Neutral Third Parties in Minnesota Business Disputes

What Does a Neutral Third Party Do in a Minnesota Business Dispute?

A neutral third party runs a process that helps the parties resolve their dispute, and Minnesota sorts neutrals by how much they decide. Minnesota General Rule of Practice 114.02(e) says a “Neutral” “is an individual who provides an ADR process under this rule.”

Rule 114.02 groups the processes into four kinds:

1. Adjudicative. The neutral decides. Arbitration is “A process in which a Neutral or panel renders an award after consideration of the evidence and presentation by each party or counsel.”
2. Evaluative. The neutral gives an opinion about the case, as in early neutral evaluation.
3. Facilitative. Mediation is “A process in which a Neutral facilitates communication and negotiation to promote voluntary decision making by the parties to the dispute.”
4. Hybrid. The process combines roles, such as mediation followed by arbitration.

Whether the result binds your company depends on what the parties agreed to. Under Minn. Stat. § 484.76, subd. 2, the court’s ADR methods “must be nonbinding unless otherwise agreed to in a valid agreement between the parties.” A neutral’s power over your company comes from your contract or your agreement with the other side, not from the neutral’s title.

How Is a Mediator Different From an Arbitrator?

A mediator cannot decide your dispute; an arbitrator can, and a binding award is hard to undo. The Minnesota Civil Mediation Act, Minn. Stat. § 572.33, subd. 2, defines a mediator as “a third party with no formal coercive power whose function is to promote and facilitate a voluntary settlement of a controversy identified in an agreement to mediate.”

An arbitrator works under different rules. Rule 114.02(a)(1) says an arbitration award “may be binding or non-binding, pursuant to the agreement of the parties.” Rule 114.09(a)(2) adds: “Any binding arbitration shall be conducted pursuant to Minnesota Statutes, chapter 572B.” Three differences follow for a business:

• Who decides. In mediation, your company and the other side decide whether to settle. In binding arbitration, the arbitrator decides.
• Discovery. Under Minn. Stat. § 572B.17(c), an arbitrator “may permit such discovery as the arbitrator decides is appropriate in the circumstances,” weighing “the desirability of making the proceeding fair, expeditious, and cost-effective.” That can lower cost, and it can also limit the documents you obtain from the other side.
• Review. Under Minn. Stat. § 572B.23(a), “the court shall vacate an award if” one of the listed grounds applies. One ground is “evident partiality by an arbitrator appointed as a neutral”. Another applies when “an arbitrator exceeded the arbitrator’s powers”.

The Minnesota Supreme Court reviewed a city’s challenge to an award under a police union contract in City of Richfield v. Law Enforcement Labor Services, Inc., 923 N.W.2d 36 (Minn. 2019). The court said “judicial review of arbitration decisions is generally extremely limited.” It added: “The burden lies with the party seeking to vacate the arbitration award to demonstrate that the award should be vacated.” The motion and its deadline are covered in how to vacate an arbitration award in Minnesota.

A court-annexed arbitration can also be non-binding. After a non-binding award, any party may request a trial within a short period that Rule 114.09(f)(1) says “shall not be extended.” If no party requests a trial in that period, Rule 114.09(e)(2) provides that “the court administrator shall enter the decision as a judgment,” and that judgment “is not subject to appeal.” If a party makes that request, Rule 114.09(f)(4) provides: “A trial de novo shall be conducted as if there had been no arbitration.”

What Other Neutrals Can a Business Use?

Rule 114 also recognizes neutrals who evaluate a case, find facts, or decide with a right of appeal. Each one fits a different kind of stalemate:

• Early neutral evaluation (“ENE”). One or more neutrals with experience in the subject matter review the case after it is filed but before formal discovery. Under Rule 114.02(b)(1), “The Neutral may give an assessment of the strengths and weaknesses of a claim, case, or defense; an opinion of settlement value; and an opinion as to how the parties should expect the court to rule on the case or issue presented.”
• Neutral fact finding. A neutral analyzes a factual dispute, such as whether delivered equipment met the contract’s specifications, and issues findings. Under Rule 114.02(b)(3), “The findings are non-binding unless the parties agree to be bound by them.”
• Mediation-arbitration (“med-arb”). Rule 114.02(d)(2) describes “A process in which a Neutral first mediates the parties’ dispute and then, in the event of an impasse, serves as arbitrator of the dispute.” The person who may decide your case is the same person who heard your private sessions during the mediation phase, so I suggest deciding before the mediation phase what you are willing to say in those sessions.
• Consensual special magistrate. A neutral decides the issues after a presentation similar to a lawsuit tried to a judge. Under Rule 114.02(a)(2), “This process is binding and parties have the right of appeal to the Minnesota Court of Appeals.” That right of appeal is the main difference from binding arbitration.

