Ethical Issues in Mediations and Arbitrations

ETHICAL ISSUES IN MEDIATIONS AND ARBITRATIONS

HON. MICHAEL D. MARCUS (RET.)
ADR SERVICES, INC.
1900 AVENUE OF THE STARS, SUITE 250
LOS ANGELES, CALIFORNIA 90067

I. MEDIATION ETHICS

Some of the ethical responsibilities apply to the mediator, some to the parties and some to all involved.

A. The Mediator’s Duties

A mediator must be impartial – “A mediator must maintain impartiality toward all participants in the mediation process at all times.” (California Rule of Court 1620.5(a); [all of the Rules of Court concerning mediations in this outline apply only to court-ordered mediations conducted by panel and not private mediators].) Mediators should not have any substantial personal or business relationships with any of the parties and have a continuing duty to disclose potential areas of conflict that might affect their impartiality. (Rule of Court 1620.5(b).) Note that privately retained mediators, unlike privately retained arbitrators in consumer arbitrations, do not have formal disclosure obligations.

• An attorney-mediator who attempted to mediate a dispute between his construction clients and a contractor without making full disclosure about his alleged lack of neutrality to the contractor, exposed himself to a potential malpractice claim by the contractor, notwithstanding that he did not have an attorney-client relationship with the contractor. (Furia v. Helm (2004) 111 Cal.App.4th 945.)

A mediator must not accept any gift that might raise a question concerning his or her impartiality. (Rule of Court 1620.9(d).)

A mediator does not represent the participants – “A mediator must inform all participants, at or before the outset of the first mediation session, that during the mediation he or she will not represent any participant as a lawyer or perform professional services in any capacity other than as an impartial mediator.” (Rule of Court 1620.7(d).) Note, too, regarding possible settlement options and terms, that “[a] mediator may also assist the parties in preparing a written settlement agreement, provided that in doing so the mediator confines the assistance to stating the settlement as determined by the parties.” (Rule of Court 1620.7(h).)

A mediator must be truthful and accurate in marketing his or her services – (Rule of Court 1620.8(a).) Additionally, “In marketing his or her mediation services, a mediator
must not: (1) Promise or guarantee results; or (2) Make any any statement that directly or

Copyright, Michael D. Marcus, November 2006
indirectly implies bias in favor of one party or participant over another.” (Rule of Court 1620.8(c).) Further, “A mediator may recommend the use of other services in connection with a mediation and may recommend particular providers of other services. However, a mediator must disclose any related personal or financial interests if recommending the services of specific individuals or organizations.” (Rule of Court 1620.7(e).)

A mediator must disclose the receipt of compensation – “Before commencing the mediation, the mediator must disclose to the parties in writing any fees, costs or charges to be paid to the mediator by the parties. A mediator must abide by any agreement that is reached concerning compensation.” (Rule of Court 1620.9(b).)

The mediator’s fee can not be contingent upon the outcome of the mediation – (Rule of Court 1620.9(c).)

A mediator must self-assess his or her competence to conduct a mediation – Mediators must decline to serve in a mediation if they do not have the level of skill, knowledge or ability necessary to conduct the mediation effectively. (Rule of Court 1620.6(d); see also Rule of Professional Conduct 3-110(A) which provides that “A member shall not intentionally, recklessly, or repeatedly fail to perform legal services with competence.”)

A mediator has no authoritative decision-making power – The parties are in control of resolving the dispute. (Saeta v. Superior Court (2004) 117 Cal.App.4th 261, 269, 271; Travelers Casualty and Surety Company, et al. v. Superior Court (2005) 126 Cal.App.4th 1131.)

The mediation must be conducted in a timely manner – “A mediator must make reasonable efforts to advance the mediation in a timely manner. If a mediator schedules a mediation for a specific time period, he or she must keep that time period free of other commitments.” (Rule of Court 1620.7(a).)

