Alternative Dispute Resolution As a Problem-Solving Device

The past decade has featured massive growth in lawsuits, including those involving real estate. Sometimes these lawsuits have been unavoidable, arising from insolvencies or foreclosures. Often, however, they have resulted from disagreements between property owners and tenants or contractors. The time and money spent on these disputes has caused a needless and crippling drain on the resources of the parties.

Practitioners have observed escalating disillusion of clients with litigation as the primary vehicle for dispute resolution. Sources of dissatisfaction have included, among other things, the length, complexity, expense and general rancor involved. This has been especially true during the recent dramatic and continuing downturn in the economy. Nor are such complaints new. More than 80 years ago, for example, Judge Learned Hand expressed similar views:

The price we pay for unrestrained advocacy, the atmosphere of contention over trifles, and the unwillingness to concede what ought to be conceded, and to proceed to things which matter. Courts have fallen out of repute; many of you avoid them whenever you can, and rightly. About trials hang a suspicion of trickery and a sense of result depending upon cajolery or worse. I wish I could say it was all unmerited. After now some dozen years of experience I must say that as a litigant I should dread a lawsuit beyond almost anything else short of sickness and death.

“The Deficiencies of Trials to Reach the Heart of the Matter,” address to the Association of the Bar of the of the City of New York, 1921.

Alternative Dispute Resolution

Alternative dispute resolution (ADR) ' principally arbitration and mediation ' has for some time been successfully used in a wide variety of commercial
disputes. In addition to such areas as labor/management relations, with which it has been traditionally associated, ADR has been used in such diverse areas as medical malpractice, accounting and professional services disputes, claims regarding health care and securities, matrimonial matters, employment discrimination, sexual harassment and, recently, in disposing of creditor claims in bankruptcies. ADR has also long been used in resolution of real estate disputes, including those relating to real estate valuation, commercial leases ' notably leases for retail space ' and construction issues. The widely used American Institute of Architects (AIA) construction agreement contains a provision calling for arbitration of disputes among the parties, and requiring mediation before an arbitration can be initiated.

ADR has enjoyed a warm reception and high success rates in most of these areas. A notable former exception was the securities industry, in which claimants complained that arbitrations, especially, were controlled, and the outcome skewed, by the industry. Fortunately, the securities industry, now governed by a regulatory body known as the Financial Industry Regulatory Authority (“FINRA”), has a highly effective mediation facility that can be used as an alternative to arbitration. Despite extensive use in business and professional settings, arbitration and mediation have been underutilized in commercial real estate disputes. The arbitration and mediation processes are described below.

The Role of an Arbitrator

Most practitioners have at least passing familiarity with arbitration and mediation as dispute resolution devices. However, they differ widely. Arbitration is an adjudicative process. The role of an arbitrator, not unlike that of a judge, is to hear and determine, with the determination binding and ultimately enforceable in much the same manner as a judgment. A major advantage of the process is to allow the parties to choose the arbitrator(s) after receiving information regarding their credentials and background. As a result, panel members can be obtained who are objective and expert in the area of the dispute. This option, not available to litigants, fosters expedited dispositions without the need to educate the arbitrator regarding the legal and practical context in which the dispute has arisen. Unlike litigation, in the arbitration process, documents and records are kept confidential, except with the consent of the parties. Communications with the arbitrator can be made only with the other party(ies) present or through the American Arbitration Association or other supervising entity, if any.

Further savings in time and cost are effected by: 1) the power of the arbitrator to impose a hearing schedule that will not be changed without good cause; 2) the relative informality of arbitration proceedings; 3) suspension of many of the formalistic rules of evidence; and 4) truncation of extensive discovery, frequently unavoidable in litigations. For example, a well-known, publicized case administered by the American Arbitration Association under its Large Complex Case Program involved the valuation of a prime Park Avenue, NY, building. A three-member panel was selected, consisting of a commercial real estate owner, an expert in appraisal and valuation techniques, and this author as the real estate lawyer. The case was heard, and a nine-figure award rendered, in less than six months. It can be expected, and the parties agreed, that litigation of this matter, including motions and appeals, would have taken many years.

Limited Grounds for Appeal

Because of extremely limited grounds for appeal, arbitration awards are seldom challenged and very rarely overturned. The virtual waiver by the parties of their rights to appeal adds to the efficiency of the arbitration process. It also serves as a spur to arriving at a settlement before the award is rendered. Appeal rights will not be readily relinquished, however, unless the parties have implicit confidence in the neutrality and qualifications of the arbitrator, and the orderly administration of the case.

