In this article, we continue discussing basic but important points to consider when drafting a dispute resolution clause in English-language contracts, in particular the utility of providing for international commercial mediation before parties use litigation or arbitration to resolve a cross-border dispute. Below we first explain what mediation in the international commercial context entails, as well as its potential efficacy, and then consider language that could be used to provide for international commercial mediation in a dispute resolution clause.
1. What is International Commercial Mediation?
Broadly speaking, mediation is a process of negotiation between parties with a neutral facilitator (that is, the mediator) who attempts to help the parties amicably resolve their dispute. Mediators do not decide which party wins or loses the dispute (as a judge does in litigation or an arbitrator does in arbitration). Rather, the mediator’s role is to facilitate settlement discussion between parties. Mediators may try to assist countries or non-governmental organizations resolve political disputes. Or mediators can assist individuals to settle personal or family disputes (in Japan, for example, such mediations often take place in connection with court procedures).
For purposes of this article, we will focus on mediation as it typically is conducted by corporations that are involved in disputes arising from international commercial transactions (hence the phrase “international commercial mediation”). In order to use international commercial mediation, companies must voluntarily agree to do so, either in their contract or later after a dispute has arisen. As with other kinds of mediation, in international commercial mediation the mediator is impartial. Similarly, and again, the mediator is not a decision-maker (nor does the mediator evaluate the merits of parties’ positions unless the parties specifically agree otherwise).
2. What is the International Commercial Mediation Process?
Compared with cross-border arbitration or litigation, international commercial mediation is a relatively simple and informal process. It does not have strict procedural requirements, involve the substantial, serial written submissions of arbitration and litigation, or include the document disclosure (or discovery) in which arbitration and common-law litigation parties typically engage. Like arbitration, however, companies often will select a mediation institution that can help administer their mediation (discussed further below).
After parties agree to international commercial mediation under the auspices of a mediation institution, one party typically will submit a brief request for mediation. The parties will then designate an individual who is willing to be the mediator, and they and the mediator will execute a short mediation agreement. In addition to identifying the parties and mediator, this agreement will reflect that the mediation is to be a confidential process conducted on a “without prejudice” basis (that is, statements made when attempting to settle a dispute cannot be used later as evidence in court or arbitration against the party that made the statements). In addition, the agreement will include terms for terminating the mediation if one of three events occurs: (i) the parties agree to settle the dispute and execute a settlement agreement, (ii) the mediator concludes that the parties are unable to settle the dispute and ends the mediation, or (iii) any of the parties decides to withdraw from and thereby terminate the mediation. The last term is an important one that highlights the voluntary nature of the international commercial mediation process, and that such mediation is non-binding unless and until the parties agree to resolve their dispute and execute a settlement agreement.
The mediation agreement also will provide a schedule for the mediation procedure, which usually is relatively simple. Parties typically will each submit one, short (approximately 10-20 page) position paper that the mediator can review. While parties may choose to provide some supporting documents to accompany their position papers, the volume of such materials generally is small and, as mentioned, there is no document disclosure (or witness statements). The substance of the position papers is up to each party, but usually parties will try to “put their best foot forward.” Of course, given the position papers’ brevity, they are not intended to convince the mediator of the legal merits of a party’s case. Indeed, because the mediation is a negotiation process facilitated by the mediator, the main purpose of the position papers is to afford parties negotiation leverage when they meet in person during the mediation session.
The mediation session itself will take place between the parties and the mediator on a pre-arranged date after submission of the parties’ position papers. The mediation session typically is set for just one day – the idea is that this session should be a concentrated event which focuses the parties’ attention on either reaching a settlement or determining that they cannot do so (at least on that particular day). While different mediators have differing approaches and styles to handling the mediation session, usually parties will begin by making brief opening statements to each other and the mediator before breaking off into separate rooms. The mediator will then go back and forth between the parties, speaking to them separately to identify points on which they may be willing to concede, and, with each party’s permission, communicating with the other party about any concessions and areas of common ground. The parties will convene again with the mediator if they can reach a settlement agreement or if the mediator concludes that settlement is not possible and terminates the mediation.
As the foregoing indicates, the most important dynamic in the mediation session is not between the parties and the mediator, but between the parties themselves. Each party is essentially communicating to the other through the mediator, endeavoring to persuade the other party to meet it half-way by accepting some of its demands and dropping or reducing its own demands. Accordingly, each party should approach the mediation session with a strategy for making concessions to its negotiating position (whether for legal or commercial reasons), including consideration of the extent to which it is willing to lower the amount of its financial claims or other demands or, conversely, the extent to which it is willing to meet the counterparty’s demands.