When Will a Minnesota Court Send Your Lawsuit to a Neutral?

In a Minnesota state-court business lawsuit, you should expect the court to require some form of ADR, because the statute and the rule both call for it. Under Minn. Stat. § 484.76, subd. 1, outside family law matters, “the rules shall require the use of nonbinding alternative dispute resolution processes in all civil cases, except for good cause shown by the presiding judge.”

Rule 114.04(b) sets the sequence. After the complaint is served, the parties confer about the process, its timing, and the neutral. The rule then provides: “If the parties agree on a process, the court should order the parties to participate in that process. If the parties cannot agree on an ADR process, the court shall order the parties to use a non-binding ADR process. In the event that the parties are unable to agree on a Neutral, the court shall make the selection of a Qualified Neutral.” A Qualified Neutral is a neutral listed on the State Court Administrator’s roster.

Two rules protect your company’s say in the choice:

1. Your attorney’s duty. Under Rule 114.03(b), “attorneys shall provide clients with information about available ADR processes.”
2. Removing a court-picked neutral. If the court selects a Qualified Neutral without the consent of all parties, any party may file a notice to remove that neutral. Rule 114.04(c) provides: “Such notice must be filed with the court and served on the opposing party within 7 days of notice of the court’s appointment.” I suggest checking the current rule text the day the appointment order arrives, because the period is short.

A court may excuse ADR only in limited cases, including “In rare circumstances where the court in its discretion finds ADR to be inappropriate or to operate as a sanction” (Rule 114.01(a)(5)). If your company was just served, ADR planning belongs with the first weeks after your business is served with a lawsuit.

How Should You Vet a Neutral Before Agreeing to One?

Before your company agrees to a neutral, get the neutral’s qualifications and a conflict disclosure in writing. An individual who acts for compensation as a mediator under the Civil Mediation Act, or as a court-annexed neutral under Rule 114.13, must provide a written statement of qualifications before beginning. Chapter 572B and Rule 114.13 require arbitrators and court-annexed neutrals to disclose conflicts. An arbitrator’s missed disclosure can later undo an award.

• Qualifications. Under Minn. Stat. § 572.37, “No individual may act as a mediator pursuant to the Minnesota Civil Mediation Act for compensation without providing the individuals to the conflict with a written statement of qualifications prior to beginning mediation.” The statement “shall describe educational background and relevant training and experience in the field.” I suggest reading it for experience with your industry or contract type, because an evaluator’s opinion of value depends on that experience.
• Arbitrator disclosures. Under Minn. Stat. § 572B.12(a), a person asked to serve as an arbitrator must disclose “any known facts that a reasonable person would consider likely to affect the impartiality of the arbitrator in the arbitration proceeding,” including “a financial or personal interest in the outcome of the arbitration proceeding” and “an existing or past relationship with any of the parties to the agreement to arbitrate or the arbitration proceeding, their counsel or representatives, witnesses, or the other arbitrators.” Under subsection (b), “An arbitrator has a continuing obligation to disclose” facts learned later.
• Arbitrators who may not serve. Minn. Stat. § 572B.11(b) provides: “An arbitrator who has a known, direct, and material interest in the outcome of the arbitration proceeding or a known, existing, and substantial relationship with a party may not serve as a neutral arbitrator.”
• Court-annexed neutrals. The Code of Ethics in Rule 114.13(A), subdivision 2(a), says: “A Neutral shall disclose all actual and potential conflicts of interest reasonably known to the Neutral. After disclosure, the Neutral may serve, with the consent of the parties.” Under subdivision 2(b), “Neutrals acting as arbitrators shall disclose to the parties in writing at the time of selection, or promptly after it becomes known, any actual or potential conflict of interest known to the Neutral arbitrator.”