Mediation is a process in which a neutral assists the parties in reaching an agreement. The mediator has no power to issue an award or to impose a resolution. The role of the mediator is to create and maintain a climate that maximizes the possibility of settlement. Of course, the person(s) empowered to make final decisions for the respective parties must be present. Mediators may initially act as “agents of reality.” Especially at the beginning of the process, the mediator is likely to point out, separately and repeatedly to each party, the apparent weaknesses in its case, the uncertainties of success in an adversarial proceeding and the unpleasant and expensive litigation alternative that may lie ahead in the event that the mediation is unsuccessful. Like arbitration, mediation proceedings are confidential except when consented to by the parties. In addition, the mediator may not disclose to any party information given by another party unless specifically authorized to do so.

A Skillful Art

Mediation is a skillful art. The mediator's role may be more or less active, depending on the dynamics of the process and what is needed to help move the parties toward settlement. In some cases, once having helped to set the process in motion, mediators may adopt a less active “maintenance” role, allowing the dialogue between the parties to continue, while seeking to head off an impasse that could result in derailment. Even in this less active role, the mediator may be needed when snags develop. For example, the mediator must act when a party is represented by a team rather than by an individual, and some members of the team disagree with a proposed solution acceptable to other members.

On the other hand, the mediator may take a very active role, like the conductor of an orchestra, in which he/she helps each side to fashion successive proposals as the parties move closer together. Mediators must use all tools at their disposal ' creativity in proposing solutions, use of interpersonal dynamics, and knowledge of the subject matter to try to develop “win-win” solutions to disputes between parties. The mediator can also serve as a “cover” to make proposals necessary for settlement that the parties may have considered privately but are unwilling to introduce for tactical or political reasons.

Mediation is hard, concentrated work. Preceding the mediation, the parties must submit pre-mediation statements summarizing their positions. These will be read and absorbed by the mediator. If there are questions or suggestions, the mediator may speak jointly or ex parte to any party(ies) and/or their counsel. The mediator must have refined and sophisticated knowledge of the subject area and a thorough understanding of the dispute and the positions of the parties before the mediation begins. He/she must be convinced that the mediation will succeed and communicate that conviction to the parties.

'Empowerment'

In a relatively recent development, there has arisen a new concept of transformative mediation, which emphasizes “empowerment” of the parties to express their needs and feelings, and “recognition” of those of the other party. The parties are encouraged to define their own needs and objectives while understanding those of the other side. Transformative mediation is seen by proponents as a way of reaching the roots of conflicts between the parties instead of focusing on solutions to immediate problems. They believe that the “problem-solving” approach involves suppression of feelings and long-term needs in order to reach a short-term solution. Transformative mediators are, as a result, seen as less directive than problem solving mediators, with the transformative approach using a broader context for moving the mediation ahead. Transformative mediators may consider the mediation a success, even though no solution has been reached, if improved understanding and communication between the parties has been achieved.

Transformative mediation has been especially effective in areas where the emphasis is on the relationship of the parties, as in matrimonial situations, and conflicts involving families, neighbors and co-workers. Problem solving mediation is generally more effective in business disputes. Of course, the transformative and problem solving approaches must be used where appropriate to forward the needs and objectives of the clients, the parties in the dispute. It is up to the mediator to understand the needs of the parties ' spoken and unspoken ' quickly, and to help them move towards their respective objectives. When this has occurred, the parties will respond and will be willing to trust the mediator. Among the clues used by mediators are the body language, facial expressions, speech patterns of the parties, and interactions with counsel. The mediator must “surround” him/herself in the cross-currents between the parties and counsel so as to become a part of the process.

Even in problem-solving mediation, there may be a significant emotional component as, for example, conflicts between originators of businesses and “sweat equity” partners. These feelings need not be suppressed by the mediator as diversions to a solution. On the contrary, the mediator must pay attention to those feelings, and may actually be able to use them as components in a solution. These considerations are especially important where there will be a continuing relationship between the parties. At the conclusion of a successful mediation, the participants should feel a sense of satisfaction, even camaraderie, in collaborating to “untie” a knot in their relationship.

