New Rules for Commercial Arbitration

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Many franchise agreements require mandatory arbitration of disputes, and a substantial number fall under the supervision of the American Arbitration Association (“AAA”). The AAA has issued revised Commercial Arbitration Rules that will apply to cases filed as of October 1, 2013.

These significant changes were meant to address common criticisms of arbitration, including burdensome discovery, lack of arbitrator control, and increased time and expense. The goal is to make arbitration better-managed, faster and more cost-effective.

The revisions include:

  • A mediation step for all cases with claims of $75,000 or more (subject to the ability of any party to opt-out). New Rule R-9 makes mediation mandatory. Absent an agreement of the parties to the contrary, the mediation is to occur concurrently with the arbitration and in a manner that does not delay the proceeding. A party may unilaterally opt-out from mediation.
     
  • Arbitrator control over information exchange (discovery). The new Rules direct the arbitrators to convene a preliminary hearing as soon as practicable following the appointment of the tribunal, and include a checklist of possible items to be discussed during the preliminary hearing (R-21); allow production of electronically stored documents to be completed in the manner most convenient and economical to the producing party (R-22); allow the arbitrators to allocate the costs of producing documents (R-23); and give the arbitrators the authority to impose sanctions to address abusive conduct (R-58).
     
  • The availability of emergency measures of protection. An “emergency arbitrator” may grant interim relief before the arbitral tribunal is constituted (R-38). A party may request the AAA to appoint an emergency arbitrator, prior to the constitution of the tribunal. Within one business day, the AAA must appoint a single emergency arbitrator, who must then establish a schedule for the consideration of the application for emergency relief within two business days. This provision is not intended to prevent applications to courts for provisional relief.
     
  • Access to dispositive motions. The revised Rules expressly grant arbitrators the authority to hear dispositive motions, as long as the party who intends to bring the motion shows that the motion is likely to succeed in disposing of or narrowing the issues in dispute (R-33).

Since arbitration is a matter of contract between the parties, some of these Rules, like mandatory mediation, may be varied by the agreement. Agreements that have AAA arbitration clauses should therefore be reviewed and updated. New agreements should be drafted with these Rules in mind.

 

The Wonders of Mediation

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The right to a trial by jury is a fundamental liberty, residing at the heart of Anglo-American jurisprudence. It is a core value which defines us as a people and traces its roots prior to the Magna Carta in 1215. The Virginia Declaration of Rights adopted in 1776 provided that in a “suit between man and man, the ancient trial by jury is preferable to any other, and ought to be held sacred.”
 

As a method of resolving modern day civil disputes, however, trial by jury has lost some of its luster. The discovery process grinds slowly toward an often anticlimactic struggle between parties left traumatized by the process. Along the way, the “principle,” initially deemed worthy of vindication at all cost, can become elusive to the point of obscurity.
 

Parties put themselves at the mercy of the court, seeking money damages to restore them to a position formerly enjoyed. Their motivation may be primal: vengeance, pride or justice.  For some, the gamble pays handsomely. For others, “victory” rings hollow when compared with an alternative means of resolving the dispute.
 

In ancient societies, disputing parties sought a wise elder’s counsel; someone familiar with the parties and the dispute. A trusted broker, acting beyond reproach, this person served as a conduit through whom the parties could themselves reach a fair and just compromise.
 

The modern day equivalent of this time-honored practice, which predates even the revered trial by jury, is “mediation.” Mediation creates an atmosphere where posturing and gamesmanship, the life’s blood of litigation, is replaced by redirecting the parties’ creative energies to focus on a mutually beneficial solution. The virtues of mediation are its cost (a fraction of the cost of litigation), its non-binding informality (if it fails, the parties go back, without prejudice, to litigate in court), and its flexibility (offering infinite solutions, by contrast to the procedurally stilted remedies available in court).
 

Perhaps most important, it empowers parties to control their own destiny, rather than having an imperfect solution imposed by others, leaving both parties dissatisfied. It’s sometimes possible, through mediation, for both sides to prevail, each achieving a greater measure of “justice” than they might have otherwise. Novelist William Gaddis commented on the absurdity of the modern American legal system by beginning his book “A Frolic of His Own” with the following line: “Justice? – You get justice in the next world, in this world you have the law.”
 

