Saturday, March 29, 2014

Payments

The problem with payment plans is that they are a nuisance to enforce. It seems that more often than not, the party that is supposed to make the payments at some point stops keeping up with its obligations, and the party to whom the payments are due has to take some action to get the payment plan back on track. Naturally, people at the time of entering into such arrangements usually want to avoid these problems. The debtor wants an agreement that they can perform, and the creditor wants the best enforcement tools available to make sure the payments are made.

One common technique is to provide that in the event of default, judgment can be entered for an amount much larger than the total value of the payments. That is supposed to give the debtor an incentive to keep up with the payment plan, and compensate the creditor for the time and trouble of having to enforce the agreement. Surprisingly, however, the appellate courts in California have been quite hostile to these kinds of arrangements.

Another Court of Appeal opinion in California recently reaffirmed the rule that penalty provisions in settlement agreements are not enforceable. In a settlement agreement entered in Purcell v. Schweitzer, the plaintiff agreed to accept payments totaling $38,000, but provided that in the event of a default, judgment in the full amount of $85,000 could be entered. Evidently hoping to make such a judgment enforceable, the settlement agreement also recited that the $85,000 "is an agreed upon amount of monies actually owed . . . and is neither a penalty nor is it a forfeiture." Further, the agreement set forth a host of reasons why an $85,000 judgment was reasonable, and barred the defendant from appealing or otherwise contesting this amount.

No dice, said the Court of Appeal. The additional amounts over and above the damages and interest resulting from breach of the settlement agreement, could not be justified, and the contractual language attempting to characterize these amounts as something other than a penalty was swept aside as contrary to public policy.

Mediators probably lament the loss of of a useful tool to persuade settling parties to enter into payment arrangements. I'll bet, however, that parties will continue using them (prior court rulings refusing to enforce these provisions haven't ended the practice), either in the hope that they might be found enforceable, or with the desire to strike some fear into the debtor of the uncertain consequences of non-payment. Paying parties can feel fairly safe making those agreements in the hope that they will actually be able to make all the payments on time, but also having the comfort of knowing that in the event they fall behind, such penalties will probably be held unenforceable.

I suggest that in the true spirit of mediation, we probably should not regret that the courts have taken away the club of draconian sanctions to induce parties to perform their agreements. Better to try to bring about enough change in attitude between the reconciled parties that they will be able to manage the payment plan on an amicable basis.

Wednesday, March 26, 2014

Victims of conflict

Last night I had a chance to hear Shane Bauer, Josh Fattal and Sarah Shourd discussing their new book A Sliver of Light, which recounts their two year ordeal of imprisonment in Iran. You might be more familiar with them the way they were usually characterized in the press as the "three American hikers." They prefer to be thought of as hostages rather than hikers. In actuality, they were tourists visiting the Kurdish region of Iraq. Hiking was just the activity they happened to be engaged in on the day they accidentally crossed (or were lured across) the border into Iran.

Their story is compelling as a prison and survival narrative, and as a result of their experiences, they have become activists on issues of human rights and the treatment of prisoners in general. But it is also revealing as an example of how a conflict between two powerful parties can severely damage the lives of innocent bystanders. We are familiar with the tales of refugees and other war victims. Perhaps less familiar are the stories of those who become pawns in such larger struggles.

The United States and Iran have been locked in paralyzing conflict for more than three decades. Each views the other as the devil. Neither has been able to reach any agreements that involve trust or cooperation, until the recent preliminary agreement on Iran's nuclear facilities. Under those circumstances, the situation of three trapped pawns in this struggle, who clearly were not spies and who had no business being detained in Iran for even one day, became for many months, impossible to resolve. At times the Iranians recognized their value as bargaining chips. As such, their release should have been relatively easy to achieve in exchange for some reciprocal gesture by the Americans. But because of the longstanding inability of the US and Iran to agree on anything, the two countries could not even commit to the kinds of prisoner exchanges that are often routine even among hostile nations.

It's good to put a human face on the victims of conflict, and to be reminded that the costs of conflict often extend far beyond the costs incurred by the parties themselves.  Sometimes we remember to take into account the suffering of the children of divorcing couples. But collateral damage can extend to other family members, associates, employees, customers and many others, in all kinds of conflicts. Yet the interests of these victims are not always respected in resolving a dispute between the two main parties. They do not have a seat at the table. But their plight can perhaps serve to remind warring parties of the costs of continued conflict. Just as the three American hostages may have played a small part in the recent thawing of relations between the US and Iran, the suffering of other victims can perhaps be used in some cases to help parties recognize the value of resolving destructive conflict.