If your contract sends disputes to AAA, JAMS, or a private arbitrator, § 572B.12(f) adds a step. When the parties agree to “the procedures of an arbitration organization or any other procedures for challenges to arbitrators before an award is made, substantial compliance with those procedures is a condition precedent to a motion to vacate an award on that ground.” I suggest raising a conflict through the provider’s challenge process as soon as you learn of it, because skipping that process can cost you the partiality ground later. In federal court, the FAA lists the same concern as a ground to vacate: 9 U.S.C. § 10 reaches cases “where there was evident partiality or corruption in the arbitrators, or either of them”.

What Stays Confidential When You Talk to a Neutral?

In a non-binding court-annexed process such as mediation, what you say and the documents you create for the session stay out of the later trial. Documents that were discoverable anyway do not become protected because you showed them to the neutral.

Rule 114.07(b) provides that “no statements made nor documents produced in non-binding ADR processes that are not otherwise discoverable shall be subject to discovery or other disclosure. Such evidence is inadmissible for any purpose at a later trial, including for impeachment.” Three other rules support that protection:

• The neutral’s file. Under Rule 114.08(a), “Notes, records, impressions, opinions and recollections of the Neutral are confidential,” subject to listed exceptions.
• The neutral as a witness. Under Minn. Stat. § 595.02, subd. 1a, “No person presiding at any alternative dispute resolution proceeding established pursuant to law, court rule, or by an agreement to mediate, shall be competent to testify, in any subsequent civil proceeding or administrative hearing, as to any statement, conduct, decision, or ruling, occurring at or in conjunction with the prior proceeding, except as to any statement or conduct that could” be a crime, “give rise to disqualification proceedings under the Rules of Professional Conduct for attorneys,” or be professional misconduct.
• Settlement talks. Under Minnesota Rule of Evidence 408, an offer or acceptance of a compromise “is not admissible to prove liability for or invalidity of the claim or its amount,” and “Evidence of conduct or statements made in compromise negotiations is likewise not admissible.” The same rule “does not require the exclusion of any evidence otherwise discoverable merely because it is presented in the course of compromise negotiations.” It also “does not require exclusion when the evidence is offered for another purpose, such as proving bias or prejudice of a witness, negativing a contention of undue delay, or proving an effort to obstruct a criminal investigation or prosecution.” The approach is the same one behind settlement offers that do not admit liability.

The protection is narrower in a deciding process. Under Rule 114.07(c), “Evidence in consensual special magistrate proceedings, binding arbitration, or in non-binding arbitration after the period for a demand for trial expires, may be used in later proceedings for any purpose for which it is admissible under the rules of evidence.” Private conversations with the neutral follow the same divide. Rule 114.10(b) allows them in “evaluative, facilitative, and hybrid processes with the consent of the Neutral, so long as the communication encourages or facilitates settlement,” while Rule 114.10(a) bars them in adjudicative processes “unless approved in advance by all parties and the Neutral.”

Rule 114.01(a) states its own reach: “This rule governs court-annexed Alternative Dispute Resolution (ADR).” For a private mediation before any lawsuit is filed, I suggest putting the confidentiality terms in the written agreement to mediate, because the Rule 114 protections are written for court-annexed ADR.

What Makes a Mediated Settlement Binding in Minnesota?

Under the Minnesota Civil Mediation Act, a mediated settlement agreement is not binding unless it says it is binding and recites three written warnings, or “the parties were otherwise advised of the conditions in clause (1)” of the statute. The act defines a mediated settlement agreement as “a written agreement setting out the terms of a partial or complete settlement of a controversy identified in an agreement to mediate, signed by the parties, and dated.”

Minn. Stat. § 572.35, subd. 1 provides: “The effect of a mediated settlement agreement shall be determined under principles of law applicable to contract. A mediated settlement agreement is not binding unless” either

1. “it contains a provision stating that it is binding and a provision stating substantially that the parties were advised in writing that (a) the mediator has no duty to protect their interests or provide them with information about their legal rights; (b) signing a mediated settlement agreement may adversely affect their legal rights; and (c) they should consult an attorney before signing a mediated settlement agreement if they are uncertain of their rights”; or
2. “the parties were otherwise advised of the conditions in clause (1)”.

