Mediation as a Profession in Modern Legal System: An Economic Analysis

This article was authored by Divyanshu Modi from School of Law, Christ.

Abstract:

With a backlog of around 3.3 crore cases, the Indian Judiciary system really requires a change. It is important to understand that the procedure that the Indian Judiciary uses in order to hear the cases is very slow and it is required a change. Collaborative problem-solving and decision-making are becoming more common in industry. Justice systems are adopting procedures that promote, and in some situations require, parties to attend early collaborative dispute resolution procedures. The word mediation has its origin from the Latin word “mediare”-to halve. A common understanding is that it is a process where a third party i.e. a neutral party who has no relation to the case assists the parties to reach to a common ‘consensual’ agreement. Mediation has been relied on increasingly over the years. This article focuses about mediation as a profession and how it is better than Adversarial Process of resolving disputes. The study also provides for an economic analysis of mediation as a dispute resolution process and how it is helpful for the legal system in the country. Mediation has more recent history as one of a number of processes forming the modern alternation dispute resolution (ADR) Movement, which has swept, albeit at different tempos, across many countries. It also discusses upon the fact that how mediation can be made a better solution to a huge amount of backlog of pending cases and how mediation could be great alternate to litigation. The article also examines different types of mediation.

Keywords: Mediation, Alternate Dispute Resolution, Economic Analysis, Adversarial Processes

Mediation as a Profession in Modern Legal System: An Economic Analysis

Introduction:

Mediation as a profession in the field of law is both new in its terms of emergence and old in terms of its timeless universality. This is the reason as to why it needs to be distinguished from the traditional forms of dispute resolution at the outset. The word mediation has its origin from the Latin word “mediare”-to halve. A common understanding is that it is a process where a neutral party or the mediator assists the parties involved in the dispute to reach to a common ‘consensual’^[1] agreement. “mediation is a facilitative process in which disputing parties engage the assistance of an impartial third party, the mediator who helps them to try to arrive at an agreed resolution of their dispute. The mediator has no authority to make any decisions that are binding on them, but uses certain procedures, techniques and skills to help them to negotiate an agreed resolution of their dispute without adjudication.”^[2] Mediation is not a paradigm of 20^th Century but it is evidently a process dating back to around 4000 years to Sumerian and Chinese Cultures.^[3] It has been seen that whenever social cohesion is vital ‘kinship based’^[4] communities from all across the continents of Asia have mediated their disputes through ‘harmony’, ‘moral persuasion’ and agreement rather than the accusatorial mechanisms. Mediation has more recent history as one of a number of processes forming the modern alternation dispute resolution (ADR) Movement, which has swept, albeit at different tempos, across many countries. Mediation over a period of decade is being practised in labour-management negotiations, international relations, and community disputes (Kressel and Pruitt 1989; Hiltrop 1985; Mika 1987; Wall and Blum 1991). Mediation is informal and flexible approach which can be tailored to accommodate the cultural, structural and commercial differences that may emerge in dispute resolution. It is said to offer a better time and cost efficiencies than determinative processes example arbitration and litigation. Presently, mediation is making strong roads into mostly every sort of area of dispute resolution. One of the most important aspect of mediation is that there is no imposition of a mediator’s decision on the parties i.e. a mediator controls the process but the power of making a decision is in the hands of the parties. Mediation is a voluntary process i.e. it depends upon the parties to continue with the mediation or to try it. Due to its non-coercive and consensual nature of resolving the disputes, mediation is radically different form the adversarial system.^[5] Mediation creates an atmosphere where confidentiality is ensured and enables participation of the parties, with their lawyers/advocates. Agreements that are reached in the process of mediation are readily enforced by the legal process.

