Arbitration|Conflict Resolution|Ethics|Mediation|Negotiation

Business Lawyers and ADR: Ethical Challenges

The third and final part of the morning-long Commercial Finance and Dispute Resolution Symposium at the recent ABA Business Law Section Annual Meeting was a discussion, among audience and experts, of some hypotheticals implicating the obligations of attorneys who negotiate dispute resolution clauses and who represent clients in ADR procedures.

The experts were Stan Sklar of Chicago and Alex Wald of Boston’s Cohen and Gresser.  The audience included some of the sharpest minds in commercial negotiation and dispute resolution.  And the hypos brought out some clever analysis, even if not every one led to clarity.  The scenarios, and a capsule of the discussion of each, follow.

Tom Transactional is negotiating a multi-million deal for Clyde Client. Counsel for the other side suggests a “stepped clause” that requires mediation as a first step and then arbitration thereafter. Tom asks his partner Larry Litigator for advice.  Larry says no way, mediation is worthless, all you do is provide cheap discovery without court control. Same with arbitration, I want court rules, I want discovery, I want right of appeal. So the final contract excludes any dispute resolution procedure. Five years later, the deal is in shambles. The parties have been in court for the past two years. Clyde Client tells Tom that he now understands that, if they had gone the arbitration route as proposed, the case would be over by now — and that Tom never really explained the rationale behind not doing so.  Clyde’s new lawyer, Sarah Sue-Me, will be filing a malpractice action against Tom and his Firm. Did Tom and Larry breach their duty to Clyde?

The audience approached this as a dual question:  whether any ethical obligation was breached, and whether the firm opened itself to malpractice, which is a different legal standard.  The experts noted that very few jurisdictions expressly require counsel to advise a client facing the prospect of litigation of non-litigation alternatives.  And more than one attendee noted that advice was sought and given — the fact that it may be contested with hindsight doesn’t give rise to a challenge to its validity at the time.  In other words, this is not a case of neglect.  Nevertheless, the group agreed with the experts that best practices would dictate advising a client of alternatives to litigation in a manner somewhat more nuanced than Larry Litigator did here.

A lender engages a mediator pursuant to an arrangement by which the lender is obligated to pay the mediator’s services.  The lender proposes that the mediator’s fee be some fraction of the amount recovered during the mediation.  Is the offer ethically proper?  May the mediator ethically accept?  What about if both parties agree to split the fee equally, and both parties also offer the mediator a 30% “incentive premium” in the event that a deal is struck by the mediator prior to close of business on Friday (i.e., a “success fee”)?

At first this was greeted as the opportunity to shoot ducks in a barrel: No one even remotely entertained the propriety of either offering or accepting a mediator fee that was a function of the amount collected by one of the parties.  A nicer question arose, however, as to a “kicker” to a mediator’s fee, that would be based on whether an agreement was reached — any agreement — by a certain time.  Many thought it gave the mediator an unhealthy incentive to push reluctant parties to agree to a deal that is not in their best interests.  Yet it was pointed out that Rule 4.5.5(c) of the CPR/Georgetown rules for attorneys as third-party neutrals permitted such an arrangement, as long as the parties knew what they were getting themselves into.  Put otherwise, principles of informed party autonomy dictate that a neutral is not rendered unethical by accepting to do what informed parties ask her to do, the way they want her to do it.

Hearings have closed and Panel cannot agree on the interpretation and applicability of a legal issue.  A Panel member in a large law firm volunteers to have her summer associates do some research on the issues.  Is there an ethical problem with arbitrators’ conducting independent legal investigation, and relying upon it in framing their award?

This is a topic on which there is much heat but not all that much light.  Binding outcomes based on law that the parties did not have the opportunity to brief seemed to most of the audience to be something to be avoided.  But then so is an outcome based on law that the arbitrators, but not the attorneys, know to be inapplicable or overruled.  The consensus was that the panel should alert the parties to their concern on the question, and direct preparation of briefing addressing that concern, but that they should not go off and draft an award that is based on their own legal research.

Midway through an arbitration a young associate informs you that she has determined that the sole arbitrator’s law firm had represented an affiliate of the adversary party four years ago, before the arbitrator joined the firm.  This had not been previously disclosed.  Do you raise it at the next hearing, even though the arbitration seems to be going well for your client?  If you decide not to press the issue, and an award issues against your client, may you ethically raise the undisclosed conflict in a motion to vacate?

Readers of this blog know that this is a scenario about which I have concerns.  Expert Stan Sklar noted that the ADR providers (AAA, CPR, JAMS, etc.) have developed new rules concerning ongoing disclosure requirements by arbitrators, but the audience seemed to agree that the disclosure requirements of counsel who has learned of a possible conflict are not so clearly regulated.  Nor do doctrines of waiver or laches dispose of the problem.  The group left this one puzzled and uncertain.

The parties have come to an agreement in mediation, the lender taking a steep discount in light of the borrower’s persistent assertions of inability to pay.  While the lender and his counsel are outside the room preparing copies of the MOU, the debtor (who has represented himself) shows the mediator photos of the McMansion he is building on the lakefront. The mediator concludes that the deal – predicated on the debtor’s indigence — is unfair at best, fraudulent at worst.  Does the mediator have any ethical duty to act?  Does the answer change if the debtor is represented by counsel?  Does the answer change again if the mediator is a member of the bar in a jurisdiction imposing a reporting duty?

The experts agreed that the variation in which the party is represented imposes on that attorney a requirement to withdraw in the event of fraud.  But a surprising number of the audience also advocated that the mediator should also withdraw, despite the fact that the withdrawal would necessarily be pretty “noisy.”  Expert Wald stated what was on my mind:  How does the mediator know it’s fraudulent?  How does the mediator know who built it with whose money and what entity owns it and what entity is the debtor and how it is encumbered and on and on and on.  Moreover, whose job is it to run an asset search on the debtor before agreeing to forgive a debt? Is the mediator there to prevent the consequences of sloppy lawyering?  And who says it’s sloppy?  Maybe they ran the asset search and know perfectly well what they’re doing.  Who knows how important it is for the lender to get the default off its books?  A minority (and count me in) felt strongly that mediators are not enforcers of either the law, or ethics, or morality, but rather facilitators of consensual — even if unwise — agreements between parties who make decisions — even if unwise — on their own accord and for their own reasons.

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