The mediation must be conducted in a procedurally fair manner – “’Procedural fairness’ means a balanced process in which each party is given an opportunity to participate and make uncoerced decisions.” (Rule of Court 1620.7(b).) Note, however, that a mediator is not obligated to ensure the substantive fairness of an agreement reached by the parties.” (Rule of Court 1620.7(b).)

A mediator should not combine a mediation and arbitration, without the consent of the parties. – “A mediator must exercise caution in combining mediation with other alternative dispute resolution (ADR) processes and may do so only with the informed consent of the parties and in a manner consistent with any applicable law or court order. The mediator must inform the parties of the general natures of the different processes and the consequences of revealing information during any one process that might be used for decision making in another process, and must give the parties the opportunity to select another neutral for the subsequent process. If the parties consent to a combination of processes, the mediator must clearly inform the participants when the transition from one process to another is occurring.” (Rule of Court 1620.7(g).)
A mediator must advise about and comply with laws concerning confidentiality – Principles of confidentiality include advising the “participants with a general explanation of the confidentiality of the mediation process,” discussing his or her practice regarding confidentiality for separate communications with the participants and not disclosing information revealed by one party in confidence to another party unless authorized to do so by the revealing party. (Rule of Court 1620.4(b) and (c).) Further, “A mediator must not use information that is acquired in confidence in the course of a mediation or for personal gain.” (Rule of Court 1620.4(d).)

The mediator must respect the participants’ rights both to participate in and to withdraw from the mediation at any time – (Rule of Court 1620.3(b).)

B. The Lawyer’s Duties

Provide timely notice of the cancellation of a mediation – Every plaintiff or party seeking affirmative relief must notify the mediator at least two days before a scheduled hearing of any settlement or other disposition of the case. (Rule of Court 225 [the failure to do so may result in monetary sanctions]; see also Los Angeles Superior Court Rules 7.9(f) and 12.5 which implement rule 225.)

The client must be told about settlement opportunities – “A lawyer should consider and discuss with the client, promptly after retention in a dispute, and thereafter, possible alternatives to conventional litigation, including settlement.” (American Bar Association, Section of Litigation, Ethical Guidelines for Settlement Negotiations [ABA Guidelines], 3.1.1; see also Business and Professions Code section 6060(m) and Rule of Professional Conduct 3-500 which require lawyers to keep clients reasonably informed of significant developments relating to the representation. Note that Rule 3-510(A)(2), which requires communication to the client of written settlement offers, generally would not apply to mediations where the offers are most usually communicated orally.)

All participants, including insurance representatives, must appear personally at the mediation – Parties, and not just their counsel, including an insurance representative of a covered party, have an obligation to appear at a court-ordered mediation. (California Rule of Court 1634 and Los Angeles Superior Court Local Rule 12.15.) Defendants, however, are not required to appear where they are covered fully under an insurance policy that gives the insurer the right to settle without the insured’s consent. (Fiege v. Cooke, et al. (2005) 125 Cal.App.4th 1350.) Because the failure to appear occurs outside of a mediation (and, as a consequence, is not governed by confidentiality laws), both the mediator and the appearing party may report non-compliance of the appearance requirement to the judge who ordered the mediation. The failure to comply with a court order to appear at mediation is a violation of Business and Professions Code section 6103 and may be punishable by a contempt citation or referral to the Office of Trial Counsel of the State Bar of California for possible discipline prosecution.

Ex parte communications with the mediator are permitted – Since mediations are based substantially upon ex parte communications between one party and the mediator, California Rule of Court 379 and Rule of Professional Conduct 5-300 do not apply and a party may communicate separately with a mediator, including sending a confidential brief, calling the mediator beforehand and speaking alone with the mediator during the proceeding.

Conflicts of interest with multiple clients must be avoided – An attorney at mediation who represents more than one party in the matter must be careful that he or she has complied with California Rule of Professional Conduct 3-310(C) which requires, inter alia, that the attorney disclose in writing to the clients the relevant circumstances and reasonably foreseeable adverse consequences of the joint representation and then, following this disclosure, receive an informed written consent from each client to the representation. Because negotiations at mediations are constantly in flux, new conflicts regarding these multiple clients can arise following the original disclosures and waivers of conflict, thereby necessitating new written disclosures and waivers.

