I wrote last about “Decision Tree Analysis” (DTA) being a sound investment for reaching better decisions. The principles identified in the Feb. 3 article are particularly well suited for application in the alternative dispute resolution process.
In today’s construction and business environment, increasingly more contracts contain mandatory mediation and arbitration clauses. A typical clause might read:
“In the event of a dispute, the parties shall endeavor to settle the dispute by mediation under the current Construction Industry Mediation Rules of the American Arbitration Association. In the event that mediation of the dispute is unsuccessful, the dispute shall be resolved by Arbitration under the Construction Industry Rules of the American Arbitration Association.”
The courts in Idaho have generally found that an agreement to arbitrate is enforceable and any suit is likely to be dismissed to allow for the alternative dispute resolution (“ADR”) to be followed. How do we work toward success in the ADR process?
Mediation is a process where a neutral third party is selected by the parties involved in the dispute to assist them in reaching a mutually acceptable resolution by agreement. Mediation differs from arbitration in that the parties control whether an acceptable outcome is reached.
In arbitration, a neutral third party or parties control the outcome by way of the issuance of a binding decision. Someone wins and someone loses, most often with no basis for or opportunity for appeal.
In preparation for the mediation, you’ll want to gather the facts for presentation, analyze your approach, and determine what you will present to the mediator and your adversary. It’s also important to know how you will undertake each step, and why. Further, you’ll want to understand your own risk/reward scenario so that you have a framework for evaluating and making choices that may arise during the mediation.
Decision Tree Analysis can help you prepare for the mediation. The process and methodology is as demonstrated the Feb. 3 IBR. Only the nature of the questions changes.
In this example, both parties have claims. Your opponent first claims that a breach by you occurred only after you had provided proper notification of your claim and submitted the supporting documentation. (In any dispute, prepare and maintain documentation of the facts surrounding the claims).
Here’s how your analysis of the breach of contract scenario might look. In your view, you have an 80 percent chance of winning your claim, and your adversary has a 60 percent chance of winning their claim. Each outcome must be considered separately, as each has risk, benefit, and cost components which must be considered.
In the example, these are the potential cost components of pursuing the claim and the risks for both you and your opponent of having to pay the other party’s attorney fees.) For this example we have set the cost of bringing the claims for both sides at $10,000 respectively. Your claim has a value of $100K with an 80 percent success rate. Their claim value is 24K with a 60 percent success probability.
In your best-case scenario under this DTA, your upside is estimated at$100,000, but the estimated/probabilistic outcome is $77,000. Conversely, the estimated/probabilistic outcome of their case against you is you paying them $27,400.These values form one basis for your decision-making in the mediation and, in addition, the anticipated risk/reward scenario going into a mediation or arbitration. In this example, the range of values indicates that you might be prepared to resolve the case for a payment to you of the net value or $49,600.00 ($77K – $27.4K).
An experienced user of this tool will also test the sensitivities of the probabilities to observe the impact on the expected probabilistic results. These tests will be based upon your personal experience and that of your legal counsel, and perhaps others. By testing the sensitivity of the outcome to various probabilities you help bracket the results for further guidance.
This type of DTA can be presented to the mediator in a private conversation as part of the mediation process, as a way to advance the mediator’s understanding of the risks. Likewise this tool can be used during the mediation process to provide a turning point in the mediation analysis of both the mediator and your adversary.
With a thorough and objective analysis, you’ll be in a better position to negotiate an acceptable solution with your adversary.
The level of effort, sophistication, and experience you and your counsel bring to this analysis will help you quantify the risks and potential rewards. In the end, it might mean the difference between success and failure in the ADR process.
Kim J. Trout is a partner at Trout Jones Gledhill Fuhrman Gourley, P.A. Kim specializes in guiding all levels of clients through their business ventures and litigation. firstname.lastname@example.org