in a dispute to resolve the issues between them. The main types of ADR are mediation, conciliation and arbitration. Each has its own advantages and disadvantages. ADR processes may be facilitative, advisory, determinative, or a combination of these.

Research carried out in relation to mediation suggests that, when parties participate in voluntary mediation, more than 80% of disputes are resolved to both parties’ satisfaction. In my experience, mediation is successful more often than not. As such, it is not surprising that mediation has become one of the tools employed by lawyers and commercial parties in resolving disputes.

The nature of mediation

Mediation is primarily a facilitative process, in that the mediator uses a variety of methods to assist parties to identify the issues in dispute and try to resolve them. Mediation is classically defined as a form of structured facilitated negotiation in an attempt to resolve a dispute in a faster, less formal and less costly way. It is the most widely used ADR process in Australia, primarily because it is so flexible and so effective.

Moreover, where parties participate in the mediation process, they frequently find it empowering relative to litigation. This is because they have more of a sense of “ownership” over both the solution and the process that gets them there. If each party is prepared to negotiate in good faith and work towards a mutually satisfying compromise, then the mediation is more likely to succeed. Parties who are not prepared to make concessions will be better served by traditional court litigation processes.

The process of mediation is negotiation but it is also a learning experience. Information will come from the other side that may affect a party’s evaluation of its case. The mediator may be asked to give opinions on the relative strengths and weaknesses of the parties’ positions. All of this information has to be taken into account to arrive at a settlement.

The role of mediation

Mediation is not designed to replace litigation entirely, but rather serves as a means of settling cases without requiring a court hearing. This is intended to ensure that as many cases as possible can settle without necessitating the time, expense, inconvenience and stress of a trial.

Mediation negotiations are non-binding, confidential and without prejudice (subject to a few exceptions discussed below). Generally, anything said during the mediation cannot be used in any subsequent litigation. The mediator does not discuss the matter with a judge or anyone else, and will not disclose information unless the relevant party specifically agrees.

If a case does not settle through mediation it sometimes proceeds to trial. Even where mediation does not settle a dispute, it will usually give the parties a better idea of the facts and issues of a case. This narrowing of the issues can help to smooth subsequent litigation.

Different types of mediation

Court assisted mediation

Mediation forms an important part of the various Australian jurisdictions’ case management systems, as it can help to:

• reduce the number of matters proceeding to trial; and
• define the issues in dispute between the parties, thereby saving trial time and reducing costs.

There is currently no comprehensive legislative framework for the operation of mediation in Australia. Rather, each jurisdiction has its own different laws to provide for and govern mediation.

• Federal Court of Australia (FCA)
  
  Order 72 of the Federal Court Rules provides that the court may order a proceeding into mediation or arbitration, conducted by Registrars of the Federal Court's. Any case may be mediated but cases about business practices, discrimination, shipping, intellectual property, copyright and designs are more likely to be required to attend a mediation conference.
  
  The FCA will commonly decide whether a case is appropriate for mediation at the first directions hearing, and will then inform the parties what procedures are to be followed. Any party can also ask the Court to refer a case to mediation, although this should be discussed with any other parties first.
  
  Under Order 10 r 1(2)(h), the parties may be given directions to attend a conference before a registrar for the purpose of satisfying the registrar that all reasonable steps have been taken to achieve a negotiated outcome of the proceedings. Alternatively, the registrar will conduct the conference to clarify issues in dispute to enable appropriate directions to be made to dispose of the matter.
  
  Preparation for mediation typically includes a pre mediation conference to allow the mediator to meet the parties and make orders for any pre-mediation preparation that the parties or the mediator believe might be useful at the mediation. The parties will usually (either by order or by consent) also provide pertinent documents to the mediator to give the mediator an idea of the issues in dispute. If the mediation is unsuccessful (ie, it does not result in a settlement), the mediator must report this to the court.
• State Supreme Courts
  
  The Supreme Court of Victoria does not conduct mediations but routinely directs the parties in litigation before the Court to engage in mediation convened by an independent mediator (typically either a solicitor or barrister trained in mediation). Similar regimes apply in the County Court and Magistrates’ Court, although the Magistrates’ Court mediation may be conducted by a Registrar of the Court. The Magistrates’ Court also has the option of a pre-hearing conference, which is a “lite” version of mediation and is convened by a Registrar of the Court.

Private mediation and mediation under the Franchising Code of Conduct

Parties may wish to engage in private mediation on their own initiative, as an alternative or supplement to litigation. Private mediation differs from Court assisted mediation in that it is not conducted under any statute or regulation. As such, it remains the obligation of the parties to locate and appoint the mediator, determine the terms on which the mediation is to be appointed and the mediation conducted. This is usually agreed by the parties in a formal mediation agreement.