MEDIATION AND ITS GROWTH IN DIFFERENT ARES OF LEGAL DISPUTES

There are numerous styles of mediation that are practices globally in the contemporary era. They vary depending upon various factor involved in the process such as the goals that the parties wish to achieve, the nature of interface between the parties and the types of mediator intervention.^[6] In cases of commercial mediation the objective of mediation is to make calculated decisions for long term business, but goal of mediation might be of a reconciliation between the parties in cases of individualized or specialized relationship.^[7] The interventions of a mediator can be explained as directive or elicitive or in terms of the extent to which a mediators centre of attention on the content as different process. Apart from this another feature differentiating mediation models relates to the character of communication between the parties. In the process of mediation, the parties may communicate with each other as hard as bargainers or as problem-solvers, or they may contact in a conversation to explore the issues between them. Some of the recognised models of mediation include facilitative mediation, evaluative mediation, transformative mediation and expert-advisory mediation these different models differ in objectives, procedures and value assumptions.^[8]

There has been a noticeable growth in the process of Mediation from the past 25 years. Mediation is being recognised as one of the most prevalent methods in dispute resolution. Although Alternative dispute resolution procedures have not displaced the traditional litigation; hundreds of thousands of lawsuits are filed annually in the High Courts and Supreme Court. But there are some reasons to believe that ADR movement has had some success over the past 25 years in changing business and legal decision – makers’ of how to best resolve the dispute.

Mediation has its roots growing the Matrimonial disputes, Corporate and Institutional disputes, International Disputes and Environmental Concerns. Supreme Court in the case of Afcons Infrastructure Ltd. Vs Cherian Varkey Construction Co. (P) Ltd.,^[9] provided for the cases suitable and not suitable for mediation.

Mediation is an excellent mode of dispute resolution in the field of business and commerce. The advantages that the process has are keenly perceived and appreciated by the people in business for whom cost, time and relationships are of almost biblical importance. In addition to this it enables them to participate and tailor solutions to their needs. On the other hand, if the matter is proceeded with litigation the matter goes out of the control of the officials of the companies moreover time and expenses are difficult to estimate, and may well spiral out of expectation. On top of that if a company fails the case the loss incurred may cripple the company.

Matrimonial disputes constitute a genre by themselves, wherein unlike other disputes there are so many factors that need to taken care of. Conflicts and differences arise from one or more parts of mosaic which underscores the need for sensitive understanding and recognition of the range of possible causes for the breakdown of domestic relationships. Mediation has various advantages over adversarial process when compared in the matters of matrimonial disputes.^[10] It focuses on healing the relationship and repairing the emotional damage, further mediation helps in maintaining confidentiality of delicate and intimate personal issues.^[11] It allows the parties to speak and vent emotions and articulate differences and put forward solutions. Moreover, mediation saves time, money and energy.^[12] The benefits of mediation are keenly perceived in the cases where Children are a part of the dispute as breakdown in matrimonial relations traumatizes children deeply.^[13]

It can be very well understood from a detailed discussion that mediation is very beneficial and has a lot more advantages over adversarial processes of dispute resolution in the areas where ever it can be useful.

ECONOMIC ANALYSIS OF MEDIATION AS A PROFESSION: EX ANTE PERSPECTIVE:

ADR or Alternate Dispute Resolution has been coined for methods that seek to resolve conflict by reaching consensual agreement amongst the parties, and with less formality and technicality that other legal processes. In recent years, mediation has become increasingly favoured to handle a range of conflicts from personal and family disputes to commercial disagreements, from complex high value controversies to run-of -the-mill situations. In the countries of what is so called as the developed world, it has caught the attention of judges, lawyers, policy makers, corporations and other users, and has emerged as an attractive alternative to litigation. It is largely free of the negative characteristics of the adversarial system and demonstrates a high success rate in resolving conflicts swiftly and inexpensively.