The attorney must provide the client with competent representation – “A lawyer must provide a client with competent representation in negotiating a settlement.” (ABA Guidelines 2.2; see also Rule of Professional Conduct 3-110(A) which provides that “A member shall not intentionally, recklessly, or repeatedly fail to perform legal services with competence.”)

The interests of clients with special needs must be protected – “If the client lacks the requisite capacity and no one else is legally authorized to make decisions respecting settlement on the client’s behalf, a lawyer should take measures to protect the client’s interests which may include seeking appointment of a guardian, guardian ad litem, or other court-approved representative.” (ABA Guidelines 3.4.)

The opening statement at mediation may be more expansive than an opening statement at trial – The prohibition at trial against discussing unavailable and inadmissible evidence (People v. Barajas (1983) 145 Cal.App.3d 804, 808-811) and questions of law (Williams v. Goodman (1963) 214 Cal.App.2d 856, 869) in an opening statement do not apply to the opening statement at a mediation which may be wide-ranging and include the use of questionable evidence, argument, procedural issues and discovery matters.

Notwithstanding the status of the law, counsel should not misrepresent the facts or the law to the mediator – While an attorney can not mislead a judicial officer (Business and Professions Code section 6068(d); Rule of Professional Conduct 5-200(B)) and should not make misleading statements to opposing counsel (In the Matter of Katz (1995) 3 Cal. State Bar Ct. Rptr. 430, 435; Bihun v. AT&T Information Systems, Inc. (1993) 13 Cal.App.4th 976) and an attorney was disciplined, in part, for intentionally misleading a settlement judge about the facts of the case (In The Matter of Jeffers (1994) 3 Cal. State Bar Ct. Rptr. 211), misrepresentations to mediators are neither sanctionable nor disciplinable.
Putting aside the discussion whether mediators are or are not judicial officers (see Howard v. Drapkin (1990) 222 Cal.App.3d 843, 858-860, 861 holding that neutral third parties [such as court-appointed mediators] who perform dispute resolution services are protected by absolute quasi-judicial immunity), current statutes and case law provide that there are no judicially imposed consequences for misrepresentations to mediators. The analysis starts and ends with Foxgate Homeowners’ Association, Inc. v. Bramalea California, Inc. (2001) 26 Cal.4th 1, which states that a mediator, pursuant to Evidence Code sections 1119 and 1121, may not report a participating attorney’s misconduct to the judge who has the case on her calendar. (Rojas v. Superior Court (2004) 33 Cal.4th 407 extends the Foxgate principle by holding that all writings prepared for mediation are not discoverable.)
Foxgate provides that “Neither a mediator nor a party may reveal communications made during mediation” (id. at p. 4) and that Evidence Code section 1121 prohibits both mediators “and anyone else from submitting a document that revealed communications during mediation and (bars) the court from considering them.” (Id. at p. 13.) The opinion also holds that:
Although a party may report obstructive conduct to the court, none of the confidentiality statutes currently make an exception for reporting bad faith conduct or for imposition of sanctions under that section when doing so would require disclosure of communications or a mediator’s assessment of a party’s conduct although the Legislature presumably is aware that Code of Civil Procedure section 128.5 permits imposition of sanctions when similar conduct occurs during trial proceedings. FN. 13.
FN.13. The conflict between the policy of preserving confidentiality of mediation in order to encourage resolution of disputes and the interest of the state in enforcing professional responsibility to protect the integrity of the judiciary and to protect the public against incompetent and/or unscrupulous attorneys has not gone unrecognized. (Citations omitted.) As noted, however, any resolution of the competing policies is a matter for legislative, not judicial, action.
Therefore, we do not agree with the Court of Appeal that the court may fashion an exception for bad faith in mediation because failure to authorize reporting of such conduct during mediation may lead to ‘an absurd result’ or fail to carry out the legislative policy of encouraging mediation. The Legislature has decided that the policy of encouraging mediation by ensuring confidentiality is promoted by avoiding the threat that frank expression of viewpoints by the parties during mediation may subject a participant to a motion for imposition of sanctions by another party or the mediator who might assert that those views constitute a bad faith failure to participate in mediation. Therefore, even were the court free to ignore the plain language of the confidentiality statutes, there is no justification for doing so here.
(Id. at p. 17.)