Importantly, the mediation agreement should clarify the extent of the confidentiality and without prejudice protection that arises in relation to the preparation for, attendance at and conclusion of the mediation.

Mediation under the Franchising Code of Conduct is similar to private mediation except the parties are often assisted by the Office of the Mediation Advisor which can appoint a mediator and nominate a venue if the parties cannot agree on these matters.

Getting the most out of mediation

Selection of the mediator

Selecting the mediator is the most important step. Usually in court assisted mediation you will not have a choice of the mediator allocated to you. It is fair to say that the mediators at the State and Federal Courts have different approaches and styles. This is the greatest advantage that private mediation has over court assisted mediation, namely that the parties have control over the mediator considered most likely to assist each party in achieving a resolution of the dispute.

All mediations will deal with three broad issues: the legal, the commercial and the personal. Parties should select a mediator who is able to deal with all the issues as and when they arise. When choosing a mediator, many lawyers select a senior barrister or former judge, thinking that an advocate is the best person for the job. In many cases that may be true, but the key is to find a good mediator rather than a good lawyer.

For example, a solicitor or commercial advisor might be more attuned to understanding a client’s true commercial interests, but alternatively, an industry expert may be the best choice for more technical disputes such as, for example, engineering or construction. Often, the best mediators are the ones who are flexible to the parties’ needs.

Before retaining a mediator, parties should find out as much about a mediator as they can about his or her qualifications and methods, having regard to issues such as:

• Style – are they a facilitator or an evaluator? Facilitators promote communication between the parties in order to help them reach a mutually acceptable resolution. The pure facilitator refrains from expressing an opinion about the merits of the dispute. Evaluators often express an opinion on what a dispute is worth or on the merits of the parties’ position.
• Familiarity with the parties – this can be both an advantage and a disadvantage.
• Subject matter expertise – this can avoid wasting time in the mediation bringing the mediator up to speed.

The importance of clear objectives and strategies

Ongoing relationships

Meditation can help the parties’ relationship survive the dispute because it allows them to formulate their own mutually acceptable solutions. Often, the opportunity to “clear the air” can be a benefit all of its own, as well as allowing the parties the opportunity to let go and move forward.

When parties with an actual or potential ongoing relationship have explained the problem from their own perspective, it is extremely useful to invite each side to relate what they would like to have happened. The usefulness of this technique lies in setting the seeds or promoting suggestions or options for the manner in which things will proceed in the future.

Another technique to preserve the ongoing relationship by promoting and understanding is to say something like “now that you have heard how you were each affected by the situation, what do you think you might have each done differently?”

The focus in these types of mediation should be on reaching consensus, healing old wounds and agreeing mechanisms to avoid the same problem from reoccurring. As such, an aggressive approach is rarely appropriate. Rather, the tone of the mediation should be calm and conciliatory. In these types of mediation, it is often wise to let the parties confer with each other directly and the role of the lawyer is to guide rather than to dominate.

One-off transactions

The need to maintain a relationship is less important with one-off transactions. In such cases, a harder approach can be adopted with less concern for any fall out.

Typically, these types of disputes will usually require a much greater role for lawyers. The other parties need to understand what you consider to be the strengths of your case, including the facts, the evidence to be relied on (including expert evidence) and the legal position. Sometimes, the goal is to convince the other party that your case is the one most likely to be accepted by the judge. However, this is often difficult to do.

PR/Face saving issues

Face saving is a particularly important part of solving a dispute. Some mediators put the face saving need in the hidden agenda category. A party will take pains to disguise a potential loss of face by not admitting fault.

Parties and legal advisors can come to mediation in order to save face. It is interesting that in some cases a mediated settlement will mirror the exact point reached in informal pre-mediation paper or telephone negotiations that have broken down. The offers, counter-offers and settlement proposals are no different from those that have previously been canvassed. These earlier negotiations have often broken down because of a need to maintain face. Acceptance of the last proposal is seen, against all reason and commonsense, as giving in. Alternatively, the negotiations may have been conducted in an aggressive, point scoring manner which has caused bad personal feelings and polarisation.

Often there will be a need to require the parties to keep the terms of the settlement confidential. If so, this needs to be raised at the appropriate time and a value attached to it. In other words, the party desiring the confidentiality should understand that they are likely to have to “pay” for it through granting some concession or some greater payment of money. Conversely, a party asked to keep a matter confidential should understand that this is worth something to the party seeking the confidence, and should ensure that they are compensated for agreeing to it.

