A Mediator’s Proposal – Whether, When, and How It Should Be Used (Part 2)


by Stephen A. Hochman

March 2012

Stephen A. Hochman

When Should a Mediator’s Proposal Not Be Used?

            My preference is to suggest the idea of a mediator’s proposal and wait to see if either party objects rather than first asking permission from the parties to let me make a mediator’s proposal.  That is because I am less likely to get an objection if I first state my belief that a mediator’s proposal is likely to overcome the impasse and avoid a failed mediation.  However, some mediators believe it would not be appropriate to make a mediator’s proposal if either party objects after the mediator suggests the making of a mediator’s proposal.  Because either party is free to reject the mediator’s proposal, I do not believe that either party should have a right to veto the mediator’s use of a mediator’s proposal as a last resort to avoid a failed mediation.  However, if one party requests the mediator to defer making a mediator’s proposal because it believes that further negotiations might succeed without it, that request should be honored. 

What Are the Possible Disadvantages of Making a Mediator’s Proposal?

            The main reason that many mediators oppose the use of a mediator’s proposal is their argument that, if a mediator gets a reputation of using a mediator’s proposal as an impasse breaking technique, the parties are likely to spin the mediator by posturing and taking unrealistic positions in order to create an impasse rather than being candid with the mediator and negotiating in good faith by admitting their weaknesses.  However, in my experience the parties rarely admit to me the weaknesses in their case.  Instead, they do their best to convince me that they have a winning case in the hope that I will make their arguments when caucusing with their adversary and lean in their direction if and when I make a mediator’s proposal.

            Another reason that some oppose the use of a mediator’s proposal is their belief that it is  directive rather than merely evaluative and thus inconsistent with the principle of party autonomy --, i.e., that the each party should make its own decision free from the influence of the mediator.  However, I believe that most parties want the mediator to help them be realistic about their litigation alternative and hope that a mediator’s proposal will influence their adversary’s decision towards settlement at least as much as it may influence their own decision.  The reality is that, by making a mediator’s proposal, the mediator is not interfering with the unfettered right of the parties to make their own independent decision to choose between what I call the “lesser of the two evils” – i.e., a less than ideal settlement compared to the uncertain and expensive litigation alternative.            

            Another objection that some have expressed is that the mediator’s proposal may create the appearance that the mediator is not impartial because one or both parties may perceive that the proposal is more favorable to its adversary interests than its own interests.  However, that misperception can be overcome by the mediator making it clear that the proposal represents his or her independent and objective evaluation of the dispute and best effort to recommend a settlement that is better for both parties than the litigation alternative.

            Whether or not the parties anticipate that I will, if necessary, make a mediator’s proposal to avoid a failed mediation, they rarely tell me their weaknesses because they want me to focus on the strengths of their case when I caucus with the other party.  Nor do they tell me what they consider to be their bottom line or worst case settlement alternative to litigation.  Whenever parties tell me their bottom line, I thank them for sharing with me their present thinking.  Most attorneys experienced in mediation advocacy will spin the mediator to some degree because they are hoping to get a better result for their client than a worst case settlement.  However, the most experienced attorneys will avoid insulting the mediator by claiming to have a bottom line that is totally out of the ballpark of reality.  As discussed below, in deciding on the terms of a mediator’s proposal I avoid being influenced by what the parties tell me is their bottom line in our private caucuses. 

How Should the Mediator Prepare the Parties For a Mediator’s Proposal?

            Before making a mediator’s proposal, it is important that the mediator explain that part of the mediator’s job is to play the role of “agent of reality” and thus avoid making mistake number 2 in the above list of ten mistakes.  It is important for the parties to understand that, in the mediator’s confidential caucus with each party, part of the mediator’s job is to focus them on their weaknesses rather than their strengths, and that does not mean that the mediator is favoring their adversary.  I repeatedly remind the side that I am caucusing with that, when I caucus with their adversary, I will similarly be playing the devil’s advocate role with them.

            In my introduction to the mediation I usually explain to the parties that I am the only person in the room with no stake in the outcome.  To emphasize my impartiality, I make it clear that I have no interest in whether the case settles on the high end, the middle or the low end of the range of possible settlements, and my only agenda is to help the parties settle on terms that both parties decide is better than their litigation alternative.  It has been clinically proven that those with a stake in the outcome, including the attorney/advocates, cannot be totally objective in evaluating their likely litigation outcome.  Because the lawyers are hired to focus their efforts on supporting the strengths of their client’s case, they tend to underweight the weaknesses in their case and often fall in love with their most creative arguments.  It is not uncommon for the lawyers to have “advocacy bias” that anchors them to their initial evaluations and to devalue and reject what they hear from their adversary.  However, they are more likely to at least listen to and objectively evaluate what the mediator says.

