Alternative Dispute Resolution Clause – Drafting A Simple Mediation Clause
By RSG Law
Companies manage how they conduct their day-to-day operations carefully, but surprisingly neglect to manage potentially the most disruptive factor in their business: their disputes. This is often due to lack of information on alternative dispute resolution options. It should be a duty of every lawyer, if it is not, to inform the clients about the benefits of mediation and include mediation clause in the standard template for them to consider. While most will concur on the importance of these clauses, practitioners often spend little time on them when drafting a contract. Many sacrifice the client’s interest by relying on boilerplate contract. Wherever applicable, lawyers should include in the underlying contract an option for parties-conducted negotiation and followed by mediation. Lawyers should do a little more and take advantage of the parties’ positive outlook to engage them in agreeing to a mediation clause.
To begin with, clients should be informed that inclusion of a simple clause in the contract requiring that the parties mediate any dispute that arise, saves much pain, money and time further down the road by avoiding stalled negotiations and litigation. The clients should be informed that all types of disputes can be mediated. In mediation, the clients retain control over their disputes and often solve them the way they solve other issues in their business. They should be informed that in litigation, the clients have no control over the final outcome, as the court decides the case on the merits, not the commercial reality of the situation. A judgment may therefore be damaging in terms of publicity or precedent for more claims, or a client simply may not be able to pay, putting both sides at risk. A well informed client is likely to prefer that the mediation clause be included as a practical need for his business. A poorly advised client is likely to decide litigation as a main option to resolving the disputes that arise.
An option for parties to negotiate first should be included in the alternative dispute resolution clause wherever practical. As such, the parties will agree that they shall first attempt in good faith to resolve any dispute, differences and disagreement arising from or in connection with the underlying contract. Often this clause is followed by a statement that the parties will do so in order to find a solution that serves their respective and mutual interest. Including this step in a dispute resolution clause gives the parties an additional opportunity to maximize their individual and mutual interest and preserve the business relationship. This process is cost friendly and does not demand any participation by a person who is not a party to the contract. A short time limits are advisable with respect to initiation, conduct and completion of the negotiation step so as to ensure that the overall process is not too protracted, and that the subsequent mediation phase is not undermined by the parties hardening their position or becoming more adversarial. However, often this part of clause becomes useless in cases involving complex disputes or parties who have lost faith in each other. These are few reasons among many others that may necessitate the involvement of an independent third party in the dispute resolution process.
In most cases, mediation will be included in the alternative dispute resolution clause as a second steps towards resolving dispute after negotiation but prior to arbitration or litigation. Preceding mediation with negotiation may ensure that the value of mediation is not diminished by moving forward with the process too quickly i.e. before the parties fully understand their position. Deliberate and precise drafting is required for mediation clauses even if mediation’s consensual nature makes the choice of terms less consequential than with a clause committing the parties to a binding adjudicative process. Ambiguous drafting can lead to disagreements about the applicable procedures and time and money wasted on arguing about how a dispute should be resolved. Further, if the clause is too uncertain, the parties’ intention of attempting mediation may be frustrated.
An agreement to mediate can be in the form of a mediation clause in a contract or in the form of a separate contract that makes mediation a condition precedent to pursuing arbitration or litigation. A mediation clause typically begins by specifying the types of disputes subject to mediation. Most clauses will aim to provide that any and all disputes relating to or in connection with the agreement
will be subject to mediation. Whether mediation is mandatory or not should be specified unambiguously. A clause can explicitly provide that the parties must mediate or that the attempt to resolute by mediation is mandatory for the parties. Alternatively, it may specify that mediation will occur only if the parties wish to seek an amicable settlement at the time the dispute arises. Where mediation is made mandatory, it should also provide an avenue for the parties to avoid mandatory participation in mediation if a party believes that initiating arbitration or litigation proceedings is necessary to preserve its rights (for example: expiry of limitation period). An alternative remedy for a breach of the mediation clause in the clause itself should also be provided (such as liquidated damages) just in case the courts or arbitral tribunals, based on the jurisdiction, do not enforce it.
While the preceding paragraph indicates the party’s intention to mediate, it leaves many issues unresolved. Issues such as when, where, how and before whom a dispute will be mediated may become subject of disagreement once a dispute has arisen. Some or more important elements that should be kept in mind when drafting mediation clause are: applicable mediation rules, selection of the mediator, place of mediation, time limit, language, disclosure and confidentiality, and apportionment of costs.
The easiest way to identify the mediation process is to incorporate an established set of rules by reference, including by noting the rules of a certain year or those – then in force. Many reputable dispute resolution institutions provide local and international mediation rules, including some for subject-specific disputes. If adjustments to the rules are sought, the clause can provide that the rules apply except as otherwise provided. If the parties do not wish to refer to established rules, then the clause should set forth the basic process, including, in particular, how the mediator will be selected, the venue, the time limit, and the mediator’s authority to determine the date, time, and conduct of meetings.
The process by which the mediator will be selected should be determined in advance. Given that party autonomy is a fundamental principle of mediation, the mediation agreement should allow the parties to select their mediator and the mediation procedures. The mediation agreement should facilitate selection of the mediator by the dispute resolution institution, so that if the nature of the disputes makes it impracticable to have more than one mediator, the process is not hindered by the failure of the parties to agree on a mediator. Alternatively, the mediation agreement may provide for each party to select someone and the selected two picks the actual mediator.
There is inevitably friction between the need for parties to disclose information in the mediation process and the parties’ interest in protecting their positions in subsequent arbitration or litigation. At the least, it should be clear that the parties must maintain the confidentiality of the mediation and not introduce or rely on as evidence in any later proceeding, any conduct or statements made by the parties or the mediator in the mediation process. It should also be made clear that the mediation process shall continue until the case is resolved, one of the parties wishes to terminate the mediation, or the mediator makes a finding that there is no possibility of resolution. Indeed, until the end of the process, the parties are always free to reject the reached solution. This flexibility should be demonstrated in the agreement.
Finally, it seems possible and even appropriate to add an obligation for the professional to endorse the reached solution found with the mediator if it is accepted by the consumer, in order to make the mediation clause appear as much more serious in the eyes of the private individuals who subscribe it.
In conclusion, the mediation enables the parties to maintain their full freedom and autonomy of will. In mediation, the parties are presented with an opportunity to resolve the dispute, from business perspective. While arbitration and litigation are options that would be open, parties should be encouraged by lawyers to attempt mediation first by highlighting its benefits over litigation. To ensure client’s confidence in mediation is maintained, it is essential to incorporate a mediation clause that would lead the parties to the doors of mediation without serious disagreements.
For information about mediation clauses and ADR please feel free to contact us at RSG Law.