Tuesday, March 18, 2014

Gloating

A recent case from the Court of Appeal in Florida illustrates the perils of confidentiality clauses in settlement agreements, but something more as well. Patrick Snay brought an age discrimination suit against a private school that did not renew his contract as headmaster, and settled the case for $80,000 plus $60,000 in attorneys' fees. (According to footnote 5 of the opinion, it appears the settlement was accomplished by mediation.) So far, so good. The settlement agreement contained a strict confidentiality clause prohibiting the plaintiff from disclosing, directly or indirectly, any information whatsoever about the existence or terms of the agreement to anyone except professional advisers. But Snay's daughter, who was a student at the school, and apparently had also suffered as a result of the dispute, had to be told something, Mr. Snay figured. So he simply informed her that the case was settled and that he was happy with the result.

Snay's daughter promptly published the following on her facebook page:
"Mama and Papa Snay won the case against Gulliver. Gulliver is now officially paying for my vacation to Europe this summer. SUCK IT."
The school refused to make the $80,000 payment. Snay moved to enforce the settlement agreement. The trial court granted his motion, but the Court of Appeal reversed, holding that he had breached the agreement by informing his daughter that the case was settled and that he was happy with the result.

On one level, the case simply provides a cautionary tale about the drafting and enforcement of confidentiality clauses. These need to be considered very carefully! Had the parties inserted language commonly used that permits them to announce that the case has been resolved to both parties' satisfaction, but bars any further disclosures, the problem could have been avoided. Had family members been included in the list of people to whom disclosure could have been made, the problem could have been avoided. Had the father simply told his daughter that he could not say anything to her about the case at all, the problem could have been avoided. Had the father, despite his breach, sworn his daughter to secrecy, most likely the problem could have been avoided. Perhaps better yet, had the daughter, who appears to have been affected by the case to such an extent that she needed counseling, participated in some fashion in the settlement negotiations so that she better understood all of the reasons that the case was being resolved, the problem perhaps could have been avoided. (See my prior post on agents, noting the importance of including all affected parties so as to avoid miscommunications.)

On another level, this case might be about much more than a party's breach of a confidentiality clause. It has been widely reported that it was the daughter's facebook post that cost her father the $80,000 settlement payment. Strictly speaking, that is not true. The daughter was not a party to the settlement agreement, and the school could not refuse to perform based on her actions. The Court of Appeal makes clear in its opinion that it was only the father's comments to his daughter that breached the settlement agreement, not the daughter's facebook post. So why did the court even mention the details of the daughter's facebook post, or the fact that it was disseminated to her 1200 facebook friends? It's hard not to draw the conclusion that the tone of the facebook post influenced first the school's decision to withdraw the agreed-upon payment, and second the Court of Appeal's decision to validate this refusal to perform the agreement.

A settlement agreement is supposed to represent peace. Ideally, both parties should be at peace with the result. It's best not to view settlement as a victory or defeat for one side or the other, but instead and most importantly as a peaceful resolution of the dispute that benefits both sides, especially compared to the costs of continued conflict. I am of course speculating here, but perhaps because she was not included in the settlement negotiations, and perhaps because she had suffered herself as a result of her father's dismissal from her school, Snay's daughter was not fully at peace with the result. She needed to take a final jab at the family's adversary, and brag about their victory. What she might not have understood was that such jabs are not considered good form after cases are settled, and that they create a new offense, stirring up all of the negative feelings created by the dispute itself. Likely the school had its reasons for not renewing the contract, valid or not, and its officials probably felt the payment was excessive, and only justified to avoid the even higher costs and risks of continuing the litigation. I'm speculating about that as well, but that is usually the employer's response to discrimination claims by employees.

Many considerations support the inclusion of confidentiality provisions in settlement agreements, one of which is to encourage good behavior on both sides, allowing them to remain at peace. But such clauses should be drafted carefully so they don't turn into a trap for the unwary that can allow the other side to renege on its promises.

Sunday, March 16, 2014

ODR/ADR

Online dispute resolution was developed to create a more efficient system than the courts are capable of providing, especially for relatively small cross-border and internet transactions. Courts are simply too expensive and too cumbersome to resolve these kinds of conflicts. The nature of online communications allows for a more flexible conflict resolution process, one that is not tied to any one jurisdiction's legal rules and procedures. The vast majority of these online disputes are resolved by informal means, facilitated by the speedy communications allowed by the internet.

Is ODR therefore a form of ADR? Not necessarily. Remember that even the traditional, physical courthouse steers most cases toward informal resolution, whether by direct negotiation between the parties, settlement conferences with a judge, mediation, arbitration, or some other process. ODR does the same thing, resolving most cases though some form of facilitated communication. But ODR can also assist with settlement negotiations by providing a mechanism that allows bidders to make settlement offers that are not transmitted to the other side unless they are within striking distance of each other. Going a step further, ODR can provide parties with an adjudicated decision by a neutral person. Courts themselves are starting to conduct hearings and facilitate other communications online. The next step would be to program computers to decide cases. If computers can be programmed to play Jeopardy, why not teach them to adjudicate legal disputes?

Fixing the Economists blog

My fellow panelists on the program we presented this week at SXSW reminded me that algorithms are becoming sophisticated enough to decide fairly complicated questions. And disputants may not mind having their conflict resolved by a machine, as long as they view the process as fair. If that seems surprising, think of how many disputes are resolved by a coin toss, or a round of rock-paper-scissors, or the drawing of straws, all perfectly arbitrary procedures that people nevertheless accept and perceive as fair, probably because they would rather have a quick result determined by chance than argue over who goes first, or what to have for dinner. Software programs can achieve outcomes less arbitrary than a coin toss, once they are adapted to incorporate legal rules of decision. That might or might not be preferable to disputants. I wouldn't be surprised if programs are developed that could interpret contracts according to established legal rules, or adjudicate traffic accidents based on police reports, photographs, and other evidence. Lawyers and judges might find that a scary thought, but it's one that is encouraged by the tech conference I just attended, where it seems that all the young software engineers are busy designing systems that could put a lot of humans out of work. Ironic, since a lot of them are looking for jobs themselves.

ODR could eventually lead to a brave new world of robot courts, but even if we get there, there should still be a prominent place in it for facilitated party-to-party communications leading to consensual resolution of disputes.

Monday, March 10, 2014

Technical difficulties

I moderated a panel this morning at the SXSW Interactive conference, on online dispute resolution, an appropriate topic for the techies who attend this event. I couldn't help mentioning to one of my panelists, Colin Rule, that the last time he had appeared remotely at another conference I attended, we encountered a glitch in the Skype connection which made him unable to hear the questions being posed. So I was glad to have Colin at my side and in person this morning. Coincidentally, a couple of days ago at this conference, the exact same problem was suffered by Julian Assange who, being holed up in the Ecuadorean embassy in London, was only able to appear here by remote hookup.

The subject of technical glitches was on my mind this morning anyway after a movie screening I attended last night was canceled because they were not able to access the subtitles on the digital file. Then when I got to the green room before our session, I was unable to print out my outline because the printer ran out of toner. (Turned out it was probably good for me to be forced to read my notes from my laptop, however, proving that glitches sometimes encourage resourcefulness.)

After all that, I couldn't help but play the curmudgeon skeptical of technical innovations in dispute resolution, and forcing the other panelists to defend the efficacy of online systems. But while the disadvantages to conducting dispute resolution procedures via computer connection are real and are not limited to potential technical difficulties (these disadvantages can also include missing out on some non-verbal communication, and delays that sometimes occur in online communications), there are also significant advantages (convenience, cost savings, more efficient scheduling, and the ability to prepare considered statements in writing as opposed to statements that people sometimes regret making in face to face communication) to the use of technology.

Quite simply, online processes allow a lot of disputes to be mediated or arbitrated that would never be feasible to resolve in person, either because of geographical distances or cost considerations or other reasons. For small dollar value cases such as disputes between far-flung eBay buyers and sellers, online dispute resolution is a necessity. Moreover, since those kinds of disputes arose in the virtual world, it only makes sense that their resolution should take place in the same space. But even for larger cases, there may be significant advantages to conducting all or part of a dispute resolution process through the internet. The use of new online tools will also encourage new and more efficient solutions to the many problems that are encountered now in the real world, especially in multi-party and multi-jurisdictional disputes, including venue, choice of law, and enforcement. Technical difficulties will never be eliminated, either in the real or the virtual world, but automated processes are definitely improving, and probably solving more problems than they create. Online dispute resolution is here to stay.


Thanks to three excellent panelists, the other two being Beth Trent, Senior Vice President and Director of Programs with the Institute for Conflict Prevention and Resolution, and Jin Ho Verdonschot,  a justice technology architect with HiiL Innovating Justice in the Hague.