 What Criteria Should the Mediator Use in Formulating a Mediator’s Proposal?

            Most mediators try to choose a number for their mediator’s proposal that they believe has a chance of being accepted by both parties without taking into account what the mediator believes is the value of the case.  I submit that the mediator should endeavor to select a number that, in addition to having a chance of being accepted by both parties, is in the win-win range based on the mediator’s objective analysis of the value of the case.  An example of the win-win range is, if the mediator believes plaintiff has a 50-50 likelihood of winning $1 million and the parties will each spend $100,000 to get a court to give them an all-or-nothing decision, the win-win range is $400,000 to $600,000.  It is not unusual for both parties in a 50-50 case to come to the mediation believing that they are at least 70-75% likely to win.  Of course, they cannot both be right.  That is why it is important for the mediator to avoid making mistake number 3.b. in the above list of ten mistakes by being sure to do risk analysis and reality testing before permitting the parties to begin negotiating numbers.

            I believe that the dollar number that the mediator proposes should be based on the mediator’s independent judgment as to the value of the case based on an objective decision tree analysis and not on the midpoint between what the parties claimed to be their respective bottom lines.  Ideally, the mediator should propose a number in the middle of what s/he believes is the win-win range (e.g., $500,000 in the above example).  I would not be comfortable in the above example of proposing a number below $400,000 or above $600,000 merely because I thought it might be accepted by both parties.  The issue is not what the mediator believes is fair (a totally subjective standard), but what the mediator objectively believes is better for both parties than their litigation alternative.

I never believe bottom lines that are outside of the objective win-win range.  Of course, even if both parties in the above example honestly believe they are more than 60% likely to win despite the risk analysis and the reality testing that they heard from the mediator in caucus, they may still accept a $500,000 mediator’s proposal based on the their non-monetary interests and needs, including the need to avoid risk and put the dispute behind them.

            Before revealing the dollar number of the mediator’s proposal, it is  important for the mediator to avoid making mistake number 9 in the above list of ten mistakes, which is failing to “test the waters” in caucuses with each party before revealing the dollar number of the mediator’s proposal.  For example, if the mediator tells the plaintiff in the above example that she is considering a number it the range of $450,000 to $500,000, the mediator can gauge the plaintiff’s reaction.  Similarly, the mediator can gauge the defendant’s reaction to a number in the range of $500,000 to $550,000.  If plaintiff rejects the $450,000 out of hand more strongly than the $500,000, and the defendant similarly rejects the $550,000 more strongly than $500,000, the mediator can feel that there is a good chance that both parties will accept a $500,000 mediator’s proposal.

            Often a party will agree to the dollar number in a mediator’s proposal even though it would never have agreed to the same number if it were an ultimatum by its adversary.  Because the number is the mediator’s number and not the adversary’s, it eliminates reactive devaluation.  It often boils down to the parties choosing between the lesser of the two evils – either a less than ideal settlement or an uncertain and costly litigation. 

What Are the Advantages of a Mediator’s Proposal?

            The most important advantage is that a mediator’s proposal can overcome the posturing that often goes on in negotiations.  Of course, there is a number below which the plaintiff would be rational in refusing to accept in a settlement, and there is a number above which the defendant would be rational in refusing to pay.  However, the parties rarely offer to settle for that worst case number and prefer to shoot for a better number.  The beauty of using the mediator’s proposal as a last resort is that, from the plaintiff’s perspective, the money is “on the table,” at least conditionally, and both parties may accept it, albeit reluctantly, even if it is slightly worse than what they considered their worst case number during the negotiation process.  Also, the fact that the parties know that the mediator will not choose a number that is outside of the objectively determined win-win range will often increase the likelihood that it will be accepted by both parties.  That is because it comes with a stamp of objectivity and legitimacy, assuming the parties respect the competence and integrity of the mediator.

Is There Anything a Mediator Can Do If Only One Party Accepts the Mediator’s Proposal?

            On the rare occasion that only one party accepts my mediator’s proposal, I might ask the accepting party if it would be willing to release me from the pledge of confidentiality and let me tell the rejecting party that the accepting party would be willing to make a slight improvement in my mediator’s proposal in the interest of avoiding a failed mediation.  In a case where the defendant gave me permission to make a second mediator’s proposal if it was no more than 10% above my mediator’s proposal, the plaintiff agreed to accept that slightly increased number.  That was because it met the emotional need of the plaintiff to feel that it squeezed the proverbial “last nickel” out of the defendant, who the plaintiff felt had treated him unfairly.  Even in cases that are ostensibly only about money, I have found that the percentage of those cases that have an emotional component is, “give or take, 100%.”

How Should The Parties Be Instructed to Respond to a Mediator’s Proposal?