Having practiced law for almost 30 years, I have seen cases where a jury trial was the only appropriate means to decide either a case of significant import to society or where circumstances simply precluded a pre-trial settlement. I have also seen tremendous good come of carefully orchestrated settlements in cases, both simple and highly complex.
 

The New Jersey Supreme Court has, since 1992, directed all lawyers to “become familiar with available (dispute resolution) programs and inform their clients of them.” After 20 years, it’s now firmly entrenched in the legal system, mostly because lawyers, clients and judges see it actually works.
 

Mohandas K. Gandhi, who practiced law, wrote: “I understood that the true function of a lawyer was to unite parties riven asunder. The lesson was so indelibly burnt into me that a large part of my time during the 20 years of my practice was occupied in bringing about compromises of hundreds of cases. I lost nothing thereby – not even money, certainly not my soul.”
 

A path trodden long ago has been rediscovered among the bramble of our system of dispensing modern American justice. Many who go down that path emerge more intact, their dignity better preserved, able to move forward, beyond “the case.” I hope that we who work within the civil justice system may continue to see its imperceptible shift toward a more enlightened awareness of the toll it exacts from its participants. We best serve our clients by empowering them, by allowing them the opportunity to help fashion the outcome of their legal disputes.
 

Having served as a mediator in approximately 100 cases, I am available to assist interested parties and their counsel in exploring alternate dispute resolution options, including mediation. 

 

Tom Pryor a Shareholder in Stark & Stark's Lawrenceville, New Jersey office concentrating in Alternative Dispute Resolution. For questions, or additional information, please contact Mr. Pryor.

Attention Mediators: Be sure to finalize your settlement agreement in writing

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Mediators face yeoman’s work- bringing battling litigants together and assisting them to resolve their dispute without further resort to the judicial process is by no measure an easy task. However, mediators should always be careful to heed the lessons of a recently published Appellate Division case, Willingboro Mall, Ltd. V. 240/242 Franklin Avenue, L.L.C., __ N.J. Super. ___ (App. Div. 2011), and ensure that the mediated settlement is quickly reduced to writing or run the risk of being brought into the fray as a witness when a party seeks to enforce the terms of the unwritten settlement. 

In Willingboro Mall, the parties engaged a retired judge who mediated the dispute and precipitated a resolution among the parties. That resolution was communicated to the General Equity judge by counsel for the defendants 3 days after the mediation and in the days that followed, defense counsel placed settlement funds into escrow.  However, plaintiff refused to consummate the settlement. The defendants filed a motion to enforce the settlement and after discovery and a plenary hearing lasting four days, the General Equity judge, relying heavily on the testimony of the mediator, ruled that the oral settlement agreement was enforceable.
 

On appeal, relying on R. 1:40-4(i), plaintiff advocated the position that the Rule mandates that a settlement be reduced to writing during the mediation. Writing for the appellate panel, Judge Cuff found plaintiff’s arguments unpersuasive and found that hewing so rigidly to the Rule becomes an “impediment to resolution of the matter through mediation.” Focusing on the reason for mediation, which “is utilized to afford the parties an opportunity to present their position before an experienced professional with the goal of resolving some or all of the differences between the parties,” Judge Cuff held that the writings prepared in the days following the mediation, stating the terms of the settlement and informing plaintiff that settlement funds had been placed in escrow, sufficed under the Rule.
 

The careful mediator ensures that the terms of the settlement reached by the parties is reduced to a writing as quickly as possible after the successful mediation. This diligence helps ensure that memories do not fade and that no party has time to develop a case of “buyer’s remorse.” Moreover, this practice helps ensure that significant sums are not expended by the parties in litigating the enforceability of an oral settlement and keeps the mediator on the sidelines where he belongs, not in the middle of the dispute as a witness.