Foxgate, therefore, allows attorneys to report mediation misconduct, such as the failure to appear at a mediation or some untoward conduct that may occur in a public place during the mediation; but all communications during the mediation process, no matter how scurrilous or misleading, are protected until the legislature says otherwise.

Note that, if the above legal hurdles did not exist, that a mediator is “competent”, pursuant to Evidence Code section 703.5, to testify about statements or conduct at a mediation that could give rise to civil or criminal contempt, constitute a crime or be the the subject of investigation by the State Bar.

The attorney must consult with the client during the mediation – “A lawyer must reasonably consult with the client respecting the means of negotiation of settlement, including whether and how to present or request specific terms.” (ABA Guidelines 3.1.3; see also Business and Professions Code section 6060(m) and Rule of Professional Conduct 3-500 which require lawyers to keep clients reasonably informed of significant developments relating to the representation.)

Multiple clients must consent to aggregate settlements – An attorney (plaintiff or defendant) who represents more than one party may not, pursuant to California Rule of Professional Conduct 3-310(D), enter into an aggregate settlement of a claim without the informed written consent of each client.

The final settlement terms are within the client’s control – “A lawyer can exercise broad general authority from a client to pursue a settlement if the client grants such authority, but a lawyer must not enter into a final settlement agreement unless either (a) all of the agreement’s terms unquestionably fall within the scope of that authority, or (b) the client specifically consents to the agreement.” (ABA Guidelines 3.2.1; on the other hand, the defendant client need not be consulted about the settlement or its terms if the client is covered fully under an insurance policy that gives the insurer the right to settle the matter without the insured’s consent. [Fiege v. Cooke, et al, supra, 125 Cal.App.4th 1350.)

Agreements not to report misconduct are unenforceable – “A lawyer must not agree to refrain from reporting opposing counsel’s misconduct as a condition of a settlement in contravention of the lawyer’s reporting obligation under the applicable ethics rules.” (ABA Guidelines 4.2.3) This provision is a corollary to California Rule of Professional Conduct 5-100(A) which provides that “A member shall not threaten to present criminal, administrative, or disciplinary charges to obtain an advantage in a civil dispute.”
The terms of the settlement may be confidential – “Except where forbidden by law or disciplinary rule, a lawyer may negotiate and be bound by an agreement to keep settlement terms and other information relating to the litigation confidential.” (ABA Guidelines 4.2.6; in the absence of such an agreement, a written settlement agreement signed by the parties pursuant to a mediation is not confidential, notwithstanding the confidentiality accorded generally to mediations, if the agreement provides either that it is subject to disclosure or binding upon the parties. [Evidence Code section 1123(a) and (b).)

C. The Mediator’s and Lawyer’s Joint Duties

Confidentiality of mediations – Evidence Code sections 1119, 1120, 1121 and 1122, as well as Foxgate Homeowners’ Association, Inc. v. Bramalea California, Inc., supra, 26 Cal.4th 1 and Rojas v. Superior Court (2004) 33 Cal.4th 403, provide confidentiality, with few exceptions, to the communications made at and exhibits prepared for and used in mediations. Foxgate, in conjunction with Evidence Code sections 1119 and 1121, holds, in substance, that all oral and written communications made in a mediation are not discoverable and shall be confidential. Rojas provides that the plain language of Evidence Code sections 1119 and 1120, the legislative history of these statutes and the preference for confidentiality in mediation proceedings lead to the inescapable conclusion that all writings, as broadly defined by Evidence Code section 250, that are prepared for mediation are sacrosanct.

