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Arbitration and Mediation FAQs: Should I Agree to Mediate Future Disputes Arising out of a Business Contract or Transaction?

March 22nd, 2014 Arbitration and Mediation FAQs, Drafting Arbitration Agreements, Drafting Mediation Agreements, Mediation, Mediation Agreements, Negotiation, Small Business B-2-B Arbitration, Small Business B-2-B Mediation Comments Off on Arbitration and Mediation FAQs: Should I Agree to Mediate Future Disputes Arising out of a Business Contract or Transaction? By Philip J. Loree Jr.

Suppose you are a business entity or an individual negotiating a contract that contemplates an ongoing business relationship with another person or entity. You need to consider many things, not the least of which is what kinds of provisions, if any, you might want to include in your contract that deal with the contingency of one or more disputes arising in the future. You might decide, for example, to agree to arbitrate disputes. You might decide that arbitration is too risky in the circumstances and that you would rather have a court resolve your dispute, but that you nevertheless want to include provisions in your contract dealing with choice of law, choice of forum, permissible remedies and the like. These are all important decisions that need to made carefully and often with the help of an attorney having skill and experience in such matters.

But they are not the only things that you might consider or be asked by your counterpart to consider. Whether or not you agree to arbitrate, or to litigate but only in a particular forum under the law of a particular state, there is something else you might want or be asked to consider: an agreement to mediate future disputes arising out of or relating to the contract and the business relationship it creates.

Should you give such an agreement some serious thought? There is no single correct answer to that question because, like most other things, the devil is in the details. But, depending on the circumstances, an agreement to mediate as a precondition to judicial or arbitral dispute resolution might be a very good idea.

Mediation is a voluntary process by which the parties appoint a neutral third party, the mediator, to assist them in reaching a voluntary, negotiated settlement of their dispute. Often times, parties who end up at loggerheads with one another will, for any number of reasons, be unable to settle their dispute amicably. The role of a mediator is to bring the parties together in a non-adversarial fashion, and help them: (a) objectively assess the strengths and weaknesses of their positions and the risks and benefits associated with settling or not settling their dispute; (b) identify common ground that they may not be aware exists; (c) agree on mutually beneficial settlement terms; (d) focus on solving the problem rather than on emotions that may be clouding their judgment; and (e) memorialize the material terms of their settlement in a judicially enforceable document, even if the parties contemplate entering into a more formal, final settlement agreement at a later date.

Mediation has a number of potential advantages over arbitration and litigation:

  1. The parties do not commit themselves to a formal, binding resolution of their dispute, which makes it less risky than proceeding directly to arbitration or litigation.
  2. It can be less expensive and time consuming than arbitration or litigation if it results in a settlement.
  3. It may enable the parties to walk away from their dispute without compromising their future ability and willingness to do business with one another. It might even help repair and renew a business relationship that has gone south or is headed in that direction.
  4. It is generally confidential, even if no settlement results.
  5. If a settlement results, it, like most other settlements, will most likely be done on an expressly without prejudice basis, which means that the settlement will not determine the outcome if a substantially similar dispute arises in the future, and that the parties do not admit any fault or wrongdoing.
  6. Judicial intervention in the process is the rare exception, whereas in arbitration, judicial involvement is fairly common  (even if only to confirm an award).
  7. Even if a mediation does not result in a settlement during the mediation process, it can sometimes pave the way for a future settlement, or narrow the issues that might need to be resolved in arbitration or litigation.

That is not to say that mediation is risk-free. Mediators are service providers and they charge fees, typically hourly ones. Some are better than others or are more suited than others to mediate the parties’ dispute, which means that mediator selection must be done carefully and may take some time. It may, depending on the circumstances, be necessary to have attorneys involved, particularly if your counterpart is unwilling to mediate without his or her attorney present. The process might be completed in a session or two, or could take several sessions over a long period. In addition to participating at the mediation sessions, the parties and the mediator will likely have to do invest time in preparation, which may increase costs. Ultimately the mediation may not be successful, which means that the time and money spent will be in addition to whatever time and money will need to be spent in judicial or arbitral proceedings.

There are some other things that need to be considered as well.  First, mediation, like arbitration, is unlikely to be successful if the parties will not act in good faith toward one another. If one party is likely to use mediation as a tool for delay, than there is no point in agreeing to give that party an excellent avenue for doing just that.

Second, parties who agree to mediate future disputes must take care to ensure that their agreement is properly and clearly drafted, and not simply a springboard for mediation-related disputes that need to be resolved in arbitration or in court. Thus, as is the case with negotiating any other agreement that involves reasonably significant stakes, it is advisable to seek the advice of counsel with experience and expertise in the field.

On balance, though, agreeing to mediate future disputes may, depending on the circumstances, prove to be a very effective way of managing dispute resolution costs, and perhaps avoiding some of the stress and hassles that business disputes so often cause.

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