Changes Made to Rules for New Jersey Civil Presumptive Mediation Program

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In a report published for its 2009 - 2010 term, the New Jersey Supreme Court Committee on Complementary Dispute Resolution came up with certain recommendations concerning changes in the New Jersey Civil Presumptive Mediation Program. The New Jersey Supreme Court adopted the Committee's recommendations and has amended Rules 1:40-6(b), 1:40-12(b)(2) and Rules Appendix XXVI. These amendments will take effect on September 1, 2011. The purpose of these Rule amendments are to streamline and improve certain areas of the mediation program and mediation process.

 

The amendments approved by the New Jersey Supreme Court deal with: 1) the ability of parties to select their own mediator; 2) continuing education requirements for mediators; 3) charging of retainers by mediators; and 4) the method for mediators to secure assistance from the Courts to collect unpaid fees.




 

Selection of Mediator
The New Jersey Court Rules have always allowed parties involved in litigation to select a mediator of their own choice. Prior to the recent Rule amendments, the Court Order for mediation named the mediator that would handle the mediation and the designation of that mediator was effective as of the date of the Order. The parties could replace the designated mediator with a mediator of their own choice. The amended Rule change is subtle in that it still allows the parties to choose their own mediator. However, under the new Rule, the designation of the Court appointed mediator does not become effective for a period of 14 days after the date of the Order. During those 14 days the parties may choose their own mediator. If the parties do not choose their own mediator within 14 days, the mediator designated by the Court will become effective.




 

Continuing Education

Continuing education has always been part of the mediation process. The amendment to R. 1:40-12(b)(2) provides that continuing mediator education shall now include instruction in ethical issues associated with the mediation process.



 

Retainers
The amendment to Appendix XXVI dealing with the compensation of mediators, now allows mediators on the Court's mediation roster to charge a retainer once the two free hours of mediation have been completed and provides that mediators can charge more than the allowed one hour for pre-mediation preparation if the parties are so advised and there is an appropriate written disclosure prior to the beginning of the initial mediation session.



 

Enforcement of Compensation of Mediators
Getting paid is obviously an important concern of mediators. The amendments to the mediation Rules also change the process as to how mediators will have access to the Court system to collect fees. Previous, mediators could apply to the Court for the issuance of an Order to Show Cause in the event that they were not paid for their services. This process will no longer be allowed. Instead of providing that the Court issue an order requiring the delinquent party to show cause why the mediator's fee has not been paid, the Rule amendment provides that mediators may bring an action in the Special Civil Part of the county where the underlying action was brought. While mediators will still have access to the Courts to help them get their fees paid, the manner of enforcement has changed.


 

Mediation in New Jersey is very successful but is a constantly evolving process. We can certainly expect new amendments to the Rules on a continuing basis.

Is There a Penalty for Failing to Provide Full Disclosure at a Mediation?

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In the Matter of the Estate of Lillian L. Fischer, the Appellate Division of the Superior Court of New Jersey (Docket No. A-0091-10T2) determined that a failure to disclose information in a mediation did not require a settlement to be overturned. This case was recently decided on June 14, 2011. 

 

In the Fischer case, the parties entered into a settlement of a case as a result of a court sponsored mediation. Sometime thereafter, a disagreement arose concerning the disposition of certain assets that had not been disclosed during the mediation. 

 

One of the parties to the mediation was aware of certain assets (in this case certain securties) and this party declined to alert the mediator or the other side that these assets existed because "[n]obody asked her about it". The other side, which was unaware of these assets, alleged that there was bad faith due to the failure to disclose the existence of additional assets. 

 

The Trial Court determined that there was no duty to disclose the fact that there were additional assets noting that there was no "exchange of discovery" or "clear identification of each party's positions about these issues." Accordingly, the Trial Court found no basis for concluding that there was any bad faith or bad motive during the mediation process. An appeal of the Trial Court's decision was filed. 

 

The two issues that were considered on appeal were whether there was a breach of the covenant of implied good faith and fair dealing that is implied in every contract under New Jersey law and whether there was an intentional failure to make a disclosure to the detriment of the other side. 