Business and Professions Code section 6068(d) provides that attorneys shall not “seek to mislead the judge or any judicial officer by an artifice or false statement of fact or law.” Rule of Professional 5-200(B) is essentially the same except it adds jurors to the prohibition. These ethical guidelines reflect the policy that “Honesty in dealing with the courts is of paramount importance, and misleading a judge is, regardless of motives, a serious offense.” (DiSabatino v. State Bar (1980) 27 Cal.3d 159, 162-163, citing Paine v. State Bar (1939) 14 Cal.2d 150, 154.) Business and Professions Code section 6106 (concerning acts of moral turpitude and dishonesty) prohibits misrepresentations by a lawyer to opposing counsel. (In the Matter of Katz (Review Dept. 1995) 3 Cal. State Bar Ct. Rptr. 430, 435.)

Although Jeffers and Katz make it clear that an attorney cannot misrepresent facts to a settlement judge or opposing counsel, case law provides that misrepresentations at a mediation are not sanctionable or disciplinable, absent the amendment of Evidence Code sections which provide for confidentiality in that setting. The analysis starts and ends with Foxgate Homeowners’ Association, Inc. v. Bramalea California, Inc. (2001) 26 Cal.4th 1, which states that a mediator, pursuant to Evidence Code sections 1119 and 1121, may not report a participating attorney's misconduct to the judge who has the case on his or her calendar.

Foxgate also distinguishes between the right of opposing counsel to report misconduct but not communications. While finding that a party may report misconduct even though a mediator may not (id. at p. 4) and, without deciding the issue, that a court that ordered a mediation may impose sanctions for conduct during the mediation, pursuant to C.C.P. section 128.5 (id. at p. 10, n. 6), Foxgate then states that “Neither a mediator nor a party may reveal communications made during mediation” (id. at p. 4) and that Evidence Code section 1121 prohibits both mediators “and anyone else from submitting a document that revealed communications during mediation and barred the court from considering them.” (Id. at p. 13.) The opinion reasons that:

Although a party may report obstructive conduct to the court, none of the confidentiality statutes currently make an exception for reporting bad faith conduct or for imposition of sanctions under that section when doing so would require disclosure of communications or a mediator's assessment of a party's conduct although the Legislature presumably is aware that Code of Civil Procedure section 128.5 permits imposition of sanctions when similar conduct occurs during trial proceedings. FN. 13.

FN.13. The conflict between the policy of preserving confidentiality of mediation in order to encourage resolution of disputes and the interest of the state in enforcing professional responsibility to protect the integrity of the judiciary and to protect the public against incompetent and/or unscrupulous attorneys has not gone unrecognized. (Citations omitted.) As noted, however, any resolution of the competing policies is a matter for legislative, not judicial, action.

Id. at p. 17.

Foxgate, therefore, allows attorneys to report an opponent's mediation misconduct, such as the failure to appear at a mediation or any other unacceptable misbehavior that does not include a communication, but protects, until the legislature says otherwise, all communications during the mediation, no matter how improper.

II. ARBITRATION ETHICS

The ethical issues here, other than those which generally govern how attorneys shall comport themselves at any trial, predominantly apply to the arbitrator and the arbitration system.

A. The Arbitration System

The arbitration system - The arbitration must proceed under rules which provide a party the fair opportunity to present his or her side of the dispute. (Graham v. Scissor-Tail, Inc. (1981) 28 Cal.3d 807, 826.) That being said, “’The common law requirement of a fair procedure does not compel formal proceedings with all the embellishments of a court trial [citation], nor adherence to a single mode of process. It may be satisfied by any one of a variety of procedures which afford a fair opportunity for [a disputant] to present his position. As such, this court should not attempt to fix a rigid procedure that must invariably be observed.’” (Id., citing Pinsker v. Pacific Coast Society of Orthodontists (1974) 12 Cal.3d 541, 555.)