In Haghighi v. Russian-American Broadcasting Co., 577 N.W.2d 927 (Minn. 1998), the Minnesota Supreme Court applied the 1996 version of the statute, which did not include the current clause (2); the legislature amended the section in 1999. In that case, two businesses settled a contract dispute at the end of a daylong mediation under the act. Both companies had lawyers present. Because one company’s representative had a plane to catch, the lawyers wrote the deal by hand, and both parties signed every page. The document did not say it was binding. The court, answering a question certified by the federal appeals court, held the document unenforceable under that earlier text and said: “Requiring that a settlement agreement contain a provision stating that it is binding, even when both parties are represented by attorneys, does not produce an absurd result.” The federal appeals court then reversed the trial court’s order enforcing the handwritten deal.

In my experience, parties in an all-day mediation rarely settle in the morning, and the final numbers can come late in the day. Once the parties reach agreement, I suggest writing it up and signing it before anyone leaves, because a party who goes home may not return with the same willingness to settle. I tell clients to keep the evening open rather than book a flight. What a mediation day looks like covers the rest of that day.

Three more rules affect a mediated settlement:

1. Court-annexed mediation. Under Rule 114.13(A), subdivision 7(b), the neutral’s signed agreement with the parties must state that “no agreement reached in this process is binding unless it is put in writing, states that it is binding, and is signed by the parties (and their legal counsel, if they are represented) or put on the record and acknowledged under oath by the parties.”
2. Debt collection. Under § 572.35, subd. 2, “a mediated settlement agreement between a debtor and creditor is not binding until 72 hours after it is signed by the debtor and creditor, during which time either party may withdraw consent to the binding character of the agreement.”
3. Undoing a settlement. Under Minn. Stat. § 572.36, “a court of competent jurisdiction shall set aside or reform a mediated settlement agreement if appropriate under the principles of law applicable to contracts, or if there was evident partiality, corruption, or misconduct by a mediator prejudicing the rights of a party.”

How Do You Pick the Right Neutral for Your Dispute?

I suggest matching the neutral to what is actually blocking a settlement, because each neutral answers a different problem. The choice should also account for whether you can live with a result you cannot appeal.

• The parties disagree about money but could live with a deal. Mediation keeps the decision with your company, and a mediated settlement agreement under the Civil Mediation Act is not binding unless it meets § 572.35.
• The parties disagree about what a court would do. Early neutral evaluation gives both sides an outside opinion of the claim, its settlement value, and the likely ruling.
• One technical fact is driving the dispute. Neutral fact finding answers that question without a full trial, and the findings bind only if you agree.
• Your company needs a final decision without a full lawsuit. Binding arbitration delivers one, with narrow court review and discovery the arbitrator controls.
• You want a decision but also an appeal. A consensual special magistrate decides the case, and the parties keep a right of appeal to the Minnesota Court of Appeals.

Your existing contracts may have already made the choice. Under Minn. Stat. § 572B.06(a), “An agreement contained in a record to submit to arbitration any existing or subsequent controversy arising between the parties to the agreement is valid, enforceable, and irrevocable except upon a ground that exists at law or in equity for the revocation of contract.” For a contract involving interstate commerce, 9 U.S.C. § 2 makes a written arbitration provision “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” If the other side refuses to arbitrate under a valid clause, your company can ask a court to compel arbitration.

Cost belongs in the comparison too. A neutral’s fee can be small next to what a business lawsuit costs through trial, and an early mediation or evaluation can end the case before discovery. My work on mediation and arbitration for businesses covers how I prepare a company for each process.

Next Steps for Your Company

The neutral your company uses determines who decides the dispute, what stays confidential, and whether you can challenge the result. Before you agree to one, read the qualification statement and conflict disclosure, and make sure any settlement you sign states that it is binding and recites the warnings in § 572.35. Before you sign a contract with an arbitration clause, weigh the narrow court review and arbitrator-controlled discovery that come with it.

For more on how disputes move through Minnesota courts, see my overview of business litigation. If you would like my analysis of which neutral fits your company’s dispute, or of the mediation or arbitration clause in your contracts, email [email protected] with a brief description and the names of the other parties. Please hold any confidential documents until after an intake and conflict check.