ADR IN WASHINGTON – Chapter 28 of “Doing Business in Washington” (5th ed., WSBA International Section)
I was asked to author the chapter on Alternative Dispute Resolution for the 5th edition of “Doing Business in Washington”, published (fall 2010) by the WSBA International Section in conjunction with the Washington Department of Commerce. I also authored the same chapter in prior editions of that deskbook. The ADR Chapter in the 5th edition follows. The deskbook is available from the WSBA in both English and Chinese.
ALTERNATIVE DISPUTE RESOLUTION
Philip E. Cutler
In addition to the option of having commercial disputes resolved by a court proceeding, other options for resolving disputes are available. These options are commonly referred to as Alternative Dispute Resolution, or ADR. Given the high cost of civil litigation, the drain on management time which protracted litigation entails, and the general U.S. and Washingtonrule that parties pay their own litigation costs and attorneys’ fees, ADR options are increasingly preferred as a means to resolve business disputes. Because ADR, particularly arbitration, is operationally more similar to methods of dispute resolution in other countries, it is often attractive to foreign businesses with U.S.interests. Parties who desire to resolve commercial disputes by ADR are wise to include such a term in their contracts where possible as parties cannot generally be forced to give up their option to have disputes decided in court.
Both arbitration and mediation are forms of ADR. However, the purpose of arbitration is very different from mediation, as is the function of the independent neutral who is involved in each process.
The purpose of arbitration is to resolve a dispute privately using the services of an independent, neutral decision-maker, the arbitrator, using the adversarial process. Although the arbitrator is not a judge, he or she functions in much the same manner as does a judge and determines whether or not a claim should he allowed and, if so, in what amount or under what circumstances. There is a “winner” and a “loser”. The arbitrator’s award is most often final and binding. An arbitration award may generally be filed in court and, once approved by the court, becomes a judgment with the same force and effect as a judgment which results from a judicial trial.
While the purpose of mediation is also to resolve a dispute privately using the services of an independent neutral, the mediator, the dispute is resolved through settlement. The mediator acts as a facilitator and helps the parties negotiate a settlement. There is no “winner” or “loser” in mediation. The mediation process is entirely voluntary; no party is required to agree to a settlement; the terms of any settlement reached are controlled by the parties, not the mediator. For that reason, mediation offers disputing parties dispute resolution options that they could not obtain in a court proceeding.
In arbitration, a neutral arbitrator or panel of arbitrators sits as the decision-maker in a dispute, hearing the evidence and argument and making an award. The finality of an arbitration award depends upon the arbitration forum but in general the award is final and binding. In cases brought under the Commercial Arbitration Rules of the American Arbitration Association, the rules of the New York Stock Exchange or the National Association of Securities Dealers, and under either state or federal arbitration law, and in cases referred to binding arbitration by consent of the parties in lawsuits brought in any of the Washington federal trial courts, the arbitrator’s award is final and binding and may only be overturned for serious arbitrator misconduct, or possibly manifest error. Most of the U.S.’s major trading partners are signatories to one or more treaties governing the arbitration of international disputes, resulting in the bilateral transnational enforceability of arbitration awards.
Although arbitration forums differ somewhat in how cases are handled, arbitration whether through a court-sponsored program or through a private ADR provider generally has the following characteristics:
- While arbitration is voluntary in the sense that parties must have agreed at some point to submit a dispute to arbitration, once arbitration has been selected as the dispute resolution mechanism, no party may unilaterally withdraw from the process without consequence.
- Although the arbitrator is not a judge, he or she functions in much the same manner as does a judge and determines whether or not a claim should be allowed and, if so, in what amount or under what circumstances. The arbitrator receives “evidence” and decides the facts and the law, ultimately making an “award”. There is a “winner” and a “loser,” oftentimes with attendant publicity about, and financial or other consequences to, who won and who lost. The arbitrator’s award is most often final and binding.
