Mediation: effective resolution of contract disputes.

• Author: Autry, Charles T.

The electric power industry is currently undergoing dramatic structural changes, and such changes are likely to continue for the foreseeable future. The wholesale power market continues to be transformed into a competitive market as the result of legislative and regulatory changes, but is still very much a work in progress. At the retail level, some states continue to experiment with various forms of "customer choice."

Adding a further layer of complexity is the fact that while the deregulated market brought about the introduction of a multitude of new players into the power market, such as power marketers, financial problems arising with deregulation have also changed the playing field, resulting both in the elimination of some participants and in changes in audit standards and regulatory requirements. (1) Ultimately, both distribution cooperatives and generation and transmission (G&T) cooperatives find themselves in an era of fluctuating relationships with contractors, suppliers and/or customers.

Industry changes have greatly increased the number of commercial relationships that most electric cooperatives need in order to function effectively in the new environment. Cooperative managers and directors face a corresponding increase in the number and complexity of the contractual arrangements needed to cement these relationships. (2) Once such contractual arrangements are made, these contracts--which are, in essence, simply large commercial contracts--must be administered and, if disputes arise, litigated.

A seemingly simple dispute arising from a complex commercial contract can take on a life of its own. Lawsuits are filed or arbitrations are instituted. The attorneys take charge. Experts and consultants are hired. The claims proliferate. As the proceedings progress, attorneys' fees, expert witness fees, document reproduction costs, deposition expense, and travel expense may approach or even exceed the amount in dispute. The cooperative and its attorneys can easily find themselves in a "lose-lose" position. The "sunk costs" are so large that a complete victory at trial is the only hope for salvation. Such victories, however, can be elusive, and inevitably drain resources that could be spent better elsewhere.

The complexity of such contracts, and the enormous costs in time and money incurred in litigating such contracts, make it inviting and sensible to consider other methods of resolving contractual disputes--both as to settling disputes under existing contracts and in requiring use of such methods for future contracts. These alternative methods are often collectively referred to as alternative dispute resolution, or simply ADR. This article examines one ADR method whose use has exploded in the last decade: mediation. (3)

This article explains the advantages and disadvantages of mediation and discusses the mechanics of a typical mediation proceeding. Also discussed are scenarios in which a cooperative might be required to go to mediation, such as where courts or agencies require or suggest that the parties attempt mediation. In addition, this article examines the abilities of cooperatives to provide for mediation in future contracts and discusses key elements that should be included in mediation clauses.

What is Mediation?

Mediation involves the use of a neutral third party (i.e., the mediator) to act as a facilitator of settlement discussions. Unlike an arbitrator, a mediator does not decide the controversy, but guides the negotiations and helps the parties reach their own agreement. In a typical mediation, the parties personally participate in joint sessions and in private caucuses that the mediator holds with each party and its attorney. Because mediation is non-binding, both parties retain the right to pursue other means of resolving the dispute. Because of the informal, confidential and non-binding nature of mediation, the management representative often plays a greater role in reaching a business solution than in more structured legal processes, such as arbitration or litigation, where legal counsel is much more in control of the process and direction of the proceeding.

Why Use Mediation?

The primary advantage of mediation over other dispute resolution methods is clear: it gets cases settled quickly. From a practical standpoint, it works when other options have failed. By the time most disputes are mediated, the business managers have been unable to find a solution and the attorneys have also been unsuccessful in achieving closure. A trained mediator can help the parties understand why they need an agreement, can provide the support necessary for the parties to acknowledge their desire for an agreement, and can point out why the alternative of litigation is usually the least affordable alternative. Mediation has many other advantages, including:

* Mediation is substantially less costly than litigation or arbitration

* It achieves results much faster than litigation or arbitration

* Mediation offers an environment that reduces confrontation and encourages discussion; it orients the parties toward problem solving rather than position building

* It provides a reality test on the parties' issues and arguments by pointing out negative aspects of a case that the clients or attorneys are reluctant to confront

* It stands a much greater chance of preserving the business relationship than litigation or arbitration. Once a dispute is litigated, the parties almost always find it extremely difficult to continue to do business

* The mediator can develop and offer solutions that the parties have not considered

* Mediation gives the parties the freedom to reach a settlement that achieves their particular objectives, as opposed to a court judgment which simply awards money and establishes liability

Even where mediation does not result in settlement, the parties still receive substantial benefits from the process. The mediator's evaluation helps the parties more accurately assess the potential risks of litigation. It may well be that, at some point after an unsuccessful mediation and before a trial or administrative hearing, the parties will rethink their commitment to litigation based on insights originally brought out at mediation. In the event that the parties proceed to trial, the insights obtained during mediation will assist in streamlining the issues and reducing time and expense.

Whether mediation results in settlement or assists in preparing for litigation, mediation remains a low-risk proposition. Compared to litigation or arbitration, the cost is nominal and is usually shared between the parties. The cost in time is also comparatively low because of the comparatively informal nature of the mediation process. Considering the huge savings that undoubtedly result from a settlement, the payback potential of mediation is indeed high.

Several comprehensive studies have established that these advantages go beyond anecdotal evidence and have been proven in practice. For example, in a study conducted by Cornell University in 1997, respondents from approximately six hundred of the Fortune 1000 corporations answered a comprehensive survey concerning their use of ADR. (4) A sizeable majority of corporations stated that they used mediation because it provided a more satisfactory process than litigation, allowed the parties to resolve disputes themselves, provided more satisfactory...