Being Directive

By the same token, transformative mediations may be “directive” in helping the parties to accomplish their goals. Transformative mediators must be alert to indications that are useful in empowering the parties to express their needs and feelings and to recognize those of the other party(ies). The mediator sees these opportunities and encourages the parties to pursue them.

At the end of the mediation process the mediator, like the catalyst in a high school chemistry experiment, is scarcely in evidence. By allowing the parties to arrive at their own understanding, the mediator has maximized the possibilities for a favorable outcome. As authors of the resolution, the parties have made an investment in its successful implementation.

Resolving Commercial Real Estate Disputes

Mediation, currently underused, can be very helpful in resolving commercial real estate disputes. Frequently arising issues, such as those involving real estate tax and rent escalations, common area charges, use of space, cost of utilities, service disruptions, casualty insurance issues, restrictive covenants, availability and maintenance of parking facilities, including proper lighting, condemnation and construction issues are often sources of litigations, which continue for many years.

Predictably, very few mediated settlement agreements fall apart once the mediation has concluded. Partly for this reason, mediation is especially useful in situations where the parties will have an ongoing relationship, as opposed to those where the dispute involves a “one-shot deal.” It can be expected that a history of non-adversarial dispute resolution will strengthen the business relationship of the parties and enhance their ability to dispose of future disagreements successfully.

Conclusion

Counsel in a wide range of specialties are faced with a litigation-weary marketplace, hungry for speedy and inexpensive dispute resolution procedures. With steadily emerging demands of clients on all levels for cost-effective service, lawyers dare not fail to respond. The availability of ADR continues as a valuable tool, useful to potential adversaries and counsel seeking to avoid the rigors and expense of litigation. This is certainly true as to disputes where retail and commercial leasing are involved. These are areas in which ADR procedures have powerful potential for productive use. Hopefully, ADR is a resource that will be recognized and used by potential litigants.

Walter Goldsmith has been a mediator and an arbitrator for 25 years, and has worked for the American Arbitration Association and for the Financial Regulatory Authority (formerly NASD). The cases have included disputes regarding complex commercial, retail, and shopping center issues. Mr. Goldsmith is a partner in the New York law firm of Goldsmith & Fass. His practice is centered on real estate and real estate litigation.

The past decade has featured massive growth in lawsuits, including those involving real estate. Sometimes these lawsuits have been unavoidable, arising from insolvencies or foreclosures. Often, however, they have resulted from disagreements between property owners and tenants or contractors. The time and money spent on these disputes has caused a needless and crippling drain on the resources of the parties.

Practitioners have observed escalating disillusion of clients with litigation as the primary vehicle for dispute resolution. Sources of dissatisfaction have included, among other things, the length, complexity, expense and general rancor involved. This has been especially true during the recent dramatic and continuing downturn in the economy. Nor are such complaints new. More than 80 years ago, for example, Judge Learned Hand expressed similar views:

The price we pay for unrestrained advocacy, the atmosphere of contention over trifles, and the unwillingness to concede what ought to be conceded, and to proceed to things which matter. Courts have fallen out of repute; many of you avoid them whenever you can, and rightly. About trials hang a suspicion of trickery and a sense of result depending upon cajolery or worse. I wish I could say it was all unmerited. After now some dozen years of experience I must say that as a litigant I should dread a lawsuit beyond almost anything else short of sickness and death.

“The Deficiencies of Trials to Reach the Heart of the Matter,” address to the Association of the Bar of the of the City of New York, 1921.

Alternative Dispute Resolution

Alternative dispute resolution (ADR) ' principally arbitration and mediation ' has for some time been successfully used in a wide variety of commercial
disputes. In addition to such areas as labor/management relations, with which it has been traditionally associated, ADR has been used in such diverse areas as medical malpractice, accounting and professional services disputes, claims regarding health care and securities, matrimonial matters, employment discrimination, sexual harassment and, recently, in disposing of creditor claims in bankruptcies. ADR has also long been used in resolution of real estate disputes, including those relating to real estate valuation, commercial leases ' notably leases for retail space ' and construction issues. The widely used American Institute of Architects (AIA) construction agreement contains a provision calling for arbitration of disputes among the parties, and requiring mediation before an arbitration can be initiated.