There are three reasons as to why mediation may be mutually beneficial. First, mediation may lower the cost of resolving dispute or risk. Second, it may engender higher incentives with higher accuracy of result or other characteristics. To take for instance, that a substandard performance of a contract would be assessed correctly by person who is an expert mediator and not by not by the courts. The parties to the contract then would prefer adopting mediation because it would induce good performance, thereby, raising the willingness of the promisee to pay for the contract. Third, mediation may result in improved incentives to engage in disputes or to refrain from that. For instance, it may it may be that the number of disputes brought under the legal process would be excessive, dissipating substantial resources of the parties without instigating mutually thus an ADR agreement that would serve to limit the number of disputes would be advantageous. Such benefits of ex ante ADR agreements cannot generally be obtained by means of ex post agreements to use ADR. Where courts are not able to ascertain substandard performance and this occurs, the parties will hardly have any reason at that point to adopt ADR-it will be too late to induce good performance. The advantages of ex ante ADR agreements, combined with the frequent inability to secure them through ex post ADR agreements, explain why parties will often want to make ex ante ADR agreements. Because ex ante ADR agreements made by knowledgeable parties raise their well-being, the agreements raise social welfare (in the absence of external effects). Thus, it is suggested that ex ante ADR agreements should ordinarily be enforced by the legal system.^[14] At the same time, there is no general call for ex ante ADR to be subsidized or otherwise aided by the state. Ex post ADR agreements are considered in Section II of this article. Parties will tend to make ex post ADR agreements when, after a dispute arises, ADR would produce mutual gains. This can come about in two major ways: through promotion of settlement, and through reduction of dispute resolution costs. To determine how ADR functions in these respects, I append ADR to the standard economic model of litigation. Specifically, I assume that a potential plaintiff decides whether to sue, and if so, he either goes immediately to trial, agrees to a settlement, or engages in binding or nonbinding ADR. Alternative dispute resolution is assumed to be cheaper than trial and possibly to convey information about what would occur at trial. Two ADR regimes are studied: where the use of ADR is voluntary, and where nonbinding ADR is required before there can be a trial.^[15] I compare outcomes in these regimes with that where ADR is unavailable.

Ex ANTE AGREEMENTS TO USE ALTERNATIVE DISPUTE RESOLUTION

1. Ex Ante Alternative Dispute Resolution Agreements and Mutual Benefits: Suppose that two parties are in contact with each other before adverse events that could lead to legal disputes arise. The parties might be in a contractual relationship (including that between employer and employee) and be considering the problem of inadequate performance or breach. Or the parties might not be in a contractual relationship but nevertheless recognize the possibility of outcomes that would cause legal disputes. For example, a factory and nearby residents might recognize that accidents are likely to occur in which the residents would be harmed (say by truck traffic from the factory). Such parties would tend to adopt ADR if it would lead to mutual advantages. Let us now briefly consider the three sources of mutual advantage mentioned in the introduction.
2. Reduction in Dispute Resolution Costs or in Risk: If adoption of ADR would lead to a reduction in the total costs to the parties of dispute resolution, then it would obviously be in their interests to make an ex ante ADR agreement. If, for example, the costs for each party were reduced by one-third in every dispute, then they each would want to employ ADR, other things being equal. Note, though, that in principle the parties would not need to make an ex ante agreement to obtain the one-third reduction in costs. They can wait until disputes arise and then adopt ADR and still reduce their costs by one-third. Thus, while reduction in costs is an advantage of ex ante ADR agreements, it is equally an advantage of ex post ADR agreements. Similarly, if ADR would lower the risks attending disputes (because, for instance, exposure to unreliable jury verdicts could be avoided), the parties would tend to find ADR mutually beneficial if one or the other is risk averse. And, as with cost reduction, this benefit can be obtained by parties after disputes arise, so that it is a source of advantage for both ex post and ex ante ADR agreements.
3. Improvement in Incentives: A different way in which ADR may be of aid to parties is that it may induce a change in behaviour that benefits both, by increasing the value that their relationship produces. Amplification of the example of arbitrators who can discern substandard contractual performance will illustrate this.

