Published date01 December 2008
Date01 December 2008

Are mediation clauses in commercial contracts legally enforceable? The orthodox stance of commonwealth courts is that they are not. This is largely due to an erroneous conflation of mediation clauses with agreements to agree. With recent first instance decisions such as Cable & Wireless plc v IBM United Kingdom Ltd1 and the subsequent case of Hyundai Engineering and Construction Co Ltd v Vigour Ltd2 the tide may have turned in favour of the enforceability of mediation clauses. This article discusses the issue in light of recent case law. It will proffer that it is now inevitable mediation clauses will be accepted as legally enforceable. It will explore practical methods of enforcing mediation clauses.

I. Mediation — A commercial dispute resolution tool

1 In the last decade, mediation has become an important means of resolving commercial disputes.3 The commercial world has come to appreciate mediation’s cost savings, and mediation’s utility in mending and preserving commercial relationships. Both compare favourably against the aftermath of the adversarial litigation process. Once viewed as being suitable only for quasi-personal disputes because of its non-adjudicatory nature,4 mediation has become an accepted mainstream

form of resolving commercial disputes. Mediation’s acceptance is reflected in the legislation of several jurisdictions, including the United Kingdom5 and Canada6, which establish mandatory mediation for varying types of suits. In commercial practice, many contracts now incorporate mediation clauses as part of their dispute resolution mechanism. A common manifestation of this is the tiered dispute resolution clause that provides distinct stages for resolving disputes. Tiered dispute resolution clauses commonly involve three separate and sequential processes: negotiation, mediation and arbitration. Such clauses may also be worded such that only upon the failure of a prior process may a subsequent process commence.7 For example, it may be provided that a dispute can only be arbitrated if mediation fails to achieve a settlement.

2 Appeal courts have not kept pace with the commercial world’s acceptance of mediation. Contrary to a plain reading of the contractual term, appeal courts have generally maintained that agreements to mediate are not legally enforceable. A long line of authority to this effect became entrenched and this position is still the orthodoxy in many common law jurisdictions. Given this disconnect between the needs of the commercial world and the orthodox position taken by the appeal courts, it is unsurprising there has been a persistent guerrilla campaign by first instance courts to subvert the orthodoxy. This article charts the latest skirmish in this struggle.

II. The orthodoxy

3 The orthodox position of English courts is not to recognise mediation clauses as enforceable. Three theoretical bases for this consistent objection to enforceability can be identified in case law: (a) agreements to mediate are void as agreements to agree; (b) the requirement of good faith is fatal because it is not possible to ascertain whether a party mediated in good faith;8 and (c) the uncertainty of such agreements because of the lack of procedural specification.9 Of these

three bases, only the first is an existential objection. The others may be addressed by careful drafting.10

4 The case of Courtney & Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd11 stands for the existential objection to recognition of an agreement to negotiate as an enforceable contract.12 This is due to such an agreement being void at common law for being an agreement to agree.13 The holding in Courtney has been subsequently approved and followed by the House of Lords in the case Walford v Miles.14 Although the two cases were concerned with agreements to negotiate, courts have exhibited a tendency to equate agreements to negotiate with agreements to mediate due to their common non-determinative nature.15 This is an erroneous conflation of the two. It is this tendency that led the English High Court in Paul Smith v H & S International Holding Inc16 to suggest that an agreement to submit a dispute to mediation17 did not create enforceable

legal obligations18, while incorrectly citing Courtney as authority for this principle.