- Resolving a dispute through arbitration is often quicker and less costly and burdensome than using the court system. Although the court system is less congested with cases now than in the past, parties frequently must wait a year or more to have their case heard in court. Too, theU.S.civil justice system permits parties wide latitude in “discovery” the process by which each side gathers evidence in support of its case which, in turn, is often costly and time-consuming. By contrast, an arbitration hearing is generally held within a few months after the arbitration claim is filed. Also, while parties are free to agree on a “discovery” program, a party’s right to discovery in the arbitration context is ordinarily limited. As a consequence, legal costs for arbitrations are generally less than for a similar case processed through the court system.
- The arbitration process is more confidential than a court proceeding. However, while the arbitration hearing is “closed” (members of the public are generally not admitted, nor is any public record kept of the proceeding), the arbitration award, once filed with a court, becomes a matter of public record.
- An arbitration award is most often binding and may generally be filed in court and, once approved by the court, becomes a judgment with the same force and effect as a judgment which results from a trial. Circumstances under which an arbitration award may be vacated or overturned are quite limited. For all practical purposes, there is no appeal from an arbitration award.
28.2.1 Mandatory Arbitration in Washington State Courts
In most Washington counties, all civil cases filed in the Superior Court involving only claims for money damages where the amount in controversy does not exceed US$15,000 are referred initially to arbitration. Higher limits (up to US$50,000) apply in the most populous, business-center counties. Although the parties to such a case are required to go through arbitration, the result is not binding: any party dissatisfied with the arbitration award may demand a trial of the case. There are no additional court-assessed fees or costs for cases subject to mandatory arbitration; fees of the arbitrator are paid by the court. The parties, of course, pay their own attorneys’ fees and costs, unless the parties’ contract or a statute shifts that burden.
When a case is referred to mandatory arbitration, each party is given a list of several lawyers who the court has determined are qualified to serve as arbitrators. Each side is permitted to “strike” several names and from the remaining names the Superior Court will appoint an arbitrator. Alternatively, the parties may agree on an arbitrator, which they are encouraged to do.
The arbitration hearing is required to be held within 9 weeks after the arbitrator is appointed. Although the arbitration hearing is less formal than a trial (for instance, the rules of evidence are relaxed), the proceeding follows much the same format as at trial: the parties present the evidence in support of their case by the testimony of witnesses and the submission of documents. The arbitrator’s award is due 14 days after the hearing.
Any party dissatisfied with the arbitrator’s award may demand a trial of the case, called a trial de novo by timely filing a written demand. The arbitration award is sealed so that the judge or jury deciding the case is not influenced by the arbitrator’s decision. If the party demanding a trial does not obtain a better result at the trial de novo than that party obtained in the arbitration, that party is required to reimburse the opposing party for that party’s attorneys’ fees. If no trial is demanded, any party may obtain a judgment on the arbitration award by requesting that action of the Superior Court.
28.2.2 Arbitration in Federal Court in Washington State
Parties in cases pending in either of the federal court districts in Washington may stipulate to arbitration of the dispute; alternatively, arbitration may be ordered by the court. (Arbitration in federal court is addressed by the local court rules. For the Eastern District of Washington, see ED LR 16.2(c)(2)(d); for the Western District of Washington, see WD LR 39.1(d).) There are no additional court-assessed fees or costs for arbitration in the Eastern District of Washington; arbitrators in the Western District of Washington may be compensated at rates approved by the court.
