The Mediator’s Proposal: A Useful Tool for Breaking Impasse

When a proposal is made by the mediator, reactive devaluation is significantly reduced. Thus, a party might agree to a proposal made by the mediator, even though it would not have agreed to that proposal if it had come from the opposing party.

“Reactive devaluation” is a cognitive bias that occurs when a proposal is devalued because it comes from an adversary. Applied to mediation, it is not uncommon for a party to reject a proposal made by the opposing party for no apparent reason other than it came from the opposing party. When the proposal is made by the mediator, however, reactive devaluation is significantly reduced. Thus, a party might agree to a proposal made by the mediator, even though it would not have agreed to that proposal if it had come from the opposing party.

A mediator’s proposal is typically used as a last resort after all other attempts to avoid impasse have failed. It is a one-time, “take-it-or-leave it” dollar amount that the mediator suggests at the end of the mediation process. If both parties accept, the case settles for the proposed amount. If one party accepts and the other rejects, or if both parties reject, there is no settlement. In this commentary I will assume there are only two parties, and one dispute involved in the mediation.

Sometimes a mediator’s proposal will be made at the end of the mediation session before the parties depart, but I believe the better practice is for the mediator to convey the mediator’s proposal after the conclusion of the mediation session. A mediator’s proposal should (1) be in writing and sent via email to counsel for each party separately (to avoid an inadvertent “Reply All”), (2) include a dollar amount (and other essential terms), (3) set a deadline for each side to respond in writing to the mediator with an unqualified “yes” or “no,” and (4) make it clear there is no negotiation. By waiting a day or two before sending the mediator’s proposal, the parties will have had a chance to recover from the emotions of the mediation session. In addition, it will give the parties time to communicate with decision makers who were not able to attend the mediation session, which may result in one or both parties having more settlement authority than they had on the day of the mediation session.

If both parties say “yes,” the mediator announces a settlement. However, if one or both parties say “no,” the mediator does not reveal either side’s response but simply announces there is no settlement. This “double blind” approach is meant to ensure that the party who said “yes” will not be prejudiced if settlement negotiations occur later in the litigation (otherwise, the rejecting party would know the number at which the accepting party was willing to settle).

The mediator should make it clear to the parties that the number being proposed is not necessarily what the mediator thinks is “fair,” and it is also not the mediator’s opinion of the “correct” outcome of the case. Instead, it is the mediator’s estimate of what the mediator believes would be best for both parties, after taking into account the risks, uncertainty and costs of litigation. It is based on the mediator’s experience, intuition and judgment, and represents what the mediator thinks both sides might be willing to accept.

A mediator’s proposal should not be made until it appears that the parties’ continued negotiations will no longer be productive, and the mediator has tried every other impasse breaking technique in his/her mediation toolbox. It should also not be made until the parties are close enough so that both sides recognize a final attempt at settlement makes sense. The larger the gap when the parties reach impasse, the less likely a mediator’s proposal will succeed. In addition, while there is not universal agreement, the consensus seems to be that a mediator’s proposal should not be made without the consent of all parties.

One of the benefits of a mediator’s proposal is that the mediator can propose a number that neither side felt comfortable making. Thus, before making the proposal, the mediator should “test the waters” in the private caucus sessions with each party to get a feel for how far each side might be willing to stretch beyond which they would otherwise move. The private caucus sessions also give the mediator the opportunity to build trust with the parties and their counsel, which is crucial if the mediator’s proposal is to be given serious consideration by both sides.

A mediator’s proposal provides no option for a party to make a counteroffer, which increases the stakes because both sides know that a rejection means no deal. But does a rejected mediator’s proposal end all hopes of settlement? Not necessarily. If nothing else, effective mediators are persistent, and an experienced mediator can still work to narrow the divide and find a way to settlement. It should be kept in mind, however, that no matter how the mediator describes the proposal, it is often seen as the mediator’s opinion on the merits of the dispute, in which case, the mediator may have lost some of his/her impartiality and ability to persuade. For example, if the parties continue mediation after rejection of the mediator’s proposal, a party being asked to pay or accept a less favorable amount might resist the mediator’s attempt to prod that party above or below the number in the mediator’s proposal. This gives the mediator a lot of motivation to get it right. If the mediator’s proposal misfires, it might do more harm than good.

The goal of a mediator’s proposal is to resolve the dispute; thus, it is important that any settlement resulting from a mediator’s proposal is binding and enforceable. Acceptance of a mediator’s proposal may not result in a binding contract when it is subject to further conditions, such as the drafting and execution of a mutually acceptable settlement agreement. However, including conditions may be the only way to get the parties to agree to the mediator’s proposal. The mediator should consider using language along the lines used in the mediation resolving the dispute over the founding of Facebook: “The parties agree that they may execute more formal documents, but these terms are binding, and this document may be submitted into evidence to enforce this agreement.”

In conclusion, when used in the appropriate situation, a mediator’s proposal can be a valuable tool in resolving disputes where the parties have reached impasse.

Reprinted with permission from the December 13, 2024 issue of Daily Report © 2024 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

Pat Jones has been on the Henning panel for over 20 years and brings 40+ years of experience and a unique perspective to the mediation and arbitration table in business and commercial disputes.  His background includes being a CPA with a Big Eight accounting firm, practicing corporate and tax law as a partner in three major law firms in Atlanta, and serving as General Counsel, CFO and head of investor relations of a public technology company, as well as the Chair of the Audit Committee of a private technology company for 15 years.  Pat was also the Chair of the Tax Law Section of the Atlanta Bar Association, and the Co-Chair of the Georgia Limited Liability Company Committee, which drafted the Georgia Limited Liability Company Act.  Click to schedule your next mediation or arbitration with Pat today!