EXAMPLE 1. Suppose that the value of good performance to a contract buyer is $1,000 and the cost to a contract seller of supplying it is $400, while the value of substandard performance to the buyer is $500 and the cost of supplying it is $300. Then the joint value of the contract to the parties is only $200 if performance is substandard, for $500 – $300 = $200, but the joint value is $600 if performance is good, as $1,000 – $400 = $600. Hence, the parties would both prefer good performance. Assume, for instance, that the contract price is such that they split their joint value. Then if performance is substandard, the price would be $400, the seller’s benefit would be $100 (namely, $400 – $300), and the buyer’s benefit would also be $100 (that is, $500 – $400). But if performance is good, the price would be $700, and the seller’s benefit would be $300, as would the buyers. Suppose too that the courts are unable to detect substandard performance, while ADR-designated arbitrators can. Then without ADR, performance would be substandard since the seller could always save $100 by adopting substandard performance. But with ADR, good performance could be induced by the threat of the seller’s having to pay damages if substandard performance were detected, which it would be. Hence, the parties would be better off with ADR-each would obtain a benefit of $300 rather than $100. In this example, the reason that ADR led to improved incentives was that under it the quality of performance was assessed better than it would be in court. More generally, ADR could lead to improved incentives for other reasons, such as that a different legal rule is employed from that which would be applied in court. As long as ADR leads to changes in behaviour that raise joint value for parties, there will be a mutually beneficial agreement that they can make involving ADR rather than the legal system. It should be emphasized that, as a general matter, ADR that improves incentives must be agreed to ex ante because the parties would not obtain joint benefits from an ADR agreement ex post. In example 1, were performance substandard, there would obviously be no joint advantage to be gained by adopting ADR. At that juncture substandard performance has occurred, it is too late to affect incentive to induce good performance.^[16]

1. Beneficial Changes in the Frequency of Disputes: A third route by which ADR may produce gains for the parties is by bringing about a change in the frequency of disputes. It could be that, given the applicable law, too many actions would be brought in the sense that they would absorb resources in the form of dispute resolution costs but not produce any (or, more generally, much) benefit in behaviour. In such a case, the two sides would elect to make an ADR agreement that reduces the frequency of disputes.

EXAMPLE 2. Suppose that strict liability for product defects applies, that a defect would result in a loss to a contract buyer of $1,000, but that there is nothing the contract seller can do at reasonable cost to reduce the incidence of defects.^[17] Assume too that suit can be brought at a cost of $100 and that defence costs would be $150. Consequently, whenever a defect occurs, the buyer will bring suit-$100 is less than the $1,000 he could collect so the two sides will incur $250 in costs (or, if they settle, they will bear positive settlement costs). Yet by assumption these expenditures will not alter the incidence of defects. Hence, the parties would prefer to make an ADR agreement under which suits for defects are not brought. They could, for instance, agree to bar suits for defects or adopt the negligence rule rather than strict liability. (If they did the latter, the seller would never be found negligent since he can do nothing do avoid defects; thus, suits would not be brought.) Observe as well that the parties must make an ex ante ADR agreement to reduce the frequency of disputes. They will not make an ex post ADR agreement; their whole problem is that, if they wait until a dispute arises, the harmed party will have a reason to bring an action. While in the above example the problem was that too many suits would be brought in the absence of ADR, another possibility is that the frequency of disputes would be too low in the absence of ADR, in that more actions would improve incentives and increase joint value by an amount exceeding the change in dispute resolution costs.^[18] And here, too, only an ex ante ADR agreement would be helpful to the parties.^[19]

