Article Summary: Contractarian Economics and Mediation Ethics - The Case for Customizing Neutrality Through Contingent Fee Mediation

In Contractarian Economics and Mediation Ethics: The Case for Customizing Neutrality Through Contingent Fee Mediation, Scott R. Peppet, Associate Professor at the University of Colorado School of Law, argues for a contractarian approach to mediation ethics, where more standardized, yet flexible rules replace the current vague, immutable rules. Peppet explains why a set of default ethics rules governing mediations, which allows parties, under certain circumstances, to agree to "opt-in" or "opt-out" of the rules to fit their particular needs, could be more efficient than current standards. The article focuses in depth on the lack of merit to an absolute rule against all kinds of contingent fee mediation (CFM) (including fees paid to the mediator based upon the amount of settlement, achievement of settlement, costs saved by the parties, and value created by the mediator). Peppet describes why the current use of a "categorical immutable rule" against contingent fee mediation is so over-inclusive as to be detrimental to the field of mediation. Instead, he proposes a default rule on CFM where parties can tailor a mediator's incentive structure to align the mediator's interest with their own.

The first major section of the article provides a brief overview of contractarian economics, a description of many different types of CFM, and the current regulations affecting the use of contingent fee mediation. In his discussion of the current regulatory scheme, Peppet notes that despite the many types of rules which could be used to regulate CFM, where regulations do exist, they tend to have a blanket rule prohibiting all types of CFM in all situations. This general tendency exists in all sources of regulation, including state or federal court rules, private mediation associations, and local bar associations. Peppet argues that these "categorical immutable rules" fail to consider the range of contingent fee agreements which exist in the mediation setting or the advantages and disadvantages of each kind of agreement.

The next sections detail the case for and against CFM. The most common criticism of CFM is that an incentive fee schedule will bias the mediator, undermine mediator neutrality, and hurt the mediation process. While acknowledging that this could occur under certain circumstances, Peppet explains why the argument does not hold true for all types of contingent fee agreements. The crux of this argument lies in the distinction between neutrality as impartiality and neutrality as self-disinterest. Peppet argues that the classical conception of mediator neutrality tends to unnecessarily conflate these two distinct kinds of neutrality. While impartiality (both the appearance of and actual) is indeed critical to an effective mediation, mediator self-disinterest is not.

Peppet explains that neutrality as impartiality addresses party-bias and the resulting distrust of the mediator. Without trust in the mediator, parties are more likely to withhold information from the mediator which could overcome impasse or allow an opportunity for the mediator to add value to the parties' negotiation. Furthermore, impartiality is critical to party self-determination, a fundamental aspect of mediation. If the mediator is biased towards one party, the agreement may impose an undesired outcome upon the other party.

However, a mediator can have a personal interest in the outcome of the mediation while remaining impartial to the parties' interests. Peppet effectively describes this scenario with the case of a mediator who is self-interested in the outcome of the mediation (in favor of settlement) because settlement would improve her reputation by increasing her settlement rate. Here, the mediator does not have a biasing interest, despite the fact that she is self-interested in the outcome of the dispute.

In arguing against an immutable prohibition of CFM, Peppet reconsiders the classical conception of neutrality which requires both impartiality and self-disinterest. Because the neutrality requirement exists to protect the core functions of the mediator (discovering where settlement is possible, optimizing settlement, and helping parties to overcome emotional and psychological barriers to settlement), Peppet questions whether all types of CFM, particularly those which only create mediator self-interest, would harm the utility of the mediator. While impartiality is critical to the mediator's ability to perform these functions, Peppet dedicates a significant portion of the article explaining why self-disinterest is not.

However, it is important to note that Peppet does not argue for a categorical rule in favor of all CFM, rather he thinks a case-by-case, or tailored approach to CFM is appropriate. He acknowledges that CFM does have drawbacks. In some circumstances, CFM could lead to biasing interests. Peppet provides such an example where the mediator's ADR firm has a contract with a corporation to handle all of the employer's employment-related disputes. Under the contract, the mediator is only paid where the case is settled and the corporation pays the entire fee, if applicable. In this scenario, over time, the settlement bias will be more in favor of the employer than the employees because, for a variety of reasons, the employer wants to keep the disputes out of the courtroom. Here, the mediator's interest in getting paid will always be aligned with the corporation's desire (settlement), and not necessarily with the individual employee's interests. Regardless of whether the mediator attempts to ignore such a party-bias, the appearance of the bias is such that Peppet believes that CFM should be prohibited.

Additionally, he describes how the use of certain types of CFM can lead to a process bias where the mediator will focus her efforts on a particular aspect of the mediation process, such as value creation or whatever will result in settlement in the least amount of time, to the detriment of other conceivable advantages to the mediation. Because of these potentially negative effects of CFM, Peppet explains that some procedural safeguards, including an informed party consent requirement, are critical to the use of CFM.

Yet, despite these drawbacks, CFM is not inherently harmful to mediation. In some circumstances, CFM can give parties more control over the process and outcome of the mediation by allowing the parties to align the mediator's interests with those of the parties. To explain such a circumstance, Peppet considers the use of a CFM in a divorce case where the parties are eager to remain out of court. The parties might consider making the mediator's fee contingent on the money they expect to save by avoiding litigation. This fee structure would provide the mediator an incentive to settle the case (the same outcome which the parties desire), but it would not bias the mediator against a particular party. In this sense, a rule allowing some CFM would promote one of mediation's core functions: supporting party self-determination by allowing parties to have CFM if they want it.

In the final section of his article, Peppet proposes a tailored CFM default rule which, under certain circumstances and with procedural safeguards, allows parties to "opt-in" to CFM. He then concludes by exploring the potential positive implications that a contractarian approach to mediation ethics (or at least a discussion thereof) could have on the entire field of mediation. For example, such a discussion could lead to a reevaluation of other current immutable mediation ethics rules, such as those regarding evaluative approaches by the mediator and the control over terminating a mediation. Even if a contractarian approach is not adopted, perhaps a more efficient ethics standards than the current rules could be formulated. In sum, Contractarian Economics and Mediation Ethics provides thought-provoking insight into the effectiveness of the current approach to contingent fee mediation and to mediation ethics generally.

The full text of Scott R. Peppet, Contractarian Economics and Mediation Ethics: The Case for Customizing Neutrality Through Contingent Fee Mediation, can be found in 82 Tex. L. Rev. 227 (2003).