Mandatory Mediation in Commercial Contracts

When my daughters sailed on the tall ships for several summers, the crew had a daily activity called “mandatory fun.” It seems like an oxymoron until you think about it a bit. If you tell people they’re going to have fun, they do.

If you tell people they have to try to resolve their disputes, or else… — they will.

I have had many “full and frank discussions” (a very useful diplomatic euphemism) with fellow commercial lawyers about whether to include mandatory mediation clauses in business agreements.

Those who are vehemently against the idea insist that forced mediation doesn’t work. If a dispute arises and the parties want to mediate, they can do it, clause or no clause.

I have argued, just as strongly, that it is a good idea. The courts have shown than mandatory mediation does work. And including mediation in a contract dispute resolution clause removes two of the major barriers to early dispute resolution: simple inertia and a fear of looking weak.

Many standard contracts include dispute resolution clauses with escalation provisions that require negotiations between senior executives. If they can’t agree, it goes to arbitration or court.

I think there are many benefits to including a mediation step in between.

It gives the senior executives another tool to help them negotiate a reasonable settlement. If the other side is being unreasonable – and it’s always the other side that’s unreasonable – a mediator can help set up meaningful discussions, get other options on the table and possibly break the impasse.

Making it mandatory means that neither side has to make any concessions to get the other party to the table. This is often half the battle when disputes become entrenched in an organization.

Moving to mediation early and automatically makes it cheaper and easier to resolve the dispute. Neither side has invested the time and money involved in taking the matter to court. It’s true, of course, that many disputes settle only when both parties have been so beaten up and impoverished by the adversarial system that they just give up, but that doesn’t seem to be a very principled argument against mediation.

Early mediation can also provide a relatively inexpensive way to learn more about the strengths and weaknesses of both your case and the other guy’s. It encourages internal discipline because the staff who are briefing the senior executives for the direct settlement negotiations will also have to pay attention to the flaws and weaknesses that will likely come out at mediation. No one wants to embarrass his or her boss in front of a mediator. That alone may encourage the parties to settle before the matter even gets to mediation.

There are some pitfalls to look for in contract mediation clauses.

The first is the risk of getting stuck in some kind of mediation limbo. Ensure that there is wording to allow either party to move directly to court or arbitration, if there is a need for immediate legal relief. In those cases, the party seeking relief should not have to go through any of the internal escalation or external mediation steps.

Once the immediate crisis has been dealt with, there is no reason the court or arbitrator can’t send the parties back to negotiation or mediation to attempt to work out a permanent settlement.

The second is timing. The time limit to start the mediation should be very short. A week or two is not enough time for mediation to produce a resolution, but it should be enough to know that it’s not going to work and to move on.

Once the mediation has begun, it should move along at a brisk pace. In most cases, there is no need for formal mediation briefs, volumes of supporting documents or the other trappings of much commercial mediation. The parties should look for a streamlined process, with an early meeting to clarify the issues and agree on the steps and time required to conclude the mediation. In a complex commercial dispute, the resolution of all of the issues may take some time, but once the process has started it has its own momentum. As long as progress is being made neither side will want to pull the trigger on arbitration or litigation.