While the mediator may and often does offer suggestions to the parties throughout this process, the mediator has no power to compel the parties to settle their dispute – this decision is in the hands of the parties. If the parties are able to settle their dispute during the mediation session, they will be expected to finalize and execute a binding settlement agreement before leaving the session. Therefore, it is prudent for parties to come to the mediation session with at least an initial draft settlement agreement, and it is crucial that at least one representative from each party has the appropriate authority to sign the settlement agreement on behalf their respective companies. But, again, any party may withdraw from the mediation session and terminate the mediation if for some reason it does not wish to proceed prior to signing a settlement agreement.
As noted above, there are institutions that can help parties administer international commercial mediation. Often, these are international arbitral institutions that have adopted international mediation rules which corporations can use (for example, the International Chamber of Commerce and Japan Commercial Arbitration Association), or are independent mediation institutions with close ties to existing arbitral institutions (for example, the Singapore International Mediation Centre and the Singapore International Arbitration Centre). Among other things, these institutions may provide parties with names of mediator candidates. Notably, in Japan a second international commercial mediation institution – the Japan International Mediation Center-Kyoto – opened in November 2018.
3. Why Do Companies Participate in International Commercial Mediation?
In surveys, corporations have identified various aspects of international commercial mediation they find valuable. Perhaps the most obvious is that, where mediation leads to an amicable settlement, companies are able to avoid the often considerable time and expense of arbitrating or litigating their cross-border dispute and perhaps also are able to preserve business relationships with their counterparties. In addition, mediation offers corporations the possibility of remedial flexibility, that is, the ability to shape a settlement to their needs in a manner that may reflect commercial concerns as well as the merits of the disputed matter. Confidentiality is another characteristic that companies appreciate. Lastly, mediation is a relatively inexpensive, low-risk process compared with arbitration or litigation.
That said, corporations also have identified potential downsides of mediation. These include cost and delay if the mediation does not lead to a settlement agreement and, notwithstanding the “without prejudice” requirement, the risk of revealing weaknesses to a counterparty (a risk that can and should be mitigated by competent counsel).
Readers of this article naturally will be curious whether mediation can work. According to recent surveys from mediators in England and the United States, in a large majority of international commercial mediations (around 89 per cent) parties reportedly have been able to settle their dispute on the day of the mediation session or shortly thereafter. There is, however, no way of verifying this high figure, and in this author’s experience the settlement rate of complex disputes that are submitted to mediation is lower.
Nonetheless, parties in a mediation may well have different perspectives about the meaning of “success.” For example, a party that is the claimant in a dispute may be more eager to achieve a quick settlement (and keener to avoid a lengthy arbitration or litigation) than the party that is the respondent. In such a situation, the respondent may not be particularly disappointed if the mediation fails to result in a settlement agreement, reckoning that it might be able to get a better deal after the claimant has spent some time and money on arbitration or litigation.
To be clear, the process of international commercial mediation does not guarantee a quick and efficient settlement of a dispute. Each party will approach the mediation having assessed its position and interests and determining what kind of settlement would be acceptable in comparison with pursuing litigation or arbitration. Assuming, however, that: (i) parties are willing to agree to international commercial mediation, (ii) and there is at least some common ground between the parties as to potential settlement, such mediation does offer companies the possibility of resolving their disputes without having to resort to arbitration or litigation.
4. Should Companies Provide for Mediation in their Dispute Resolution Clause, and if so How?
When parties are negotiating and drafting their contract’s dispute resolution clause, they may wish to consider whether to include a “tiered” clause that provides first for international commercial mediation, failing which the parties will move to international arbitration or litigation.
The parties [may / shall] endeavor to resolve any dispute arising out of or in connection with this Agreement or the breach, termination, or validity thereof, by mediation under [the rules of the designated mediation institution]. Any dispute arising out of or in connection with this Agreement or the breach, termination, or validity thereof, which remains unresolved [60 / 90] days after either party gives notice of the existence of such dispute, shall be referred to and finally resolved by arbitration under [the rules of the designated arbitral institution]. The seat of arbitration shall be [designated seat]. The language to be used in the arbitral proceedings shall be [designated language].
