Minnesota ADR: Real Estate Law

• ADR: Real Estate Law
  • What Is Alternative Dispute Resolution?
    • ADR and the Settlement Process
    • The Role of Judges in ADR
  • Arbitration
  • Mediation
  • Mediation-Arbitration

For hundreds of years clients, judges, and lawyers have complained about the cost, inefficiency, acrimony, and risk of litigation. Everyone involved with civil litigation professes to deplore its harmful side effects, but until recently, no one has done much about it. The judiciary is leading the call for change, even as clients are demanding it. Most lawyers agree that change would be positive. The time for that change is upon us.

This chapter's purpose is to help business decision makers understand the current status of alternatives to litigation and deal with a litigation system that, like all established systems, will resist the change that seems to be coming. In the modern civil litigation environment, the knowledgeable decision maker can, and must, insist on using options that have the potential to reduce some of the present problems of litigation. Courts in many states, including Minnesota, are encouraging alternatives to traditional litigation and lawyers must either endorse the new approach or risk losing the business of increasingly knowledgeable and assertive clients.

Simply stated, alternative dispute resolution (ADR) is the process of resolving disputes without going to trial in front of a judge or jury. ADR is typically cheaper and more confidential than the public trial process. In recent years, caseloads in most courts have grown significantly, causing major delays and frustrations to clients, but to date, ADR has been used in only a minority of cases. The reason for this inconsistency is historical, institutional, and financial.

Before courts became overcrowded, law schools trained lawyers exclusively in the adversarial method. The adversarial system of jurisprudence is based on the concept that justice will emerge best if competing adversarial parties, represented by lawyers, present their most favorable version of the facts of their individual client's case to a judge or jury. The evidence is then subjected to the vital process of cross-examination in which each side has the opportunity to expose the flaws in an opponent's position. There is much more to modern litigation in its present advanced and complex state of evolution, but the fundamental adversarial concept is pretty straightforward. In fact, the system works quite well in some cases, particularly when cost and relationships between opponents is not a major concern. In many cases, however, the cost of litigation combat is prohibitive and the fighting and acrimony inherent in the process destroys relationships that could otherwise be preserved, be they personal, family or business. This long-standing litigation system is familiar to judges and litigators and has been in place for many years. Changing that established system is difficult.

Sophisticated parties, particularly corporations which are constantly in litigation, are now realizing the huge cost involved in that process and are looking for alternatives to the traditional combative approach. The training and traditions of lawyers and the courts is a powerful enough force against change but there is another one as well - the financial pressure of legal fees and other costs. No matter how dependable and honest a lawyer may be, the fact of the matter is that the existing litigation system can be very profitable for lawyers. Litigation must, of necessity, finance the huge support system surrounding it. This support system includes transcribers of testimony, paralegals, printers, accountants, and expert witnesses who will testify about and support opposing views on virtually any subject known to civilization.

Change is coming, however, from the top. In states like Minnesota, the courts have adopted rules that require lawyers and judges to make sure that clients understand that there are alternatives to traditional litigation. In each civil case in Minnesota, the parties must file a plan of ADR with the court. This plan must be approved by the trial judge. The parties and their lawyers must then make a good faith effort to settle the case.

Clients now are going to have to decide how to proceed with ADR when their lawyers present it to them. This chapter provides an overview of ADR options and can help businesspersons make decisions in consultation with their lawyers. This chapter addresses how to choose the type of ADR that will be most effective in a particular matter and discusses the characteristics of an effective mediator, arbitrator, or other neutral party who can help in ADR. There will be many exceptions to the general statements of this chapter, however, and readers should always make ADR decisions only with the advice and counsel of their lawyers, whose enthusiastic participation is essential to the success of any alternative to traditional litigation.

ADR and the Settlement Process

The vast majority of lawsuits settle prior to trial, usually after a case has worked its way to near the head of the judge's docket and near to the trial date. That is the point at which judges, attorneys, and clients give settlement the most time and attention. It is also the point at which substantial fees have been paid, discovery is complete, and opposing arguments have been heard. In addition, sufficient time often has passed for emotional wounds to heal and for clients to have begun addressing new issues in their lives or businesses. ADR is one device to speed the settlement along.

Typically, ADR accelerates the point in the process at which settlement occurs. ADR may be used to avoid litigation entirely, but failing that, ADR is an effective way to decrease the time and money spent in litigation. This can result in large savings and better results than having a judge or jury make a decision for the parties.

The most frequently used methods of ADR are mediation, arbitration, and mediation-arbitration. Additional types of ADR include mini-trials, moderated settlement conferences, neutral fact findings, consensual special magistrates, and summary jury trials. All of these have their place in the ADR process, but this chapter focuses on the role of mediation and arbitration to highlight their advantages and disadvantages.

The Role of Judges in ADR

Judges properly want to devote their time to hearing arguments, reviewing briefs, and trying those cases which cannot settle. ADR can help them manage their caseloads by enabling them to devote their time to those cases which need input of a judicial nature, as contrasted with cases that simply need concentrated settlement efforts.

ADR clears cases through the system more rapidly, freeing judges to focus their expertise and energies on issues which are the most complex, significant or resistant to settlement. The faster cases move through the system due to settlement, the better the judicial system's reputation, because the parties resolve their own matters and reduce delays. ADR is a powerful tool for judges to use in managing their caseloads and ADR usually reduces the total costs for litigants.