 

The Appellate Division affirmed the decision of the Trial Court finding that courts will not rewrite or unduly expand settlement agreements in order to deem settled or waived things not legitimately encompassed. The Appellate Division found that the implied covenant of good faith and fair dealing does not require "either side in negotiations to reveal any and all information that might help the adversary and hurt his or her own client." On the issue of the claim of fraud, the Appellate Division found that no fiduciary relationship existed between the parties and the transaction was not fiduciary in nature. In fact, the Appellate Division found that the adversarial relationship placed each side on notice to conduct their own due diligence. In addition, both parties were represented by counsel and entered into the settlement knowingly, voluntarily, and with an equal opportunity to negotiate the terms. It was further noted that if one side failed to investigate the existence, or the potential value, of certain assets prior to entering into a settlement, it was not the fault of the party not making the disclosure.

 

Mediation is an excellent process. It resolves disputes quickly and usually saves all parties significant expense. However, parties to a mediation must be aware that it is the obligation of each party to perform their own due diligence or understand that their lack of information cannot be used as a basis to later undo a settlement.

Failure to Request Mediation Bars Claim For Attorney's Fees

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Public policy supports the resolution of disputes before a lawsuit is filed.  What happens when a contract calls for mediation prior to filing suit as a condition of securing attorneys fees, if the party filing the suit suggests mediation after the lawsuit is filed?  Is the failure to seek mediation a bar to a recovery of attorneys fees or is the request for mediation made just after suit is filed deemed to be substantial compliance?
 

In the case of Lange v. Schilling, No. C055471, 2008 WL 2192833 (Cal. Ct. App. May 28, 2008), the Court of Appeals enforced a contract term that established a condition precedent that required a party to attempt to mediate a conflict before proceeding to arbitration or litigation in order to recover attorney fees.


In that case, the plaintiff bought property from a real estate broker, using a standard residential property purchase agreement. The agreement provided that the parties would mediate any dispute before resorting to arbitration or court action. Under the agreement, if a party commenced an action without first attempting to mediate, that party would not be entitled to recover any attorney fees which would otherwise be available. The Plaintiff sued the broker for alleged misrepresentations made about the property's condition. The Plaintiff then sent the broker a letter stating that he was willing to stay litigation in order to mediate the matter, but received no response. Thereafter, the trial court entered a judgment in favor of Plaintiff and finding the broker liable.


The Plaintiff, after succeeding in the lawsuit, filed a motion to recover attorney fees from the broker. In opposing the motion, the broker argued that the Plaintiff was not entitled to attorney fees because he did not attempt to mediate the dispute. The trial court determined that the plaintiff substantially complied by offering to stay the litigation in order to mediate and awarded the Plaintiff attorney fees. On appeal, the broker argued that the clear language of the agreement precluded an award of attorney fees if a party did not attempt mediation before commencing litigation. The Court agreed and found that since the Plaintiff filed his lawsuit prior to offering mediation, there was no basis to award fees.


The Court noted that while the agreement authorized attorney fees, that right was contingent on compliance with the mediation provision. The Plaintiff filed his lawsuit first and only later offered mediation. His failure to meet the condition precedent precluded any award of fees. The Court stated that the strong public policy in favor of mediation as an alternative to judicial proceedings is served by requiring the party commencing litigation to seek mediation as a condition precedent. Had the parties resorted to mediation, their dispute may have been resolved in a much less expensive and time-consuming manner. The plaintiff argued that his failure to seek mediation should be excused because he promptly offered to mediate, thereby complying with the spirit and intent of the language of the contract. The Court rejected this argument and noted that the plaintiff could have sent an offer for mediation before filing his complaint. The Court further determined that the doctrine of substantial compliance was not applicable because the contract imposed a clear and unambiguous condition.


Accordingly, the Court reversed the fee award.  The message set forth by the Court was simple and direct.  Public policy favors resolution of cases instead litigating them and the Court would therefore not allow the commonly used doctrine of substantial compliance to defeat that policy.

