Add a Mediation Provision to a Commercial Contract? Meh.

A client recently suggested that I add a mediation provision to a master services agreement that I’ve been preparing for them. While pondering that idea, I happened upon this item in a newsletter by the law firm Smith, Gambrell & Russell, LLP. (Why no author specified?) It captures why I ultimately recommended that we not include a mediation provision. Here’s the relevant extract:

Mediation provisions are not often included in commercial contracts, although they appear to be an emerging trend.

The goal of mediation is to provide a forum for settlement negotiations before a lawsuit is filed or an arbitration is commenced. Parties may include mediation clauses in commercial contracts in an attempt to take advantage of this fundamental purpose. However, a mediation clause may not meet a party’s expectations. Mediation is beneficial when all parties participate voluntarily and are prepared to negotiate in good faith to resolve the dispute. Mediation will often fail if less than all parties are of this mindset. Unsuccessful mediation simply results in lost time and money and delays the parties’ ability to proceed to litigation or arbitration. Unfortunately, it is often difficult, if not impossible, to determine whether a mediation provision is appropriate for the parties and the future dispute that might arise.

Understanding that a mediation provision may not be desirable in every case, parties may elect to omit a mediation provision from their commercial contract. Even if a contract does not contain a mediation provision, settlement-minded parties can mutually agree to mediate at any time under any terms upon which they agree. It is much easier to evaluate the appropriateness of mediation when the dispute arises and the facts are known. Additionally, a pending lawsuit or arbitration proceeding may serve to increase the pressure to settle.

The client agreed with me, so no mediation provision, at least for the moment. If you think I’m missing something, I’d be happy to hear it. And note that I’m speaking from ignorance: I have no experience with mediation.

Posted in Selected Provisions | 11 Comments

  • Vance_Koven

    First, I should observe that whether to have a mediation clause in a contract is a matter of substance, not drafting style.

    Second, as a matter of approach, I think you should be as skeptical of Biglaw’s recommendations on mediation as of drafting: they want their litigators to jump all over a dispute and hardball it to death.

    Third, as a matter of substance, there are some decent reasons to have one in a commercial contract. While it’s true that the parties can agree to mediate ad hoc, forcing them to do so in the contract, before they know what side they’re on in the dispute, means that they will at least have to produce arguments for their position that will be amenable to discussion with a neutral facilitator. Having been through a mediation or two, I can say that it makes a difference, certainly it makes a difference over unregulated negotiations between the parties. Disingenuous arguments that can be blustered through in direct negotiations won’t pass a skilled mediator’s sniff test, and parties are justifiably less apt to make them in the first place. And, since being in mediation implies a willingness to settle a dispute, having a professional in place in turn facilitates getting the deal done quickly (since nobody wants the mediator’s clock to keep ticking while they stall for time).

    • http://www.adamsdrafting.com/ Ken Adams

      Thanks.

  • Matthew Johnston

    I am a big fan of mediation clauses in Master Service Agreements and many other commercial contracts. It comes from my belief that most businesses and people want to resolve differences quickly and in as cost effective a manner as possible. Litigation does not do that and, increasingly, neither does arbitration. I also believe that many parties in a dispute just want to be able to “tell their side of the story.” A mediation session does that and the parties can quickly move to their common ground toward a resolution.

    I typically draft the provision to move the parties to mediation in 90 days. If after a minimum of 6 hours time, the parties can’t resolve their differences they can move to litigation.

    I have to say that for many of my clients I shy away from mandatory arbitration clauses because I believe arbitration is not nearly the cost saving mechanism it once was outside of a few industries like construction. Further, the general inability to address errors in an arbitration process through an appeal procedure makes me leery of mandatory arbitration.

    I will admit though, I often have to sell the mediation clause to about half my clients. Moat accept it though, sometimes with a statute of limitations rolling provision.

    • Westmorlandia

      I agree with you about arbitration. The only time I really use it is when confidentiality is important to one or both of the parties – that is the one clear advantage that it still enjoys over litigation.

    • http://www.adamsdrafting.com/ Ken Adams

      Thank you for your useful thoughts. Have you observed mediation in practice? I just revised my post to say that I have not.

  • Uninterested Observer

    I’ve always disliked mandatory mediation and arbitration provisions. If the parties have a real dispute but are inclined to be reasonable, they’ll work something out. It is very rare that a dispute cannot be resolved just between the parties. But if that is the case, I don’t want to be forced into a generic process for dispute resolution that was hammered out 3 years ago in the Era of Glad Tidings. I just want to be able to go to court.

