Chapter 7 Impasse and Alternative Dispute Resolution ADR

Chapter 7 Impasse and Alternative Dispute Resolution (ADR)

7 -2 Possible Negotiation Outcomes n In general, negotiations will likely result in: Agreement – both parties achieve gains n No Agreement – one party walks away exercising its BATNA n Impasse – both parties continue to desire an agreement but reach impasse n Alternative Dispute Resolution – at impasse parties seek a third party to move discussions forward n

7 -3 Negotiation Process Continuum n Impasse should not be viewed as the endpoint of discussion, but as a point that leads to a method of ADR, and then settlement: Preparation Opening Offer Bargaining Impasse ADR Settlement

Negotiation Skills n n n 7 -4 Skill 7. 1: View an impasse as a temporary situation Skill 7. 2: Anticipate settlement pressure, but follow your BATNA Skill 7. 3: If an impasse occurs, consider mediation Skill 7. 4: If negotiation and/or impasse fail, consider arbitration Skill 7. 5: If appropriate consider hybrid forms of ADR

7 -5 Chapter Case: Hunt Manufacturing Company n n n Douglas Hunt at age 70 decided to sell his company, Hunt Mfg. Co. Rick Thomas, a Hunt board member sought to acquire HMC, but his “due diligence” process uncovered a sexual harassment suit Lynn Stephen, former HMC sales director, claimed a “hostile work environment”

7 -6 Chapter Case: Hunt Manufacturing Company (cont. ) n n n Investigation by HMC’s, HR director confirmed the incidents Insurance company agreed to pay a claim up to $250, 000 if Stephan and HMC agree to mediation Douglas Hunt suffered a massive heart attack and HMC board contacted Thomas – who agreed to an acquisition if the lawsuit was settled

ADR: Overview n n n 7 -7 Increasingly negotiators when at an impasse turn to a third party (ADR) ADR = an alternative to litigation, in which a neutral third party utilizes mediation, arbitration, or a hybrid form of the two ADR – now commonly used in a variety of fields: n n n n Labor-management Commercial disputes Landlord-tenant Small claims Employment issues Family disputes Neighbor vs. neighbor International business

What Are Common Causes of Negotiation Impasse? 1. 2. 3. 4. 5. 7 -8 No real ZOPA – thus no possible settlement point Entrenchment – by one or both parties in their position(s) (“heat of the battle”) Unskilled negotiators – fail to discover a proposal with mutual gains One or more parties had no real intention to settle Settlement pressure – as a negotiation approaches a party’s resistance point and possible deal they feel pressure and walk away

7 -9 Why Has ADR Increased in Use? n To achieve a settlement, compared to litigation, ADR: Cost: often less than litigation n Complexity of issues: parties can choose a knowledgeable third party n Time: often is faster n Confidentiality: mediation, in particular, is a private process (courts are public) n Avoid disastrous decision: mediation, in particular, can keep a party from “losing” a decision because the parties develop the final decision n

7 -10 Contract Clause Specifying the Use of Mediation and Arbitration to Settle International Disputes Any dispute, controversy, or claim arising out of or in connection with this contract, or the breach, termination, or invalidity thereof, shall first be referred to mediation in accordance with the Rules of the Mediation Institute of the Stockholm Chamber of Commerce, unless one of the parties objects. If one of the parties objects to mediation, or if the mediation is terminated, the dispute shall be finally resolved by arbitration in accordance with the Rules for Expedited Arbitration of the Arbitration Institute of the Stockholm Chamber of Commerce. The place of arbitration will be Indianapolis, Indiana, the language to be used in the arbitral proceedings shall be English, and the arbitral tribunal shall be composed of a single arbitrator.

Mediation n Evolved over the past 30 years as the preferred method of conflict resolution Alternative Dispute Resolution Act of 1998 requires local rules Defined: Mediation includes three elements: n n 7 -11 1. A private, confidential process 2. Third party (neutral) 3. Facilitation of a mutually acceptable resolution Mediator does not usually offer proposals or have any authority to force agreement

Mediator Sources n n n 7 -12 Federal Mediation and Conciliation Services (FMCS) American Arbitration Association (AAA) Local governments University-based centers Non-profit associations

7 -13 Steps in the Mediation Process 1. Request by the parties of mediator services 2. Initial conference to explain role of mediator, rights of parties 3. Schedule of session(s) of private meeting(s) 4. Formal retainer is set by an Agreement to Mediate; fee shared, ground rules

7 -14 Steps in the Mediation Process 5. 6. Information gathered by the parties Facilitation by the mediator; OSLO- orientation; story telling by two parties; listing of issues; outline resolutions of issues 7. Settlement is reached, mutual agreements determined by the parties 8. Agreement may/may not be signed by the parties and submitted to their attorneys, court