The mechanism for keeping the matter confidential should also be considered and agreed. For example, making payments by instalments conditional on the recipient keeping a matter confidential is a highly effective mechanism for ensuring that the confidentiality agreement is not breached. At the very least, it should be recorded in a deed of settlement between the parties.

Likewise, parties may wish to bring to an end any public aspect of the dispute through a non-disparagement agreement or some agreed public statement. Once again, thought should be given to the best mechanism for this to be enforced between the parties and should be reduced to writing in enforceable form.

Setting an example (aka “the public hanging”)

Occasionally, it will be important for one party to make an example of another party. In those circumstances, the “win” derived through mediation should be clear and unambiguous. The parties will also need to ensure that they are free to publicise the settlement. Obviously, care should be taken in selecting the dispute that you wish to use as an example, as a poor or confidential result will not achieve the desired outcome.

Ability to pay/perform

Less frequently, a dispute is really about time. In other words, a party needs time for some event to occur (usually leading to funds becoming available) before they are able to resolve the dispute. In those circumstances, the best settlement for the client might involve a very slow lead up to mediation and several mediation conferences before a settlement can be reached. Another approach might be to negotiate settlement with payments occurring over time.

Careful thought should be given by a party as to whether the other party has “timing” issues that are precluding settlement. Offering to accept structured payments over time (with a negotiated security) can allow the other side to save face and overcome a major obstacle to settlement.

Preparation and position papers

Mediations will only work if the parties are prepared. To prepare, clients need to make sure that they are thoroughly informed about the case. This includes:

• reading all the documents that have been filed by all of the parties;
• understanding the strengths and weaknesses of their case and what the result could be if the case is heard by a judge (including the costs consequences of any loss);
• thinking about how they could negotiate to settle the case, having a clear and realistic understanding of their true top and bottom line expectations for what they want (or could give) in the mediation but being prepared to be flexible and open minded about settlement options; and
• ensuring that the solicitor is provided with all of the documents and information relevant to the dispute.

The parties also commonly prepare position papers to go to the mediator and to the other side. The purposes of a position paper are to educate the mediator about the nature of the case, to demonstrate the strong points of the case, and to set the stage for a successful negotiation. Writing a strong position paper will help to accomplish these purposes.

The goal of mediation is to end the dispute. Ironically, some position papers appear to be written as if the purpose were to prolong the dispute. Expressing outrage at the opposition, getting emotional, name-calling or accusing people of lying is counter-productive. It will move the parties further away from an agreement than they already are. A well prepared position paper can set the tone and expectation of the parties to the mediation and make settlement at the mediation conference more likely.

Venue

The venue for the mediation meeting is one of the most important but often overlooked considerations. The wrong venue can make the parties uncomfortable and disagreeable.

Ideally the venue should have room for each party and a separate room big enough for the teams and the mediator. The room should have natural light and good ventilation, especially in summer.

The rooms should be as far as possible the same size and orientation so that one party does not feel prejudiced.

The party rooms should be private and, ideally, not next door to each other. This is not only due to concerns about soundproofing, but also because parties may be upset if the other party can see what discussions are taking place or who is coming and going.

Parties

A common cause of a failed mediation is the absence of people with any real settlement authority, meaning the authority to agree to whatever is necessary and reasonable in order to dispose of the case. If the other side is fully empowered to settle, they will become justifiably irate at the uneven playing field and will probably lose interest in further mediation.

Sometimes it is not possible to have the person present who has unlimited discretion to settle. In such cases, the mediation should probably be rescheduled until that person is available. Alternatively, you may have to bring someone with a reasonable amount of authority and make arrangements to have the ultimate decision-maker available over the phone. In that event, be sure to secure the agreement of both the mediator and the other parties in advance. Wherever possible, bring a person with full settlement authority and insist that the other side do the same.

When selecting the client representative to attend, remember that often the party closest to the dispute will be both the best and the worst person to represent the client at the mediation. Clients and their advisors need to be honest with themselves and each other about whether they have the best temperament for the strategy and goals being taken into the mediation. For example, someone with emotional involvement with the dispute or some other form of personal investment (such as reputation) is unlikely to remain sufficiently cool-headed or rational to ensure that the mediation proceeds smoothly.

If there is any doubt about the contribution that a person will make to the mediation, then consideration should be given to not including them. Alternatively, they may be instructed only to listen and to provide instructions and feedback during break-out sessions. In those circumstances, another less involved spokesperson should also attend.