Arbitration may be binding or non-binding, depending upon the parties’ agreement or the court’s order requiring arbitration. The arbitrator (generally an experienced practicing attorney on a court-approved roster of neutrals) may be selected by the parties; if no specific arbitrator is selected by the parties, the court will select the arbitrator. The Federal Rules of Evidence govern the admission of evidence at the arbitration hearing. An award given in a binding arbitration proceeding is ordinarily final and not subject to appeal; the award in such a case may generally only be challenged for serious arbitrator misconduct. (Most arbitrations under the local rules of the Eastern or Western District are governed by the Federal Arbitration Act, 9 U.S.C. § 1 et seq. Grounds for overturning a binding award are set forth in 9 U.S.C. § 10.) An award given in a non-binding arbitration proceeding becomes final and binding if, following the award, no party timely seeks a trial de novo of the dispute. If on a trial following a non-binding arbitration the party demanding a trial does not obtain a better result than the arbitrator’s award, the court may in its discretion require that party to pay its opponent’s reasonable attorneys’ fees and costs even if the law or the parties’ contract would not otherwise permit a recovery of attorneys’ fees. (In arbitrations under the Western District’s local rules, attorneys’ fees may be awarded only if the court also finds that the party seeking a trial de novo did so in bad faith, or if the parties’ contract or a statute permits an award of attorneys’ fees.)
28.2.3 Private Arbitration
Parties may agree by contract to submit any dispute arising under their contract to private arbitration or, after a dispute has arisen in a case where there is no contractual arbitration clause, agree to submit the matter to arbitration: arbitration is a recognized and approved form of dispute resolution under both federal and Washington state law; the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1 et seq., governs arbitrations under contracts involving interstate, foreign or maritime commerce; the Washington Uniform Arbitration Act (“WUAA”), RCW Chapter 7.04A, governs contracts involving intra-state (wholly within Washington) commerce and may, in an appropriate case, supplement the provisions of the FAA, but only to the extent the WUAA is not inconsistent with the FAA. It is very important that an arbitration clause or agreement to arbitrate be clear and comprehensive, and that the award resulting from the arbitration be enforceable. An attorney experienced in drafting such agreements should be retained to prepare the arbitration clause or agreement to arbitrate: a thoughtful and well-drafted arbitration agreement is especially important in international contracts; substantial thought should be given, for instance, to the types of disputes likely to arise under such contracts and the appropriateness of arbitration as a mechanism for resolving them.
There are many private arbitration providers in Washington. The largest providers for commercial cases include the American Arbitration Association (“AAA”), Judicial Arbitration and Mediation Service (“JAMS”), Judicial Dispute Resolution LLC (“JDR”) and Washington Arbitration and Mediation Service (“WAMS”), all with offices in Seattle. In addition to these, there are many other arbitration service providers, consisting of both organizations and individuals who provide such services. Disputes in the securities industry are commonly arbitrated under the auspices of the Financial Industry Regulatory Authority (“FINRA”). Provider organizations will commonly appoint as arbitrator any person to which all parties stipulate and agree. In the absence of an agreement, the organization will furnish the parties with a list of experienced arbitrators from which to choose an arbitrator for their case; the parties strike those potential arbitrators who are unacceptable; the organization then appoints an arbitrator from the remaining list.
Most recognized arbitration forums have rigorous standards which must be met by arbitrators. Both the AAA and FINRA, for instance, require that arbitrators undergo training before being assigned any cases and also require periodic continuing education in order for arbitrators to be retained on their panel. Some arbitration providers have specialized panels of arbitrators with industry-specific knowledge or experience. Both JDR and JAMS utilize principally retired judges as arbitrators for cases submitted to them.
The rules and procedures governing private arbitration vary among the various forums. These rules commonly address the type of pre-hearing “discovery” permitted and the evidentiary rules (if any) which apply at the arbitration hearing. Rules may be obtained from the arbitration service provider; most have their rules and procedures available on-line: www.adr.org (AAA), www.jamsadr.com (JAMS), www.jdrllc.com (JDR), www.finra.org (FINRA), and www.usamwa.com (WAMS).
Arbitrators in private arbitrations generally have broad discretion in fashioning a just remedy for a dispute submitted to them. While “the law” provides a general framework for decisions, arbitrators are not necessarily required to limit their remedy in the same way as judges in court trials are.