Approaches to Mediation 7 -15 (in ascending order of intervention by the mediator) n n n Collaborative mediation: Mediator in joint sessions strives to get the parties to understand the other side’s issues Evaluative mediation: Mediator in separate sessions outlines to each party the strengths and weaknesses of their positions Directive mediation: Mediator allows parties to only speak to him/her, feels their passion. Mediator may suggest settlement

7 -16 Benefits of Mediation 1. Psychological – avoid stress, trauma of arbitration, court; a third party has provided a hearing 2. Savings in time and money – generally greater than arbitration, court 3. Focus on issues – parties reevaluate their own and others needs 4. Mediation works! 5. Control – of any settlement remains totally with the parties 6. Confidentiality – all discussions are private, occur only between the parties and mediator

Tactics for Success: Rules for Mediators 7 -17 1. Create a positive atmosphere – sit parties together; caucus; identify mutual goals and successes 2. Maintain neutrality – which is not always easy 3. Absorb conflict – remain calm, expressionless; make reflective statements 4. Provide reality checks – do not give advice or suggest solutions but ask if one is realistic 5. No conscience – don’t evaluate a solution as “fair” or “good” or “best”; only job is to move discussion forward

Arbitration n n 7 -18 Distinctly different from mediation Defined: three critical elements The parties signed a contract requiring arbitration to resolve conflicts n A neutral third party n Decision is final and binding n n Federal Arbitration Act (1925) “Congress declared a national policy favoring arbitration over the…litigation process”

7 -19 Two-Party, Single-Issue Negotiation

Steps in Arbitration 1. 2. 3. 4. 5. 6. Preliminary hearing Opening statements Rules of evidence Witnesses Summation Arbitrator’s award and opinion 7 -20

7 -21 Advantages of Arbitration: 1. Parties get a decision – the “over factor” can be great (the conflict is over) 2. Less costly in time/money than litigation 3. Neutral, third party decision maker 4. Parties have input in selection of arbitrator

7 -22 Potential Disadvantages of Arbitration n “Playing God”: Arbitrators are generally fact -oriented, impersonal decision-makers The “chilling effect”: Negotiators that expect arbitration may “cool” their efforts Surface bargaining: Negotiators from the start may not engage in serious bargaining and seek an impasse and arbitration

7 -23 Potential Disadvantages of Arbitration (cont. ) n Final-Offer Arbitration: Both sides submit their last offer and the arbitrator must choose one of the two n Can eliminate the “chilling effect” n n Combined Method (traditional and final offer) n Arbitration may choose the settlement point they believe is the best OR a final offer

Illustration of Three Arbitration Decision Methods: Conventional, Final-Offer, and Combined Two parties are disputing the value of a half-acre housing lot in a new subdivision. Other half-acre lots have sold in the past year in the range of $45, 000 to $65, 000 depending on exact size, location, flatness, existing mature trees, proximity to a proposed park or power lines, and other factors which affect desirability. The lot in question has no decided advantage or disadvantage in comparison to other lots. To achieve a quick resolution, the parties submitted the issue to arbitration. The last positions of the parties as revealed to the arbitrator were Party A: $25, 000, and Party B: $80, 000. The arbitrator then suggested a finaloffer process, which the parties accepted, and their final offers were Party A: $45, 000 and Party B: $68, 000. The arbitrator, still not satisfied that he could render a fair decision, suggested the combined process, which the parties accepted. The arbitrator then carefully reviewed the distinct attributes of the other lots that had recently sold in comparison to the lot in question, and decided that $55, 000 was the fair value.

Illustration of Three Arbitration Decision Methods: Conventional, Final-Offer, and Combined (cont. ) If conventional arbitration had been utilized, the arbitrator would have had a more difficult time deciding a fair value since the last positions, $25, 000 and $80, 000, were so far apart. Even if the decision was the same, $55, 000 would have represented a $30, 000 “loss” to party A, and a $25, 000 “gain” to party B. If final-offer had been utilized the arbitrator would have been required to choose either $45, 000 or $68, 000 as the value—a substantial variation from what he believed to be the fair value of $55, 000. By utilizing the combined method, the arbitrator is able to select a value that he, as an impartial third party, believes is fair, and is within a reasonable range of the two final offers made by the parties. A: Last A: Final Arbitrator’s B: Final B: Last Position Offer Settlement Offer Position _____________X______________ $0 $25, 000 $45, 000 $55, 000 $68, 000 $80, 000

Hybrid Forms of ADR n 7 -26 Mediation-Arbitration (Med-Arb) Best known hybrid n Two steps: n (1) mediation with deadline, (2) followed by arb if needed n Arbitration-Mediation (Arb-Med) Newer hybrid n Two steps: n (1) arbitrator makes a decision and keeps it in a sealed envelope (2) uses mediation (use arb decision if fails) n Both hybrids can offer the advantages of both methods