E. Ex Ante Alternative Dispute Resolution Agreements and Social Policy: When parties elect to use ADR, they are both made better off, so that social welfare must rise, other things being equal. Accordingly, the general policy of the law should be to enforce ex ante ADR agreements.^[20] This statement is, of course, subject to the two usual qualifications about the desirability of enforcement of any agreements. First, it may be that a party to an agreement was not properly informed about relevant information in the present context, information about the legal process or the character of ADR. Second, it may be that an agreement to use ADR would negatively affect third parties.” Either problem could provide grounds for not enforcing an ex ante ADR agreement. Although the state should enforce private ADR agreements, this does not imply that it should subsidize or otherwise actively encourage ADR agreements. No general basis for such a policy is evident. But, again, this statement is subject to two standard qualifications. It could be that parties have inadequate information about the benefits of ADR and that this information cannot effectively be communicated to them (if the information could be communicated to the parties, they could decide whether they want to use ADR). The second conventional qualification is that ADR might positively affect third parties. These qualifications could justify promoting or requiring ADR. Another qualification, special to the context of legal disputes, is that parties who use the courts do not at present pay the full costs of the public services that are thereby rendered to them, whereas one presumes parties do pay the full costs of ADR. Thus, ADR appears more expensive in comparison to the courts than it really is, and ADR might thus be used less often relative to the courts than would be best. (Suppose, for in- stance, that use of the court truly costs $1,000 and ADR $500, but that parties pay only $250 to use the courts; then ADR appears twice as costly as the courts even though it is really half as costly.) As an antidote to this problem of relative pricing, ADR could be subsidized. But that would not offer a full solution to a problem that emanates from failure to charge completely for use of the courts: if ADR is subsidized along with the courts, both methods of dispute resolution will be cheaper to use than they truly are for society to provide, leading to overutilization of each. Other things being equal, the appropriate policy would seem to be to subsidize neither.^[21]

Conclusion:

A final observation is that there is no paradox represented by the conclusion that the law should ordinarily enforce ex ante ADR agreements, which is to say, the law should enforce agreements that bypass the legal process. The legal process may be viewed as having been selected optimally only in an average sense-over a wide class of potential disputes- because there is a limit to the degree to which the legal process can be made sensitive to the particular situations of disputants. This limit is due principally to difficulties that would be faced by courts in determining the detailed characteristics of different situations. But the parties themselves know much about their own situations; typically, they know their situations far better than the courts could. Hence, it is not surprising that parties should be able to choose for themselves a better method of dispute resolution than the legal process would offer and that the courts should respect such choices.

1. Genn (2012) at 82 ↑
2. Henry J. Brown and Mariot, ADR Principle and Practice, 2^nd Ed. Sweet & Maxwell (1997). ↑
3. See for example; Spain & Paranica (2001) at 393; Clarke (1991); Clark (2002) (2012); Pei (1999); Hensler (2003); Kovach (2006) in Alexander (2006) ↑
4. Woolford & Ratner (2008) at 4-5 ↑
5. Sriram Panchu, Mediation Practice and Law: The Path to Successful Dispute Resolution 10 (Lexis Nexis, 2011) ↑
6. Anirban Chakraborty, Law and Practice if Alternate Dispute Resolution in India A Detailed Analysis, 221-222 (1^st ed. Lexis Nexis 2016) ↑
7. Ibid. ↑
8. N Alexander, ‘the Mediation Metamodel: Understanding Practice’ (2008) 26 Conflict resolution Quarterly 97. ↑
9. (2010) 8 SCC 24. ↑
10. Sriram Panchu, Mediation Practice and Law: The Path to Successful Dispute Resolution 10 (Lexis Nexis, 2011) ↑
11. ibid ↑
12. ibid ↑
13. Supra 10. ↑
14. American Bar Association, Directory of Law School Dispute Resolution Courses and Programs (1989), Stephen B. Goldberg, Frank E. A. Sander, & Nancy H. Rogers, Dispute Resolution: Negotiation, Mediation, and Other Processes (2d ed. 1992)., Arbitration Journal, Journal of Dispute Resolution, Mediation Quarterly, and Negotiation Journal. ↑
15. Susan Keilitz, Geoff Gallas, & Roger Hanson, State Adoption of Alternative Dispute Resolution: Where Is It Today? 12 St. Ct J. 4 (1988) ↑
16. Steven Shavell, Alternative Dispute Resolution: An Economic Analysis, vol 24 The University of Chicago Press Journals 1, 5-9, 1995 ↑
17. Ibid 9 ↑
18. Ibid 9 ↑
19. The Social versus the Private Incentive to Bring Suit in a Costly Legal System, 11 J. Legal Stud. 333 (1982) ↑
20. Supra 14 ↑
21. Supra 14. ↑