ADR has enjoyed a warm reception and high success rates in most of these areas. A notable former exception was the securities industry, in which claimants complained that arbitrations, especially, were controlled, and the outcome skewed, by the industry. Fortunately, the securities industry, now governed by a regulatory body known as the Financial Industry Regulatory Authority (“FINRA”), has a highly effective mediation facility that can be used as an alternative to arbitration. Despite extensive use in business and professional settings, arbitration and mediation have been underutilized in commercial real estate disputes. The arbitration and mediation processes are described below.

The Role of an Arbitrator

Most practitioners have at least passing familiarity with arbitration and mediation as dispute resolution devices. However, they differ widely. Arbitration is an adjudicative process. The role of an arbitrator, not unlike that of a judge, is to hear and determine, with the determination binding and ultimately enforceable in much the same manner as a judgment. A major advantage of the process is to allow the parties to choose the arbitrator(s) after receiving information regarding their credentials and background. As a result, panel members can be obtained who are objective and expert in the area of the dispute. This option, not available to litigants, fosters expedited dispositions without the need to educate the arbitrator regarding the legal and practical context in which the dispute has arisen. Unlike litigation, in the arbitration process, documents and records are kept confidential, except with the consent of the parties. Communications with the arbitrator can be made only with the other party(ies) present or through the American Arbitration Association or other supervising entity, if any.

Further savings in time and cost are effected by: 1) the power of the arbitrator to impose a hearing schedule that will not be changed without good cause; 2) the relative informality of arbitration proceedings; 3) suspension of many of the formalistic rules of evidence; and 4) truncation of extensive discovery, frequently unavoidable in litigations. For example, a well-known, publicized case administered by the American Arbitration Association under its Large Complex Case Program involved the valuation of a prime Park Avenue, NY, building. A three-member panel was selected, consisting of a commercial real estate owner, an expert in appraisal and valuation techniques, and this author as the real estate lawyer. The case was heard, and a nine-figure award rendered, in less than six months. It can be expected, and the parties agreed, that litigation of this matter, including motions and appeals, would have taken many years.

Limited Grounds for Appeal

Because of extremely limited grounds for appeal, arbitration awards are seldom challenged and very rarely overturned. The virtual waiver by the parties of their rights to appeal adds to the efficiency of the arbitration process. It also serves as a spur to arriving at a settlement before the award is rendered. Appeal rights will not be readily relinquished, however, unless the parties have implicit confidence in the neutrality and qualifications of the arbitrator, and the orderly administration of the case.

Mediation is a process in which a neutral assists the parties in reaching an agreement. The mediator has no power to issue an award or to impose a resolution. The role of the mediator is to create and maintain a climate that maximizes the possibility of settlement. Of course, the person(s) empowered to make final decisions for the respective parties must be present. Mediators may initially act as “agents of reality.” Especially at the beginning of the process, the mediator is likely to point out, separately and repeatedly to each party, the apparent weaknesses in its case, the uncertainties of success in an adversarial proceeding and the unpleasant and expensive litigation alternative that may lie ahead in the event that the mediation is unsuccessful. Like arbitration, mediation proceedings are confidential except when consented to by the parties. In addition, the mediator may not disclose to any party information given by another party unless specifically authorized to do so.

A Skillful Art

Mediation is a skillful art. The mediator's role may be more or less active, depending on the dynamics of the process and what is needed to help move the parties toward settlement. In some cases, once having helped to set the process in motion, mediators may adopt a less active “maintenance” role, allowing the dialogue between the parties to continue, while seeking to head off an impasse that could result in derailment. Even in this less active role, the mediator may be needed when snags develop. For example, the mediator must act when a party is represented by a team rather than by an individual, and some members of the team disagree with a proposed solution acceptable to other members.

On the other hand, the mediator may take a very active role, like the conductor of an orchestra, in which he/she helps each side to fashion successive proposals as the parties move closer together. Mediators must use all tools at their disposal ' creativity in proposing solutions, use of interpersonal dynamics, and knowledge of the subject matter to try to develop “win-win” solutions to disputes between parties. The mediator can also serve as a “cover” to make proposals necessary for settlement that the parties may have considered privately but are unwilling to introduce for tactical or political reasons.

Mediation is hard, concentrated work. Preceding the mediation, the parties must submit pre-mediation statements summarizing their positions. These will be read and absorbed by the mediator. If there are questions or suggestions, the mediator may speak jointly or ex parte to any party(ies) and/or their counsel. The mediator must have refined and sophisticated knowledge of the subject area and a thorough understanding of the dispute and the positions of the parties before the mediation begins. He/she must be convinced that the mediation will succeed and communicate that conviction to the parties.

'Empowerment'

In a relatively recent development, there has arisen a new concept of transformative mediation, which emphasizes “empowerment” of the parties to express their needs and feelings, and “recognition” of those of the other party. The parties are encouraged to define their own needs and objectives while understanding those of the other side. Transformative mediation is seen by proponents as a way of reaching the roots of conflicts between the parties instead of focusing on solutions to immediate problems. They believe that the “problem-solving” approach involves suppression of feelings and long-term needs in order to reach a short-term solution. Transformative mediators are, as a result, seen as less directive than problem solving mediators, with the transformative approach using a broader context for moving the mediation ahead. Transformative mediators may consider the mediation a success, even though no solution has been reached, if improved understanding and communication between the parties has been achieved.

Transformative mediation has been especially effective in areas where the emphasis is on the relationship of the parties, as in matrimonial situations, and conflicts involving families, neighbors and co-workers. Problem solving mediation is generally more effective in business disputes. Of course, the transformative and problem solving approaches must be used where appropriate to forward the needs and objectives of the clients, the parties in the dispute. It is up to the mediator to understand the needs of the parties ' spoken and unspoken ' quickly, and to help them move towards their respective objectives. When this has occurred, the parties will respond and will be willing to trust the mediator. Among the clues used by mediators are the body language, facial expressions, speech patterns of the parties, and interactions with counsel. The mediator must “surround” him/herself in the cross-currents between the parties and counsel so as to become a part of the process.

Even in problem-solving mediation, there may be a significant emotional component as, for example, conflicts between originators of businesses and “sweat equity” partners. These feelings need not be suppressed by the mediator as diversions to a solution. On the contrary, the mediator must pay attention to those feelings, and may actually be able to use them as components in a solution. These considerations are especially important where there will be a continuing relationship between the parties. At the conclusion of a successful mediation, the participants should feel a sense of satisfaction, even camaraderie, in collaborating to “untie” a knot in their relationship.

Being Directive

By the same token, transformative mediations may be “directive” in helping the parties to accomplish their goals. Transformative mediators must be alert to indications that are useful in empowering the parties to express their needs and feelings and to recognize those of the other party(ies). The mediator sees these opportunities and encourages the parties to pursue them.

At the end of the mediation process the mediator, like the catalyst in a high school chemistry experiment, is scarcely in evidence. By allowing the parties to arrive at their own understanding, the mediator has maximized the possibilities for a favorable outcome. As authors of the resolution, the parties have made an investment in its successful implementation.

Resolving Commercial Real Estate Disputes

Mediation, currently underused, can be very helpful in resolving commercial real estate disputes. Frequently arising issues, such as those involving real estate tax and rent escalations, common area charges, use of space, cost of utilities, service disruptions, casualty insurance issues, restrictive covenants, availability and maintenance of parking facilities, including proper lighting, condemnation and construction issues are often sources of litigations, which continue for many years.

Predictably, very few mediated settlement agreements fall apart once the mediation has concluded. Partly for this reason, mediation is especially useful in situations where the parties will have an ongoing relationship, as opposed to those where the dispute involves a “one-shot deal.” It can be expected that a history of non-adversarial dispute resolution will strengthen the business relationship of the parties and enhance their ability to dispose of future disagreements successfully.

Conclusion

Counsel in a wide range of specialties are faced with a litigation-weary marketplace, hungry for speedy and inexpensive dispute resolution procedures. With steadily emerging demands of clients on all levels for cost-effective service, lawyers dare not fail to respond. The availability of ADR continues as a valuable tool, useful to potential adversaries and counsel seeking to avoid the rigors and expense of litigation. This is certainly true as to disputes where retail and commercial leasing are involved. These are areas in which ADR procedures have powerful potential for productive use. Hopefully, ADR is a resource that will be recognized and used by potential litigants.

Walter Goldsmith has been a mediator and an arbitrator for 25 years, and has worked for the American Arbitration Association and for the Financial Regulatory Authority (formerly NASD). The cases have included disputes regarding complex commercial, retail, and shopping center issues. Mr. Goldsmith is a partner in the New York law firm of Goldsmith & Fass. His practice is centered on real estate and real estate litigation.