Mediator Privilege Amended as of July 1, 2008

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The mediator privilege is extremely important to the mediation process.  Without it, participants would have no confidence in the process and information necessary to assist the mediator in resolving a case would not be communicated.   It has often been said that the mediation process involves two levels of confidentiality.  The first level is when the parties are together in a joint session.  While the communication itself at a joint session cannot be used at a later proceeding, the information conveyed has been heard by all and that cannot be changed.  However, communications at a separate session consisting of a party, counsel and the mediator are completely confidential, subject to the provisions noted below.

 
Effective July 1, 2008, New Jersey Evidence Rule 519 was amended.  This amended Rule deals with the "Mediator Privilege". 

 
Privileged communications
The amended Rule provides that a mediation communication is privileged and shall not be subject to discovery or admissible in evidence in a proceeding unless waived or precluded as provided by law.  In a mediation proceeding, the following privileges shall apply:

(1) a mediation party may refuse to disclose, and may prevent any other person from disclosing, a mediation communication.

(2) a mediator may refuse to disclose a mediation communication, and may prevent any other person from disclosing a mediation communication of the mediator.

(3) a nonparty participant may refuse to disclose, and may prevent any other person from disclosing, a mediation communication of the nonparty participant.

Evidence or information that is otherwise admissible or subject to discovery shall not become inadmissible or protected from discovery solely by reason of its disclosure or use in a mediation.  


Waiver of privilege
The privilege may be waived in a record or orally during a proceeding if it is expressly waived by all parties to the mediation and:

(1) in the case of the privilege of a mediator, it is expressly waived by the mediator;  

(2) in the case of the privilege of a nonparty participant, it is expressly waived by the nonparty participant;

(3) a person who discloses or makes a representation about a mediation communication that prejudices another person in a proceeding is precluded from asserting a privilege, but only to the extent necessary for the person prejudiced to respond to the representation or disclosure; and  

(4) a person who intentionally uses a mediation to plan, attempt to commit or commit a crime, or to conceal an ongoing crime or ongoing criminal activity is precluded from asserting a privilege.   


Lack of privilege
There is no privilege for a mediation communication that is:

(1) in an agreement evidenced by a record signed by all parties to the agreement;

(2) made during a session of a mediation that is open, or is required by law to be open, to the public;

(3) a threat or statement of a plan to inflict bodily injury or commit a crime;

(4) intentionally used to plan a crime, attempt to commit a crime, or to conceal an ongoing crime or ongoing criminal activity;

(5) sought or offered to prove or disprove a claim or complaint filed against a mediator arising out of a mediation;

(6) except as otherwise provided, sought or offered to prove or disprove a claim or complaint of professional misconduct or malpractice filed against a mediation party, nonparty participant, or representative of a party based on conduct occurring during a mediation;  

(7) sought or offered to prove or disprove child abuse or neglect in a proceeding in which the Division of Youth and Family Services in the Department of Human Services is a party, unless the Division of Youth and Family Services participates in the mediation.

(8) considered by a court, administrative agency, or arbitrator,  in certain limited proceedings involving a crime or to prove a claim to rescind or reform or a defense to avoid liability on a contract arising out of the mediation, and in which there is a finding, after a hearing in camera, that the party seeking discovery or the proponent of the evidence has shown that the evidence is not otherwise available, that there is a need for the evidence that substantially outweighs the interest in protecting confidentiality.   


Permitted disclosures
A mediator may not make a report, assessment, evaluation, recommendation, finding, or other oral or written communication regarding a mediation to a court, administrative agency, or other authority that may make a ruling on the dispute that is the subject of the mediation, except as is noted below. A communication made in violation of subsection a. may not be considered by a court, administrative agency, or arbitrator.


A mediator may disclose:

(1) whether the mediation occurred or has terminated, whether a settlement was reached, and attendance; or

(2) a mediation communication as permitted under other provisions as noted above.


Confidentiality is the key to a successful mediation.   Every mediator must be aware of its significance and make sure that all counsel and participants understand and appreciate its role in the mediation process.

The Importance of Insurance Coverage in Mediating Complex Construction Claims

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Thomas J. Pryor, Shareholder and Chair of Stark & Stark's Insurance Coverage & Liability Group, has authored the article, The Importance of Insurance Coverage in Mediating  Complex Construction Claims for the March 31, 2008 issue of the New Jersey Law Journal.

You can read the full article here.

Arbitrator's Immunity From Civil Liability

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Is an Arbitrator in a civil matter immune from a party's claim of negligence that occurs during the arbitration proceeding?  This is the question that was recently asked in a case heard before the Appellate Division of the New Jersey Superior Court.   In the case of Malik v. Ruttenberg (Docket No. A-6615-06T3), the Appellate Division of the State of New Jersey was presented with a situation where an attorney involved in the arbitration allegedly assaulted one of the parties.   The party involved had previously asked the Arbitrator to remove this attorney from the proceedings.   This request was denied by the Arbitrator and the assault allegedly took place during a recess outside of the arbitration room.
 
The party that was allegedly assaulted brought an action against the American Arbitration Association and the Arbitrator, claiming that they knew of this attorney's dangerous tendencies but failed to exercise reasonable care to control these tendencies.  The American Arbitration Association and the Arbitrator sought dismissal of the complaint based upon a claim of immunity under N.J.S.A. 2A: 23B -14. 
 
The Appellate Division noted that whether a common law or statutory immunity applies to a party is a question of law.   If an immunity applies and bars civil liability, it trumps any theory of negligence.  In its analysis, the Court noted that there are few doctrines that were more solidly established at common law than the immunity of judges from liability for damage for acts committed within their judicial jurisdiction.  This immunity is necessary for the independent and impartial exercise of judicial judgment that is vital to the judiciary.  The opinion of the Court noted that the common law extended absolute judicial immunity to the work of quasi-judicial figures such as arbitrators.  An alleged wrongful act does not expose a judge to liability so long as the act was undertaken in an official capacity and an arbitrator is similarly protected.
 
The Appellate Court found that an Arbitrator's duty to control the proceedings was clearly within the scope of a judicial function.  The acts of the Arbitrator were found to be protected by judicial immunity, as was the arbitral organization in its job of administering an arbitration.  In finding that "immunity trumps liability" the Appellate Division dismissed the complaint filed against the Arbitrator and the American Arbitration Association.

Appeals Court Affirms Request for Arbitration After Parties Had Litigated for Over One Year

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The New Jersey Appellate Division decided Delam Construction v. 15 Thornton Road on December 10, 2007.  The parties had entered into a contract for Delam to construct a building.  Defendant, Thornton, owed Delam a balance of $187,368 for Delam’s work on the project.  Delam filed suit for breach of contract and later added Thornton’s managing member as a defendant.

Thornton counterclaimed alleging construction deficiencies.

Discovery took place and trial was scheduled more than one year after the complaint was filed.  By then, defendant had obtained new counsel, trial was adjourned and the court sent the matter to arbitration after defendant’s new attorney raised for the first time an arbitration clause in the original contract.  Plaintiff alleged that defendant had waived its right to arbitration by participating in the litigation for over one year.  The court examined the competing interests between, on the one hand, favoring commercial arbitration as a speedy and inexpensive alternative to litigation, particularly in construction contract disputes, and on the other hand, whether the active and prolonged litigation resulted in a waiver of the right to compel arbitration.

The court noted an earlier decision where a trial judge’s compelling arbitration nearly five years after the original complaint, was rejected.

After wrestling with the issue of when a waiver has occurred, the court ruled in favor of allowing the matter to proceed to arbitration.

The court relied upon “prejudice” as the “touchstone” for determining when a waiver has occurred.  The court was influenced by the perceived lack of prejudice to plaintiff given that much of the same information generated through discovery would be admissible in the arbitration.  The court was also persuaded by the assumed knowledge by plaintiff that by filing in court, plaintiff was ignoring the mandatory contractual arbitration provision.  Finding neither side blameless, the court directed the matter to arbitration.

The court recognized this was a difficult choice.  Parties litigating in this area should be mindful that there are federal cases which hold otherwise.  As always, the ultimate outcome was somewhat case specific and fact sensitive.