MEDIATION CLAUSES

• Author: Maryam SALEHIJAM LLB (European Law) (Maastricht), LLM (International Laws) (Maastricht); PhD Researcher (Ghent); Visiting Researcher at Stanford Law School and the University of Missouri.
• Publication year: 2019
• Published date: 01 December 2019
• Date: 01 December 2019

I. Introduction

1 A private mediation – as opposed to court-annexed – can only begin and continue on the basis of the parties' voluntary participation. Therefore, it is important to have clarity regarding the parties' desire to submit their dispute to mediation.1 The consent of the parties to pursue mediation can be contained in an individually negotiated contract or in a mediation clause within a commercial contract.2 Often, these agreements require the parties to submit their dispute to mediation and, at the same time, prohibit the parties from starting arbitration or litigation while mediation is pending.3

2 This article adopts an international comparative perspective in analysing the issues that arise when parties dispute the validity and effect of their mediation clause.4 Mediation clauses give rise to three clear points for discussion: when are these agreements binding on the parties (Part II);5 to what extent should these agreements be enforced (Part III);6 and how should breaches of these agreements be remedied (Part IV)?7

3 For an agreement to be binding on the parties, it must firstly be both formally and substantively valid. Part II will examine the varying approaches in civil and common law jurisdictions, drawing on Austria, Australia, England and Wales, Germany, Singapore, the Netherlands and the US as illustrations. With the exception of Singapore, it is rare for the national legislators to address the mediation clause. Therefore, general national contract, procedural and private international laws may be of relevance. Despite the absence of legislation addressing the issue of validity and enforceability of the mediation clause, there is a growing pool of case law. The majority of case law is from common law jurisdictions due to their lengthier experience with mediation clauses. Part III of this article will argue for the necessity to enforce these agreements. In considering the arguments for and against enforcement, Part III will highlight the importance of acknowledging the legitimate grounds of a refusal to enforce. Subsequently, Part IV will assess the manner in which courts and arbitral tribunals remedy breaches of such agreements. This part will further explore the remedy best suited to the needs of commercial parties.

II. Binding mediation clauses: Validity and enforceability

4 In discussing the binding nature of mediation clauses, it is significant to note the boundary between these clauses and the main contract, and in the context of multi-tiered dispute resolution (“MDR”) clauses, between the mediation tier and preceding and proceeding tiers. In line with the well-established dispute resolution principle of separability, mediation clauses ought to be viewed as an agreement

that is separate from the main commercial contract.8 Accordingly, a mediation clause is separable from the main contract; thus, it is not necessarily impeached or rendered void if the main contract is avoided, discharged, rescinded, frustrated, repudiated, or found to be void for illegality.9 Therefore, the discussion of the validity of the parties' agreement to submit their current or future disputes to mediation should be isolated from the discussion of the validity of the main contract.

5 Moreover, it is legally correct to treat mediation clauses contained in MDR clauses as separable from the preceding and proceeding tiers, including the arbitration tier.10 The Australian case of Elizabeth Bay Developments Pty Ltd v Boral Building Services Pty Ltd11 demonstrates the risk of treating tiers in MDR clauses as an integrated unit. In the case, the defendant treated the MDR clause as one agreement, assuming that it was sufficient to request a stay of proceedings to commence mediation in order to enforce the entirety of the dispute resolution clause that also included an arbitration tier. As the party never requested the enforcement of the arbitration tier, Giles J

only addressed the request to enforce the mediation tier. He found that the mediation tier was too uncertain to have a binding force and thus asserted jurisdiction, which left the arbitration clause contained in the contract unenforced.12 This is in line with the findings of the author's empirical study of 172 mediation clauses where one agreement specifically pointed out this separation:13

If any provision hereof is held to be invalid or unenforceable in whole or part, the validity and enforceability of the remainder of such provision and other provisions of this Agreement shall not be affected.

6 Without specific rules, general contract law rules govern the validity of mediation clauses. A binding contract must be both formally and substantively valid in order to be binding. Formal validity relates to the external expression of agreements. This includes considerations such as whether the agreement has to be in writing, signed, in a special font or colour, stapled or digital. Substantive (or material) validity concerns the legality of the content of the parties' agreement, their capacity and consent to enter the agreement, public policy, and sufficient certainty. Typically, these clauses have not given rise to mediation-specific legal issues relating to formal validity. This is because, unlike agreements to arbitrate, for a mediation clause to be formally valid, there are no special requirements outside of the applicable contract law requirements.14 Likewise, relating to substantive validity, the contract law defences apply. Therefore, aspects relating to the overall validity of a contract are of importance, such as fraud, duress, and unconscionability.15

7 In circumstances where mediation clauses give rise to legal disputes, parties generally are in disagreement regarding either the substantive validity of their agreement or whether the obligations therein have been fulfilled. While there is consensus that mediation clauses in the commercial context (business-to-business or B2B) are substantively valid and enforceable as long as they are sufficiently certain and in line with public policy and mandatory rules, courts and arbitral tribunals approach enforceability on a case-by-case basis and

apply different certainty thresholds.16 This is counterproductive for transnational parties and SMEs, as they are required to draft various clauses for each jurisdiction in which they have business. In absence of a uniform framework regulating the conditions for validity and enforceability of mediation clauses, it is important that the parties carefully draft their agreement in order to ensure its effectiveness.

8 Drawing from the author's comparative law analysis of the varying approaches to mediation clauses and private international law,17 it can be concluded that for a mediation clause to be binding regardless of the jurisdictions seized, it must be sufficiently certain as well as indicate the parties' intention to be bound by the obligation to attempt mediation. The use of the words “shall” and “must” in the dispute resolution clause indicates that the parties must first to seek mediation before arbitration (compulsory).18 The 1975 International Chamber of Commerce (“ICC”) Case No 4230 concerned pre-arbitral conciliation where the claimant failed to initiate conciliation and the defendant had raised a jurisdictional objection. The tribunal decided that the clause had no binding force and that it had jurisdiction. The tribunal found that it had jurisdiction in accordance with the non-obligatory wording of the clause: “all disputes related to the present contract may be settled amicably” [emphasis added]. Likewise, ICC Case No 10256 (2000) (see also No 5872) involved a pre-arbitral requirement that was not binding, as the clause stipulated that the parties “may” initiate mediation. The tribunal found that the wording of the clause indicated that mediation was not mandatory: “either party … may refer the dispute to an expert for consideration of the dispute” [emphasis added]. According to the author, to ensure that a mediation clause meets the certainty threshold in the jurisdictions under study, it must address the following matters:19

(a) the scope of the agreement (disputes covered);

(b) description of the procedure;

(c) procedure to select the neutral(s) and his or her payment;

(d) time frame for the mediation or timetable for compliance; and

(e) the obligation to refrain from acting (that is, initiating arbitration).

In reality, however, dispute resolution clauses tend to be drafted with little care. Practitioners and scholars frequently refer to dispute resolution clauses as “midnight clauses” since they are often concluded or copied and pasted so late in the day.20 In a 2017 survey regarding the perception of dispute resolution professionals and experts of mediation clauses, 65% indicated that such agreements are often copied and pasted.21 This is problematic as it raises the chances of the agreement being unenforceable if adjustments are made without sufficient research and if the copied clause is not suitable for enforcement in the relevant jurisdiction. The risk is even higher if two or more legal systems or adjudicative bodies are to scrutinise the clause.22 Therefore, there is a probability that a mediation clause concluded hastily might not fulfil the certainty criteria.23

9 It is unlikely that there will be a change to the traditional drafting practices, so the certainty of mediation clauses will continue to be a challenge. Enforcing vague requirements for a process does not require parties to settle but merely to attempt to and so should not be as problematic as it is today.24 Unmistakably, there is a need for a new approach to these agreements from the legislator and the courts. While it is possible for mediation clauses to be drafted following contractual principles so as to be held to be enforceable, the courts have the ultimate

power to remedy breaches.25 Therefore, it is important to pay regard to the...