Litigation, Arbitration

The potential of mediation in Germany – or: The forgotten costs of the litigious avenue

Written by

Dr Henriette Sigmund

Mediation – is it worth it and really a thing? A question many of us have faced in their disputes career. The answer is simple: It is. And here is why in particular practitioners in Germany may want to consider it as a valuable option for their client the next time they face a complex dispute.

Without doubt: Mediation is still a closed book for many dispute resolution practitioners in the German disputes scene and often meets reluctance. Phrases like “But our case is just about distributing money – there is no win/win that we could reach in mediation” come up again and again. Yes, there may not always be a sharing of the lemon on the horizon, one aiming at making juice, the other at using the peel; but this is not only what mediation is about. There are plenty of other valid reasons to consider mediating.

To begin with, parties may want to make sure that they find themselves in a merely distributive bargaining situation where the plus for one party equals the minus for the other. Quite often, this is the assumption, however not the case.

Furthermore, as a matter of fact, some aspects of conflicts are simply not meant to be reflected in an adversary proceeding before a court or an arbitral tribunal. Consequently, they will simply be neglected in such forums. This in and of itself is perfectly fine: Every dispute resolution mechanism has its genuine system and follows its own rules. Still, it is a valuable element of consideration when choosing one’s path.

Mediation can contribute to acknowledge potential key factors to dispute resolution that will (necessarily) be ignored in other proceedings. Exploring such factors may open the door to yet unchartered territories of potentially mutually beneficial solutions; additionally, it is often crucial to avoiding costs that are often forgotten or neglected.

I. So what is mediation?

Mediation is a structured process that facilitates reaching settlements; it involves a mediator assisting all involved parties in finding solutions to a conflict they have.

The role of the mediator depends largely on the very approach chosen and may vary even within a mediation. For example, under the most common model in Germany, the mediator will serve as a moderator and coach that structures the process, helps the parties in discovering interests hidden behind their initial positions, developing potential solutions, prioritizing, and finalizing a jointly chosen solution in the shape of inter alia a settlement.

However, a mediator’s role can be broader: In addition to facilitating settlement, he or she can also provide evaluative support, play the “devil’s advocate” towards each party. This may help in narrowing down possible outcomes and lead the parties to their very zone of agreement and the ultimate sweet spot within it.

The mediator and the parties may choose to have joint sessions, that is being in “one room” all the time. However, it may also serve the parties’ interests to have separate sessions with the mediator (so-called caucusing) to be able to talk more freely to the mediator, while deciding which information he or she may reveal to the other party afterwards.

Lawyers often constitute an indispensable ingredient in this process as they by nature act partially, consulting the party, help developing solutions and safeguard their clients’ legal position.

Evidently, parties need not fear losing by engaging in a mediation: A mediation is a voluntary process, and the parties can assure not making any compromises or concessions – both in the very process and its aftermath.

II. Neglected costs we should consider in situations of dispute

Disputes unavoidably cause costs, even for the winning party. These costs are not restricted to claims, fees for lawyers or adjudicating bodies, but involve often neglected aspects such as the time, effort and energy consumed for each party dealing with the dispute. In this regard, dispute resolution practitioners endorsing mediation as a potential way forward further their clients’ genuine interest to avoid a “fighting out” of disputes.

In doing so, for an optimum client support, dispute resolution practitioners should consider the costs related to each potential path of resolving a dispute. As set out above, these costs and the related advisory task go beyond presenting accruing fees and required time. The overall costs of adversary proceedings are often – unconsciously – understated in that they do not reflect certain costs that may still weigh heavily on the parties once caught in litigious proceedings. Among other things, these costs include

  • Psychological costs of going through strenuous proceedings – besides the burdens of coordination with the lawyers, potentially attending hearings, reviewing briefs, and providing input (e.g., anybody who has experienced a cross-examination as a witness in an arbitration will presumably be very aware of these costs);
  • Opportunity costs of not being able to invest financial means or other resources in other ways, including having employees dig into past events for litigation or arbitration proceedings instead of working on business-related purposes (e.g., anybody who has participated in a document production, consuming valuable resources and manpower for compiling potential evidence, will be very aware of these costs);
  • Costs related to financial development, such as considering the time value of money (it may be beneficial receiving a lower amount today than a higher amount in two years’ time or the other way around depending on the rate of inflation) or accruing interest (depending on alternative investment options) (e.g., anybody who has been involved in analyzing value of debts or in obtaining often costly assessments of quantum experts may be well aware of these costs);
  • Accounting-related costs such as having to reflect reserves or accruals, uncertainties and risks of legal disputes in the conduct of a business or potential transactions, including costs of an expert assessing the same on a regular basis;
  • Time and accruing interests during litigation or arbitration proceedings –  inter alia, according to statistics dated 2022, a civil court case in Germany will take in average 6 months to 2 ½ years for the first two (of three available) instances, see here, p. 26, 56, 102) (e.g., anybody who has initiated court proceedings and experienced delays related to understaffing and long-range scheduling of hearings or submissions will be very aware of these costs);
  • Needless to say: Monetary costs related to fees of a court or arbitral tribunal and (potentially not fully reimbursable) lawyers’ fees as well as potential further expenses for court reporters, translators, expert assessments, travel to hearings, etc. (e.g., anybody who has participated in arbitration seeing additional costs piling up will be very aware of these costs).

While the German legislator has enacted a mediation act and furthers amicable settlements in civil court proceedings as well as before so-called conciliation judges (see in particular section 278 paras. 1-2, 5-6 of the German Civil Code, available in English here), mediation is still an alien concept for many practitioners. The hesitancy observed in the German market towards mediation in business cases may be founded on various misconceptions. In particular, mediation is neither an esoteric approach nor does it imply a party’s weakness or doubts as to a positive outcome of adversary proceedings. On the contrary, it embraces elements of self-awareness, reflection, creativity, and cooperation that constitute a winner’s strategy. In the U.S., this shift in the common mindset has already taken place. Dispute resolution is not a matter of black-and-white, of winning or losing.

III. So why can mediation be such a powerful method?

Foremost, mediation offers a unique toolset that goes far beyond conventional negotiation skills.

Furthermore, as a matter of fact, every dispute involves individuals that have genuine interests. This may be more evident when dealing with natural persons (e.g., spouses seeking a divorce), but applies to companies or institutions as well, for example when acknowledging the potentially personally driven interests and needs of a head of the legal department or a manager aiming at obtaining a bonus or promotion. Mediation provides powerful tools allowing to consider and reflect the various interests that may be at stake and thus impact finding a viable solution to a dispute.

Conflicts cause losses and law practitioners can contribute to minimizing these losses by advising thoroughly on available methods of dispute resolution. Only such comprehensive outlook on (preferably all relevant) potential costs and benefits will allow clients to make informed decisions.

Lastly, put plastically: If your only available tool is a hammer, each dispute looks like a nail. If we increase the awareness of other tools, not only the parties involved, but also society affected may greatly benefit – for example by companies creating value by focusing on their business instead of lawsuits or keeping the costs and reserving the resources of a mainly tax-financed state court system reserved for the cases requiring it.

The Dispute Resolution practice of PwC Legal represents and advises clients in national and international arbitration proceedings as well as in state court proceedings. The team’s unique expertise also covers Alternative Dispute Resolution (ADR) methods, particularly mediation in national and international contexts.