Most clients and lawyers have some familiarity with arbitration, which is simply a private trial in which a third party decides the outcome of a case after lawyers present evidence. In many cases, a panel of arbitrators is chosen to hear evidence. The panel then issues an opinion which usually is binding on the parties. Appeal rights are typically limited unless some very onerous showings are made, such as a conflict of interest, fraud, or other dishonesty. A harmless error is typically not enough to qualify for appeal. Because an appeal is rarely available, the parties have the benefit of certainty after an arbitration, but they risk living with an errant decision.

Because of the absence of appeal, the choice of arbitrators is crucial. A major corporation, for example, has for many years required all its suppliers and contractors to submit disputes to arbitration. There is, however, a strict requirement that arbitrators have a background in and knowledge of the business. In other words, an arbitrator skilled only in securities law would not be used to resolve a dispute over the price of flour.

Experience confirms the wisdom of using arbitrators who are knowledgeable about the subject of the dispute. In one case, complex engineering and cost accounting issues were arbitrated by a panel which included a senior partner in a law firm and a retired agribusiness executive. The panel simply did not have the experience to make a ruling without a lengthy and expensive educational process. This lack of experience increased the costs dramatically and the prevailing party received an award only after two years of hearings and $250,000 in legal fees. Having several million dollars at risk without possibility of appeal is a harrowing experience which most clients and lawyers want to avoid.

Nevertheless, there are many cases in which arbitration is appropriate if speed is desired and the parties are willing to risk living with a third party's decision. The securities and construction industries, for example, have utilized arbitration very successfully for many years.

It should be noted, however, that there has recently been significant criticism of companies which require the use of arbitration to settle internal disputes as a condition of employment. For example, plaintiffs in sexual harassment cases may claim that the arbitrators chosen tend to be older men who are not sensitive to the concerns of women. Many companies are reconsidering their approach to arbitration to resolve employment disputes.

The decision to use arbitration often is determined by a careful assessment of risk and a mutual recognition that each party shares some of the responsibility for the dispute. It works well when the form of ADR is matched properly with the type of dispute, but litigants should be aware that ADR is not a panacea for litigation.

Mediation is different from arbitration in that the parties craft their own settlement terms with the assistance of a neutral mediator. The mediation process is flexible and can be tailored to each individual situation. In a typical commercial dispute mediation, attorneys for the parties present a brief statement of the case. This is an excellent opportunity for the parties to listen to each other's positions and size up each other's lawyers. It usually occurs after enough time has passed for tempers to have cooled, enabling litigants to be practical about the future costs and risks of litigation. While all of the parties usually meet together at the outset, they will often meet privately with the mediator after the initial case statements. This encourages candor and helps the mediator identify factual discrepancies and substantive issues.

A mediation is often the first chance for the parties to tell a disinterested party their version of the issues. Parties usually want to tell a neutral party their version of the facts and get a reaction before serious negotiating begins. Once they do so, pent-up anger and frustration is less likely to block settlement efforts. For example, an injured plaintiff may get to release some emotion during the process and understand why an insurance company evaluates their claims the way they do.

Creativity in settlement discussions is typically best when the decision makers participate directly in the process rather than sending a proxy. They know and understand the elements of the dispute with an intimacy that only comes from living through the dispute. Lawyers are essential to this process because they can point out the legal risks of tentative settlement proposals and help the litigants focus their energy and creativity on solutions that meet both their substantive and legal needs.

In a typical commercial case, the mediator will shuttle between conference rooms, trying to identify the core issues, while obtaining agreement on tangential issues. In this way, a mediator can take the pulse of the parties and, after a few hours, begin to help the parties propose various settlement options. In addition, the mediator can take a variety of steps which may break an apparent impasse. For example, the parties can be called together as a group to talk through the problem or the attorneys can meet separately to thrash out legal issues and test the strength of their own convictions about the success of arguments to be made. The parties can meet in private or with the mediator to determine if breakthroughs are possible. Sometimes an apology or expression of willingness to understand an adversary's position can be the needed catalyst for a successful mediation.

Absent such emotional breakthroughs, the mediation process can break through to bottom-line dollars and cents risk/reward evaluation. In an informal mediation setting, this can be particularly productive because various options can be tried on for size and rejected for better alternatives. The mediation becomes a classic negotiation with the risks of litigation being balanced against the benefits of a thoughtful settlement agreement. Only the litigants can accomplish this but they do it best with the active participation of their lawyers.

The kind of person litigants should choose as a mediator will vary, of course, depending on the dispute at hand and the personalities involved. A mediator should be a good listener and creative in proposing solutions. It is essential also for a mediator to be able to listen well and be able to identify the issues which are truly important and fundamental. A good mediator will identify and articulate the fundamental underlying interests of the parties and help the parties shed themselves of the roadblocks created by emotion or misplaced assumptions.

A mediator should also be someone with sufficient experience to command the respect of the parties and their lawyers. A recommendation by a judge is often useful. The parties should consider several options and be willing to interview several mediators before making a decision with the advice and counsel of their lawyers.

A significant benefit of mediation is that the litigants maintain confidentiality and control over the terms of settlement as well as the settlement process itself. This can be very important if the parties want to avoid a public airing of their disputes. Mediation also gives the parties an opportunity to size up their cases and their lawyers in an informal and confidential setting. And, as important as anything, mediation is often the first time the parties really listen to each other in a meaningful way. Because mediation is not binding unless the parties reach agreement, the only risk is time spent and the unlikely possibility that some fact fatal to one party's position will be disclosed inadvertently.

Often referred to as "med-arb," mediation-arbitration is a hybrid combination of mediation and arbitration. Typically, the parties will agree to mediate to impasse or settlement. If they reach impasse, they then submit the dispute to binding arbitration of either the entire dispute or unresolved issues, using the mediator or a new person as the arbitrator.