In such tiered clauses, it is important to specify a time period in which the dispute is to be resolved by mediation. While parties may agree to change this time period later if circumstances warrant, without such specific language one party could try to prolong the mediation process unduly in order to avoid arbitration or litigation.
An equally important consideration is whether to make mediation optional by using the word “may” in the first sentence of the clause, or mandatory by using the word “shall.” Using the latter word means that the parties will have to conduct a mediation before resorting to arbitration or litigation. It may be that, even in the early stage of a relationship when they are negotiating their contract, companies are certain that it would be appropriate as a first step to conduct mediation to try to resolve any dispute that arises. This, however, is not usually the case. Rather, the key strategic question for a company typically is: how will the company know in the contract drafting stage whether it might want to conduct a mediation if a dispute arises long after the contract has been executed? The answer is: the company will not know. It is only after a dispute has arisen that a company can begin to assess its position, its counterparty’s position, the possibility and suitability of settlement, and other factors to determine whether mediation might be appropriate. Accordingly, if parties wish to include a reference to mediation in their dispute resolution clause, it generally is advisable to make it optional by using the word “may.” In so doing, parties provide language to remind themselves of the option of mediation if a dispute later arises, but do not commit themselves to conducting mediation in advance.
Another alternative is not to include language referring to mediation in a dispute resolution clause that provides for arbitration or litigation. Rather, the parties may consider whether mediation might be appropriate if and when a dispute arises. Thus, if a party thinks that mediation might be suitable, it can explore with its counterparty the feasibility of conducting mediation to try to resolve the dispute before the parties proceed to arbitration or litigation. In other words, parties are not required to include language about mediation in their contract’s dispute resolution clause in order to conduct a mediation; it is possible later to decide to do so if all parties agree.
It is important to point out that, if a contract’s dispute resolution clause clearly provides for mandatory mediation, but one party later seeks to avoid mediation by proceeding directly to arbitration or litigation, courts in common-law jurisdictions likely will compel the parties first to mediate in accordance with the express terms of their dispute resolution clause. In the English case Ohpen Operations UK Ltd. v. Invesco Fund Managers Ltd., for example, the contract at issue provided for mandatory mediation under the rules of a London-based mediation institution before the parties were to proceed to litigation. One party, however, commenced court proceedings without first attempting to mediate the dispute. The court rejected this effort, concluding that the language in the contract’s dispute resolution clause “is sufficiently clear and certain to be enforceable,” and halted the court proceedings to allow the parties first to conduct a mediation.
In the US case Tattoo Art, Inc. v. TAT International, LLC, et al., the contract in question provided that, in the event of a dispute, one party was entitled to request mediation, and only if the other party refused this request or mediation did not lead to settlement could the parties then commence a lawsuit. The first party, however, began litigation before even requesting mediation of the dispute. The court ruled against this party, stating that “[t]he plain language of the mediation provision unambiguously shows that the parties elected not to be subject to this Court’s jurisdiction . . . until one of the parties either requests mediation and that request is denied or mediation commences and fails.” Accordingly, the court dismissed the lawsuit. Similarly, in another US case, Golden State Foods Corp. v. Columbia/Okura LLC, the contract provided that the parties were required to mediate any dispute before proceeding to arbitration. When one party attempted to avoid both mediation and arbitration by commencing litigation in US court, the court rejected this effort, dismissing the lawsuit and stating, “The language of the [parties’ agreement] could not be more clear: mediation is a condition precedent to arbitration and arbitration is the sole forum for adjudicating disputes, unless the Parties agree otherwise.”
5. Concluding Thoughts
While it may not be appropriate for every dispute, international commercial mediation is an alternative that companies involved in cross-border transactions should keep in mind, not least because settlement of a dispute is almost always preferable to arbitration or litigation in terms of time and cost (and usually party satisfaction as well). That said, in their contract’s dispute resolution clause companies should be cautious about agreeing to mandatory mediation before proceeding to arbitration or litigation. As suggested above, the more prudent approach is to provide for optional mediation, or not refer to mediation in the dispute resolution clause but instead assess the possibility and suitability of mediation later if a dispute arises. Parties that do commit to mandatory mediation in their dispute resolution clause can usually expect to be compelled to mediate a dispute even if they later might prefer to circumvent mediation for some reason and proceed directly to arbitration or litigation.
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The information provided in this article does not, and is not intended to, constitute legal advice and is for general informational purposes only. Readers of this article should contact an attorney to obtain advice with respect to any particular legal matter.