Timing the mediation

The timing of mediation is very important and will vary from case to case. Many cases benefit from early mediation prior to substantial costs being incurred and the parties becoming entrenched in their positions. The aim should be to find a balance between an early resolution and having enough information so as to be able to make an informed decision about settlement. A court will order mediation prior to the filing of pleadings or affidavits in some cases. In such a case, if it appears that the mediation is unlikely to result in a settlement then the parties should try to use the mediation as an opportunity to exchange information, streamline discovery, and lay the groundwork for future negotiations.

In practice parties are often inclined to delay mediation until the eve of trial. Concessions can often be obtained when the other side is faced with a deadline, and for most litigants the deadline does not occur until they are faced with going to trial. Most people want to avoid the uncertainty of trial, and as they get closer to that moment of truth they become more inclined towards compromise. Still many cases can be and are settled earlier.

An early mediation can be an opportunity for a plaintiff to reconsider an ill-advised law suit. Or if a case is weak, the plaintiff may want to settle before a lot of time and expense has been put into it.

The process of mediation

Mediation usually follows a set format, though this can be varied depending on the the parties’ needs:

• opening statement;
• responsive statement;
• identification of issues and problems;
• clarification and exploration of issues and problems;
• private sessions:
  • evaluation of the views expressed by the other party;
  • discussion of solutions; and
  • evaluation of the risks and rewards of different solutions;
• negotiations and problem solving; and
• mediation outcome.

Each of these stages will be examined further in the context of the “war stories” to be discussed later.

Key issues in mediation

An obligation of good faith?

One major issue that has arisen in the law concerning mediations is the question of whether a party is obliged to negotiate in good faith at the mediation. At present in Victoria (in both the State and Federal Courts), there is no positive legal obligation to attend and participate in the mediation in good faith. It is worth noting, however, that a failure to participate in or to participate fully in the mediation can, in extreme circumstances, lead to a sealed adverse report being filed with the Court by the mediator. The report cannot be opened by the judge until after the trial (and so will not affect the outcome) but regard may be had to it by the judge in awarding costs.

It is becoming more common to see obligations to negotiate in good faith written into contracts. While the common law has attempted to define the term of good faith, no Australian court has been successful in developing an operational definition or standard of good faith negotiation in performing a contract. As the dilemma of defining an operational standard of contractual good faith negotiation has yet to be determined adequately by the High Court, or for that matter any higher court in any state or territory, we are left with an unsatisfactory position as to how to assess whether a party has acted in good faith in an ADR process where there is a contractual or statutory requirement to do so.

While that must surely be a source of frustration for the courts charged with adequately determining whether good faith performance has been rendered, it is equally frustrating for lawyers charged with the responsibility of drafting ADR clauses in the contracts. It is suggested that the following conduct might be a failure to show good faith:

• refusing to participate in a contractually agreed ADR process;
• not attending the ADR process, refusal to consider options for settlement;
• being unresponsive during an ADR process; and
• withdrawing from the ADR process without any reason.

Truly “without prejudice”?

While it is commonly stated that mediations are confidential and that all communications and information exchanged during the process cannot be referred to or used in subsequent litigation, the true position is that there are limitations as to the extent of the confidentiality and without prejudice protection.

Some of these limitations are forensic, in the sense that information disclosed in mediation may be lead at trial from other sources (such as documents obtained under subpoena or oral evidence from third parties witnesses). Others are legal, in the sense that parties have been able to successfully litigate to have mediation settlements set aside on the basis that the other party engaged in misleading and deceptive conduct in the mediation process in order to secure the settlement ultimately reached.

Settling the dispute

Where the mediation has helped the parties to agree to settle the whole case or some parts of it, that agreement should be confirmed in a formal, open and binding fashion. Many parties have left a mediation believing that matter has been resolved and only needs “to be documented by the lawyers” only to find that the other party has “settler’s remorse” and wishes to withdraw from the agreement. A clear, unambiguous and legally enforceable agreement or a court order or judgment will prevent this from occurring. At the very least, the parties should:

• write down the terms of settlement;
• note that it forms a binding agreement (even if a more formal deed of settlement is to be negotiated and agreed later);
• note that the parties can refer to it in any later dispute (and as such that it is not “without prejudice”); and
• sign the document before the end of the mediation.

In some cases, legal documents will have to be prepared by the lawyers prior to the mediation so that the dispute can be formalised as part of the mediation. This will particularly be the case where the negotiations involve complex financial or technical considerations.

Summary and conclusions

While mediation often requires parties to a dispute make concessions to achieve a negotiated outcome, it is a process that offers the parties an opportunity to control the outcome of that dispute, rather than have it imposed upon them by a court.

Mediation, while offering the parties a chance to resolve their dispute in what is largely an “off the record” forum, can still be a key step in the conduct of litigation. Accordingly, mediation should be approached and undertaken as part of the litigation framework.