            I always prefer to get the answers to my mediator’s proposal from both parties at the same time, and I usually ask each party how much time it thinks it will need to decide on their answer.  By getting answers at the same time (e.g., by asking each party to send me a one word “yes” or “no” email between Noon and 5:00 PM on the agreed date), it avoids the situation where I am reluctant to continue my attempt to explain to the more unrealistic party why I believe my proposal is better than its litigation alternative. If that unrealistic party finds out or suspects that I previously received an answer from its adversary (who I believe is more likely to accept my proposal), continuing my attempts to do reality testing with the unrealistic party could compromise the confidentiality that I promised to both parties that I would not disclose the answers to my proposal (either by words or actions) unless both parties responded with a “yes.”

            Attached to the article as an Appendix is an example of instructions that I sent to counsel for both parties explaining the procedure for replying to my mediator’s proposal in a case that I knew would be difficult for the plaintiffs to accept because of the unrealistic expectations they had as to the value of their case.  It was a case that I spent many hours with the parties helping them reach agreement on the wording of a complicated definitive settlement agreement, and I knew I would have much difficulty in helping the plaintiffs realize that the dollar number of my proposal was preferable for them than their litigation alternative.  Fortunately, plaintiffs’ attorney realized that my mediator’s proposal was clearly better for his clients than their litigation alternative, but he needed my help in convincing his clients to overcome their anger at the defendant and avoid what would most likely be a worse result for them if the case went to litigation.  Because I expected that it would take much time for me and plaintiffs’ counsel to convince all three plaintiffs to accept my proposal, I instructed the parties to each let me know when they were ready to give a “yes” or “no” answer, but to refrain from telling me what that answer was until I was told that both sides were ready to give their answers.  That way I could continue to help plaintiffs’ counsel convince his clients to accept the proposal as being preferable to the litigation alternative without causing plaintiffs to suspect that the defendants had previously accepted the proposal.

            Conclusion

            I believe that the mediator’s proposal is an effective end-game to break impasse for those mediators who are willing to be evaluative when necessary to avoid impasse.  I find it almost always works.  To give up without attempting to use the mediator’s proposal as a last resort is, in my opinion, a missed opportunity, assuming that the parties hired the mediator to help them settle their dispute on terms that they ultimately decide are better than their litigation alternative.

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Biography




Stephen A. Hochman recently retired from the New York City law firm of Friedman, Wittenstein & Hochman, where he practiced from 1987 – 2006, first as a partner and later as counsel.  He was a founding partner in the firm now known as Kramer, Levin, Naftalis  & Frankel, where he practiced from 1968-1987, specializing in corporate, commercial and securities law.  He also represented both investors and issuers in real estate, tax oriented and other types of investment partnerships.  Prior to 1968, he was a partner in Kramer, Nessen & Hochman and an associate at Proskauer Rose Goetz & Mendelsohn, where he began the practice of law following his graduation from Cornell Law School in 1959.

Mr. Hochman now practices almost exclusively as a mediator and arbitrator.  He served as an arbitrator for the American Arbitration Association, arbitrating primarily securities and commercial disputes, and has been both an arbitrator as well as a mediator for the New York Stock Exchange and the NASD.  He also serves as a court-appointed mediator for the federal district courts in the Southern and Eastern Districts of New York, the U.S. Bankruptcy Court in the Southern District of New York and the New York State Supreme Court, New York County (Commercial Division), and serves on the Supreme Court's ADR Advisory Group. He is also a mediation trainer in the Supreme Court=s Commercial ADR Program and a Special Master for the Appellate Division, First Department, of the New York State Supreme Court.

Mr. Hochman writes, consults and lectures frequently on the subjects of arbitration and mediation and is a member of the American Law Institute and various ADR-related bar association and advisory committees.  He is a former Chair of the Arbitration Committee of the American Bar Association's Section of Dispute Resolution and former Co-Chair of its Large, Complex Case Subcommittee.  He served for many years as Chair of the American Law Institute-American Bar Association's annual program on Alternative Dispute Resolution and was Chair of its annual program on Corporate Mergers and Acquisitions.  He also served as a member of the American Arbitration Association's Securities Arbitration Rules Task Force and its Commercial Arbitration Practice Committee.

Mr. Hochman has mediated over 350 commercial, business, international and other types of disputes, including securities, contract, employment, insurance, real estate, construction, franchise, brokerage and class action disputes, approximately 98% of which have settled.  In addition to his own investment activities, he serves on the investment committees and boards of various not-for-profit corporations, including several hospitals and a non-profit captive re-insurance company.  Mr. Hochman has also been an Adjunct Lecturer in Securities Regulation at Columbia Law School and an Adjunct Lecturer in both Mergers and Acquisitions and Alternative Dispute Resolution at Fordham Law School.



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