5 The courts have also generally held that the only way to ascertain whether parties have complied with an agreement to mediate is through the determination of whether parties acted in “good faith”.19 It was deemed that “good faith” is an amorphous concept that is ultimately unascertainable by the courts and accordingly, agreements to mediate are not enforceable due to this uncertainty.20

6 Lastly, some agreements to mediate have been held to be too uncertain to enforce on the basis of their drafting. This is often due to a lack of provision on practical matters concerning the mediation process; for example, inter alia, the procedure to be adhered to in the appointment of mediators and the length of the mediation.21

III. The insurgency

7 In spite of the entrenched orthodox position on mediation clauses, it has become evident that the commercial acceptance of mediation as a mainstream form of ADR (alternative dispute resolution) cannot long be reconciled with the courts’ continued refusal to enforce agreements to mediate. The incongruity of the two stances creates a tension. It is the first instance courts that are closest to this tension. It is therefore not surprising that it is these courts which have led the struggle for change. Collectively, a series of first instance court decisions from across the Commonwealth have challenged and substantially eroded the three conceptual bases of the orthodox position.

A. An agreement to be subject to a process

8 The first orthodox basis for rejecting the enforceability of agreements to mediate is that such agreements are agreements to agree,

which are void for uncertainty. In Hooper Bailie Associated Ltd v Natcon Group Ltd,22 the Supreme Court of New South Wales gave effect to an agreement to mediate after examining English, Australian and United States authorities. Giles J (as he then was) succinctly debunked the view of agreements to mediate as agreements to agree:23

Conciliation or mediation is essentially consensual, and the opponents of enforceability contend that it is futile to seek to enforce something which requires the co-operation and consent of a party when cooperation and consent cannot be enforced … The proponents of enforceability contend that this misconceives the objectives of alternative dispute resolution …What is enforced is not co-operation and consent, but participation in a process from which co-operation and consent might come. [emphasis added]

9 It is submitted that this is an astute view that gives due recognition of the value of mediation as a process. Although it is true that mediation is a non-adjudicatory process and it is not certain the disputing parties would come to an agreement, an agreement to mediate is an agreement to undergo a process, not an agreement to achieve a result. This characterisation of mediation agreements is conceptually correct. In light of the prevalence of mediation in commercial contracts, it is also the more commercially helpful characterisation. The benefits of adopting such a position have been acknowledged in the English Court of Appeal in Dunnett v Railtrack plc24 and further reinforced in the important judgment of Colman J in Cable & Wireless plc v IBM United Kingdom Ltd25. The English Court of Appeal in Dunnett opined that even in situations where parties were initially unwilling to contemplate ADR, skilled mediators have nonetheless been able to achieve satisfactory results and a conciliatory atmosphere that were well beyond the powers of the courts.26 In Cable & Wireless, it was held that for the courts to decline enforcement of contractual references to ADR on grounds of intrinsic uncertainty would be to fly in the face of public policy as expressed in the new English CPR and the judgment in Dunnett.27

10 As a further practical safeguard, agreements to mediate may clearly indicate that they are an agreement for the parties to undergo

mediation in an attempt to settle their dispute and that a guaranteed settlement by the disputing parties in mediation is not required.

B. The ascertainability of good faith

11 It used to be the stand of the courts that the good faith element in agreements to mediate was fatal to their enforceability, as courts could not tell if the element was satisfied.28 This was successfully challenged by Einstein J in the Supreme Court of New South Wales in Aiton Australia Pty Ltd v Transfield Pty Ltd.29 There, the judge held that while there may be vagueness about a “good faith” obligation, a similar vagueness exists in many enforceable commercial contracts.30 The court hence cannot be too ready in striking down a contractual clause as void if it is possible to attribute a meaning to an apparently vague term that corresponds with the parties’ intentions.31 It was also ruled that an obligation to act in good faith was distinct from an obligation to negotiate in good faith to achieve a satisfactory outcome.32 The good faith obligation in the former instance

only serves to compel one to participate in a negotiating process, which may or may not achieve a satisfactory outcome in the end. The concept is therefore determinable, having acquired substance from the particular events that have taken place and to which it is to be applied. As such, the standard must be fact-intensive and is best determined on a case-by-case basis using the broad discretion of the trial court.33

12 The judgment of Aiton also dealt with an alternative objection to the good faith element in mediation that had been propounded in another Supreme Court of New South Wales decision, Elizabeth Bay Developments Pty Ltd v Boral Building Services Pty Ltd.34 In Elizabeth Bay...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT