Introduction

The last 50 years have witnessed a surge in civil litigation that has resulted in clogged court calendars, delays in trial, and increased expense for litigants. In 2003 alone, over 100 million lawsuits were filed in the state and federal courts, of which some 17 million were civil cases (1). Although the pace of new filings has abated somewhat over the past six years, the state and federal caseloads remain at levels that strain the justice system's ability to deliver timely and efficient resolutions.

In response to the burgeoning federal court caseloads, and in furtherance of the public policy favoring settlement of disputes, Congress passed the Civil Justice Reform Act in 1990 and the Alternative Dispute Resolution Act in 1998, both of which promote the use of alternative dispute resolution ("ADR") in federal courts, including arbitration and mediation. With most state legislatures and courts following suit, ADR (and mediation in particular) is now recognized as a viable alternative to civil litigation.

Lenders are often the target of litigation by borrowers, guarantors, co-lenders, and bankruptcy trustees.  While a growing number of lenders include ADR provisions for arbitration in their loan documents, few are requiring mediation as a precursor to litigation.  Many lenders are unfamiliar with mediation and its potential benefits.

Overview of Mediation

Mediation is a conflict resolution process by which an acceptable third-party neutral with no decision-making authority assists the mediation participants in voluntarily reaching a resolution of their dispute.  Mediation affords the participants an opportunity to negotiate their own settlement, often on terms that would be unobtainable through litigation.  Because a mediation conference is confidential, mediation communications are generally inadmissible as evidence in a later hearing.  The conference is presided over by the mediator whose role is to suggest alternatives, assist the parties in case evaluation, question perceptions, conduct private caucuses with each side separately, maintain order and decorum, and encourage problem-solving by the parties.

Benefits and Success of Mediation

The potential benefits from mediation include the guidance in negotiations by an experienced neutral, often with significant subject matter expertise and case evaluation skills; an opportunity for parties to air their differences in an informal setting, directly with one another rather than speaking to a judge or jury in a pressurized, trial setting; the possibility to resolve a dispute in a manner that assures a gain by each participant and that may not be achievable through trial; an opportunity to keep settlement terms confidential (except where court approval may be required); avoidance of the time consumption, expense and outcome uncertainty of trial; the ability to obtain an expeditious and final dispute resolution; and, when applicable, the chance to repair relationships that may be ongoing.

Although there is no comprehensive data on mediation success rates, some studies indicate success percentages ranging from 60% to 90% of mediated cases, depending upon a number of factors, including the size and complexity of the case, the past experience of counsel with one another, and the parties' willingness to compromise (2).   Indeed, most lawsuits are settled before trial, with recent estimates being that less than 2% of civil cases in federal court are terminated by trial (3),  with the balance resolved through settlement, by dispositive pre-trial motions, default judgment, or dismissal for lack of jurisdiction or prosecution. The settlement percentage varies by locale and type of case but is likely far north of 80% (4).

When to Mediate

As a general rule, litigants elect to mediate when all sides concur that a mediated settlement may be productive. Although some litigants fear that suggesting mediation will be viewed by an adversary as a sign of weakness, most parties recognize that mediation is a commonly used ADR tool. Some believe that mediation should not be undertaken before the parties have conducted necessary pre-trial discovery in order to have a firm handle on basic facts, documents and witnesses. Others argue that mediation may be more productive before the parties have sunk costs in the discovery process. Anecdotal evidence suggests that many cases settle on the proverbial courthouse steps and not infrequently during the pendency of an appeal. The best answer to the question "When to mediate" is "It depends."

The tribunal in which the litigation is pending may direct the parties to mediate, either privately or pursuant to a court-connected program. Virtually all state and federal courts have formalized programs for mediation, based upon state statutes or local court rules.

Contractual Obligation to Mediate

With increasing frequency, parties are including contract provisions that require a complaining party to engage in party-to-party or mediated settlement discussions with the contract counterpart as a condition to suing on the contract.

Some courts have refused to enforce such provisions, often because the wording of the particular clause was vague or because the court felt it to be unproductive to force an unwilling litigant to go through the pretense of a settlement negotiation (5).   Most courts, however, have given effect to such provisions when they are couched as a condition precedent to litigation, set forth procedures governing the method and timing of the mediation, and specify the consequences of a breach (such as forfeiture of attorneys' fees and costs otherwise recoverable by the breaching party) (6).   Courts are disinclined to order specific enforcement of a pre-litigation agreement by requiring the parties to engage in mediation or, since there is no certainty that mediation would result in a settlement, award damages for breach.  Instead, the courts have either dismissed or stayed the litigation until the condition is fulfilled.

Although parties may not be forced to settle, pre-litigation clauses can be beneficial in promoting settlement, mending ongoing relationships, identifying in advance of litigation the details of a complainant's claim, and highlighting the complainant's interests and needs that must be resolved for settlement to occur.

Bankruptcy Related Mediation

Mediation of commercial disputes arising in bankruptcy cases has increased significantly over the past decade.  Most observers are familiar with the successful efforts of mediators in Detroit's recently concluded Chapter 9 bankruptcy case.

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