B. Arbitrators

Arbitrators must uphold the integrity and fairness of the arbitration process, which includes maintaining impartiality. (California Rules of Court, Appendix, Division VI, Ethics Standards for Neutral Arbitrators in Contractual Arbitrations [hereafter “Standards”], Standard 5. Note, however, that the Securities and Exchange Act of 1934 preempts application of these standards to National Association of Securities Dealers (NASD) arbitrations. (Credit Suisse First Boston Corporation v. Grunwald (9th Cir. 2005) 400 F.3d 119; Jevne v. Superior Court (2005) 35 Cal.4th 935.) Arbitrators must decline to serve if they cannot be impartial. (Standard 6.)

Arbitrators must conduct the arbitration fairly, promptly and diligently. (Standard 13(a).)

Arbitrators must disclose possible grounds for disqualification – A neutral arbitrator, within 10 calendar days of service of notice of his or her proposed nomination or appointment, must disclose, in compliance with Code of Civil Procedure sections 1281.9 and 170.1 and Standard 7, the following to all of the parties:

• offers of employment or a professional relationship with a party or lawyer while the arbitration is pending (Standard 7(b)(1));
• a family relationship with a party (CCP § 170.1((a)(4); Standard 7(d)(1));
• a family relationship with a lawyer in the arbitration (CCP § 170.1(a)(5); Standard 7(d)(2));
• a significant personal relationship with a party or lawyer for a party (CCP §§ 170.1(a)(1)(B) and 1281.9(a)(4); Standard 7(d)(3));
• prior service as an arbitrator for a party or lawyer within the preceding five years (CCP § 1281.9(a)(2); Standard 7(d)(4));
• prior compensated service as a dispute resolution neutral involving a party or lawyer (Standard 7(d)(5));
• current arrangements for prospective neutral service with a party (Standard 7(d)(6));
• an attorney-client relationship with a party or lawyer (CCP §§ 170.1(A) and 1281.9(a)(3); Standard 7(d)(7));
• a financial interest in a party (Standard 7(d)(9));
• a financial interest in the subject of the arbitration (CCP § 170.1(B)(3); Standard 7(d)(10));
• an interest that could be substantially affected by the arbitration’s outcome (Standard 7(d)(11));
• knowledge of any disputed facts (Standard 7(d)(12)) and
• membership in an organization that practices discrimination (Standard 7(d)(13)).

A proposed neutral arbitrator shall be disqualified if he or she fails to comply with CCP § 1281.9(a) (failure to make the requisite disclosures within 10 days of notice of his or her nomination or appointment) and any party entitled to receive such disclosures serves a notice of disqualification within 15 days after the proposed nominee or appointee has failed to comply with subdivision (a). (CCP § 1281.9 (b).)

• The failure of an arbitrator to disclose that he had served previously as a neutral arbitrator involving a law firm, which was representing a current litigant at arbitration, led to the reversal of the trial court’s confirmation of the arbitration award. (International Alliance of Theatrical Stage Employees and Moving Picture Machine Operators, etc. v. Laughon (2004) 118 Cal.App.4th 1380.)

• The failure to make the disclosures required in CCP sections 1281.9 and 170.1 constitutes a form of “corruption” for purposes of vacating an award pursuant to section 1286.2(b). “This is because the failure to disclose such matters, even if no actual bias is present, represents a kind of ‘corruption’ by creating the appearance that the … arbitrator is concealing something important and relevant to his or her impartial participation in the … arbitration proceeding.” (Michael v. Aetna Life & Casualty Ins. Co. (2001) 88 Cal.App.4th 925, 937-938.)

Gifts – Arbitrators must not, under any circumstances, accept a gift or favor from a party or any other person or entity whose interests are reasonably likely to come before the arbitrator. (Standard 11(a).)

Ex parte communications – Subject to certain exceptions, arbitrators shall not engage in ex parte communications. (Standard 14.)

The award – Arbitrators shall not disclose the nature of the award prior to the time that it is given to all of the parties. (Standard 15(b).)

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