  • AWrightBurkeMPhil

    My frequentest participation in mediation is the (mandatory) pretrial settlement conference with a judge (who is thereby disqualified from trying the case) about 3 weeks to 2 months before the trial date, so there’s a lot of water under the bridge by then.

    Most cases don’t get tried, but not all settlements are, as laymen love to say, “on the courthouse steps,” nor are all close-to-trial settlements on the terms recommended by the pretrying judge.

    Nevertheless, the opinion of an experienced and skilled third party such as a respected judge often gets the positions of the parties close enough that they can bridge the gap on their own with some tweaks, monetary or otherwise.

    Would a mandatory pre-suit (or pre-arbitration) mediation generally help? Hard to tell at the time of writing the contract.

    In general, I find that the imminence of any trial-like experience (like the knowledge that one is to be hanged in the morning) wonderfully focuses all minds and creates a moment of maximum potential for settlement. But if the maximum potential is 2%, the game’s not worth the candle.

    So maybe the thing to do is to put into the contract a non-mandatory mediation provision that specifies the mechanics, time limits, etc., so that if a dispute arises, mediation is simply a yes/no decision instead of yes or no and if yes, with whom and on what terms, or maybe, but only if it’s done in a certain way.

    Parties who are already sore at each other are in a poor frame of mind to negotiate the details of an alternative dispute resolution regime, so why not create the regime during the honeymoon, but use it only if both parties so desire at the time of the dispute?

    I agree that this topic is substance and not form (to the extent those categories are real — haven’t we been taught that the medium is the message and the wordsmithing is the deal?), but I don’t object.

    Indeed, it wouldn’t bother me if the site frequently entertained questions, even reader questions, of whether to include and how to draft various provisions.

    And since fun isn’t necessarily off topic, Ken could even put to his blog readers the occasional challenge to redraft a chunk of contract prose to halve its word count. The attempt often reveals substantive problems concealed by bloat, which the redrafter then must solve, concisely.

    • Michael Hardcastle

      I like the idea of occasional redrafting challenges to reduce the size of contract provisions. My colleagues and most lawyers for other parties seem intent on increasing word count.

    • http://www.lawnotes.com D. C. Toedt

      1. AWrightBurkeEtc., you could draft the mediation clause to make it only quasi-mandatory by including an opt-out clause. That way the mediation will go forward unless one party or the other takes the trouble to give notice otherwise — thereby setting itself up to be branded as uncooperative. That might not be a big stick to brandish, but it’s something.

      2. You could add even more teeth by saying that a party that opted out of mediation would thereby waive its right to recover costs and attorneys’ fees.

      3. My experience has been that “evaluative” mediation is often the only form that’s worth a [hoot]. “Facilitative” mediation seems to work only when the parties are already in a mood to settle. I remember one bad experience: Each party was utterly convinced it was in the right and that the other side had acted badly, but the mediator refused to tell either party what he thought of the case. That wasn’t helpful at all.

      4. Conceptually I’m a fan of quick early neutral evaluation, which the U.S. federal court in Silicon Valley routinely requires. It’s not mediation, it’s a mandatory sanity check, delivered by a neutral third party.

      ENE is useful because litigation counsel are motivated to tell their angry clients what they think the clients want to hear — “hey, we can argue to the court that you win because of X and Y and Z; it’d be a stretch but we think we can pull it off.” Lawyers have several incentives to do this — that way lies: (1) more billable hours; (2) having the client think positively of you as a loyal team player who’s committed to the client’s cause and willing to do the needful to win; and (3) the prospect of being admired by one’s peers if one can successfully use a creative approach to pull off a difficult win.

      Consequently, it can help for a neutral to bring a dash of reality to the client’s decision-making process. Early neutral evaluation provides one avenue for this.

  • Bradley B. Clark

    This isn’t quite on point Ken but if a lawsuit is filed here in Texas chances are really good that there is a local rule requiring mediation before the case can go to trial.

  • http://www.licensinghandbook.com jigordon

    I was compelled to write in if for no other reason than to memorialize my agreement with you.

    There is no practical reason for a mediation clause: 1. All parties in a commercial transaction (except for law firms) will automatically attempt some form of alternative dispute resolution on their own before resorting to filing a claim. I know this as a result of my 15 years of doing contracts and resolving disputes. I’ve only seen ONE case actually result in a suit, and it was only filed to preserve the claim. 2. Most states are starting to mandate it pre-trial anyways. 3. As a specific type of ADR, mediation is in some ways predicated on the idea that the two sides are incapable of reaching or developing a workable solution, thus requiring a mediator to assist. Savvy commercial players unable to agree don’t need a mediator, they need an arbiter (NOT an arbitrator, either).