Most private arbitration service providers charge a filing or administrative fee; these fees vary substantially among service providers and are commonly based on the amount in controversy (claim or counterclaim). In nearly all cases, the parties also must agree to advance the arbitrator’s fees, which may vary substantially depending on the experience of the arbitrator, the complexity of the case and the arbitration forum. In arbitrations administered by the AAA, JAMS, JDR and WAMS, or in non-administered arbitrations, the arbitrator’s fees are commonly computed on either an hourly or per diem basis. Particularly in arbitrations heard by a panel of 3 arbitrators, or where the case is complex and requires substantial hearing time, arbitrator compensation can be a significant expense. In most commercial arbitrations, the arbitrator may allocate arbitrator compensation and provider-fees among the parties. In FINRA arbitrations, the arbitrator compensation component is generally less substantial, as FINRA rules set a fairly nominal “honorarium” level for arbitrator compensation. Unless the parties have provided otherwise by contract, the arbitrator may by award apportion the costs of the arbitration (including the arbitrator’s fees) among the parties.
Following delivery of the arbitrator’s award any party may file the award with the appropriate court (the appropriate county Superior Court for state-law cases, the federal court in Seattle or Tacoma (Western District of Washington) or Spokane, Yakima or Richland (Eastern District of Washington) for cases in which the federal courts have jurisdiction), with the request that the award be confirmed and judgment entered on the award. State and federal law prescribe the time by which such a request must be made and filed. There is ordinarily no appeal from an arbitration award and the circumstances under which an award will be overturned are quite limited: as a general rule, only serious arbitrator misconduct will justify a court in vacating (overturning) an arbitration award. See, e.g., 9 U.S.C. § 10 for cases subject to the Federal Arbitration Act, and RCW 7.04A.230 for cases subject to the Washington Uniform Arbitration Act; the statutory provisions are substantially similar.
In mediation (sometimes referred to as “conciliation” outside of the U.S.), the parties to a dispute utilize the services of an experienced neutral mediator to assist them in negotiating a mutually satisfactory resolution of the dispute. The mediator does not sit as a fact-finder, nor does he or she reach a conclusion on the merits of the dispute or make an award to one party. Rather, the mediator, by skillful questioning of the parties and their lawyers, assesses each party’s goals in the dispute and the relative strengths and weaknesses of each party’s case, builds on areas of agreement, and facilitates a settlement. Although frequently utilized as a means of settling a pending lawsuit, mediation may be successful at any stage of a dispute. The King County Superior Court (the Washington trial court serving King County and the greater Seattle area) and the federal courts of Washington encourage mediation as a method of dispute resolution. Federal courts in both the Eastern and Western Districts of Washington provide a roster of qualified neutrals to serve as mediators. The parties commonly agree to compensate the mediator for his or her services. Most arbitration service provider organizations also have a roster of neutrals qualified to serve as mediators.
Mediation is a process. The mediator attempts to facilitate a settlement between the parties by building upon areas of common agreement and by challenging the parties and their lawyers to think critically about the dispute, potential outcomes, and the business and other risks which attend continued pursuit of the dispute, whether in court or in arbitration.
Key characteristics of mediation include the following:
- The mediation process is confidential; no information disclosed to the mediator during the mediation process may be revealed outside the mediation setting (or even to the opposing side without consent): confidentiality is addressed both by court rule in federal cases (ED LR 16.2(b)(4) and WD LR 39.1(a)(6)) and by the Washington Uniform Mediation Act, RCW Chapter 7.07.
- Although all parties are expected to come to the mediation prepared to negotiate in good faith, mediation is an entirely voluntary undertaking; no party is required to agree to a settlement. The terms of any settlement reached are decided and agreed-upon by the parties (most often with advice and counsel of their attorneys), not the mediator.
- The mediator is not a judge (or arbitrator) and does not function like one. Nor does the mediator represent any of the parties. Although parties to a mediation are sometimes unrepresented, commonly each party comes to the mediation with a lawyer who represents the party’s interests. While the mediator may, in the course of the mediation, give the parties and their lawyers his or her opinion or best judgment, based on experience, as to a matter in dispute, the mediator does not decide who is right and who is wrong, nor does the mediator “decide” any of the issues in the dispute. There is no “loser” in mediation.
- If a settlement of the dispute results, it is because the parties decide that a settlement on the terms agreed-to is more advantageous, overall, than the continued expense and uncertainty of litigation or arbitration. Unless the parties decide to publicize the terms of the settlement, those terms remain confidential.
Why engage in mediation? The reasons are many, but include the following:
- First, litigation is an expensive process. It is costly to clients not only directly, in terms of the money expended on lawyers’ fees and litigation costs, but also indirectly: clients must devote significant time and energy to prosecution (or defense) of the case. In the business context, this diversion of effort from “the business” of the business is expensive. In all contexts, litigation is often emotionally draining as the parties must relive the dispute, even tedious details of it, with unrelenting frequency. Litigation is always costly on an emotional level.
- Second, what a judge or jury may do with a dispute is often uncertain: a party may win, but it also may lose or not “win” as much as the party hoped for.
- Third, court proceedings, and their outcomes, are public. Although cases are not actually tried in the press, the “court of public opinion” may render a verdict on a case just as surely as, and potentially very different from, a judge’s or jury’s decision. Also, while much of the arbitration process takes place privately, the arbitrator’s decision (i.e., his or her award) will become public when a party seeks either to confirm it or vacate it.
- Finally, litigation is often an unsatisfactory way to resolve a dispute and achieve closure to it. This is particularly true in business disputes where the parties have a continuing relationship or desire to do business in the future.
Mediation is an effort to settle a dispute, privately and outside of the glare of the publicity which attends public court proceedings. As a general rule, in mediation there are no losers, only winners. If the mediation results in a settlement of the dispute, both sides save the expense, uncertainty and disruption of continued litigation and trial. Even if the mediation fails to produce a settlement, both sides have the satisfaction of having at least tried to resolve the dispute out-of-court and have had many of the fundamental premises of their case tested by an independent third party. If mediation is selected as an ADR method, it is advisable for the mediation to occur as early as possible. Because litigation is so expensive, it is often more difficult to settle a dispute by mediation after the parties have spent substantial sums of money on litigation, particularly the sort of broad “discovery” available in U.S. court proceedings.
28.3.1 Court-Sponsored Mediation
The federal courts serving Washington State have a long history of emphasizing ADR, particularly mediation, to resolve disputes. The judges in both the Eastern and Western Districts of Washington commonly require that parties attempt to resolve their dispute by mediation. Panels of experienced mediators are available in each district to assist parties in that process, as are magistrate judges in those courts. Both courts have provided a complete menu of ADR alternatives, as well as detailed procedures for each of them, by court rule. See ED LR 16.2(b)(2)(b) and WD LR 39.1(c). Non-judicial mediators are commonly compensated for their services in federal court-sponsored mediation.
The Ninth Circuit Court of Appeals, the intermediate appellate court to which appeals from Washington federal courts are taken, also has a long history of encouraging mediation as a means of resolving appeals. While the dynamics of appellate mediation are different from mediating at the trial court level, experience has shown that parties successfully mediate cases even on appeal. The court has assigned an experienced mediator to the court’s Seattle office. Although the Ninth Circuit Mediator selects cases for potential mediation based upon the issues in dispute and the nature of the appeal, parties are free to request mediation. The Ninth Circuit Mediator serves the parties at no cost to them.
Washington state courts, at both the trial and appellate levels, also encourage mediation as a means of resolving disputes, although court-sponsored programs are few. Division I of the Washington Court of Appeals (handling appeals from Superior Courts in King (Seattle/Bellevue), Snohomish (Everett), Whatcom (Bellingham), Skagit (Mount Vernon), Island and San Juan counties) does not have a formal mediation program, but makes its commissioners available to serve as mediators when requested by the parties. The Court of Appeals in Divisions II and III (all other Washington counties) do not have a formal appellate mediation program but the courts in both divisions are receptive to parties’ desires to mediate at the appellate level.
28.3.2 Private Mediation
Most providers of arbitration services also offer mediation services through a roster of neutrals who have demonstrated their mediation abilities. The neutrals on the federal courts’ roster of ADR neutrals will generally mediate cases that do not originate in federal court and the court’s roster is a good source for private mediators. Other mediators may be located by contacting the ADR Sections of the Washington State Bar Association and the King County Bar Association or the local bar association of the area involved.
28.4 OTHER ADR METHODS
28.4.1 Trial by Referee
Although seldom used, litigants in a dispute pending in Superior Court may request that the court appoint a referee (an experienced lawyer, arbitrator or retired judge) to hear the case. See RCW Chapter 4.48. The referee, who is ordinarily compensated by the parties for his or her time, conducts a trial and then makes detailed findings of fact and conclusions of law, recommending a decision to the judge. The judge does not conduct a trial de novo, but reviews the evidence submitted to the referee and is then free to accept or reject the referee’s decision. Parties who submit their dispute for decision by a referee retain the right to appeal the judge’s ultimate decision to a higher court. This method of dispute resolution may be specified by the parties in their contract or dispute resolution agreement, or may be agreed upon later, when a dispute arises.
28.4.2 Mediation-Arbitration (Med-Arb)
As its name suggests, Med-Arb is a combination of mediation and arbitration. The parties’ first attempt to resolve their dispute by mediation, but agree in advance that if they are unsuccessful, either generally or as to specific issues, unresolved issues will be submitted to binding arbitration. Many ADR service providers have a Med-Arb program. Med-Arb may also be specified in a dispute resolution agreement or later, when a dispute arises. Because the neutral in a Med-Arb proceeding may be privy to highly confidential information during his or her service in the mediation phase, it is essential that all parties sign a Med-Arb agreement comprehensively addressing how these disclosures are to be handled and the impact – if any – on any arbitration award.
28.4.3 Judicial Settlement Conference
In all courts in Washington, state and federal, parties are free to request that the court appoint a judge or magistrate (not the judge assigned to try the case) to conduct a settlement conference. In such a conference, the judge commonly encourages the parties to settle their dispute by giving them his or her opinion of the case and its likely outcome.
28.4.4 Summary Trial
In a summary trial, each side to a dispute presents its evidence in summary form to a judge (or a jury) specially chosen to hear the case. A judge or magistrate, or even an experienced lawyer, presides at the summary trial. The judge’s or the jury’s verdict is non-binding but is often instrumental in achieving a settlement of the dispute. The summary trial option is expressly available in federal cases pending in the Western District of Washington, (See WD LR 39.1(f)(2).) although it may be used with the approval of the court and all other parties in other cases. It is most useful in complex, high-profile cases involving substantial sums of money where the expense of such a procedure is warranted.
28.4.5 Early Neutral Evaluation
In this ADR process, a neutral “evaluator” is selected by the parties who provide them with an evaluation of the parties’ positions concerning liability and damages, assistance in fashioning a discovery program designed to provide them with essential information early in the litigation, or both. The procedure is expressly available in federal cases pending in the Western District of Washington (see WD LR 39.1(f)(1)) although it may be used with the approval of the court and all other parties in other cases. It is particularly useful in parties’ settlement efforts prior to the filing of a case in court (or arbitration), where one party appears not to understand the current state of the law on liability or damages, or where the parties may desire settlement but disagree on what information each side needs in order for substantive settlement discussions to be fruitful.
 Philip E. Cutler is a principal in the Seattle law firm Cutler Nylander & Hayton, P.S. He is an experienced mediator and arbitrator and trial lawyer. He can be reached at email@example.com. This chapter presents a summary overview of various non-judicial dispute resolution options. The reader should consult a qualified attorney for advice concerning the legal requirements for or consequences of a particular course of action or ADR proceeding.