DLA Piper
by Gitanjali Bajaj, Gigi Lockhart & Mri Shankarla – DLA Piper, Sydney
Introduction
Historically overshadowed by arbitration, mediation appears to be catching-up as a popular and sometimes even mandatory step in cascading dispute resolution clauses.
The historical role of mediation, particularly in complex, cross-border contracts is typically characterised as a largely informal and in many cases, ad-hoc process. If the process was contractually prescribed, it was a brief step that parties were merely permitted to take in a dispute resolution process – a stepping-stone to commencing a traditional, binding arbitration or litigation process. There is, however, a growing trend in cascading dispute resolution clauses where mediation between the parties is ‘condition precedent’ to arbitration or litigation. This mandatory step can be pinned on the relative efficiency of mediation in its potential to save disputing parties substantial costs if they reach a signed settlement agreement, and its focus on amicable rather than adversarial resolution where long-term relationships are at stake. It is also possible that the shift toward institutionalising mediation and facilitating the enforcement of settlements arising from it (for example, through the Singapore Mediation Convention 2018)[1], gives mediation some much needed “teeth”.
That said, where parties to high quantum and legally complex disputes are forced to mediate bone fide prior to accessing more traditional, and easily enforceable dispute resolution mechanisms such as arbitration (through the almost universally ratified 1958 New York Convention)[2], the process can be both costly and inefficient. For the process to work, the parties usually need to have a willingness to settle, and the appropriate time for that ‘willingness’ to surface differs from case to case.
This article considers whether taking the ‘mediation step’ in multi-tiered dispute resolution clauses should be a “may” or a “must” taking into consideration cost, efficiency, the resolution of the real issues in dispute and enforcement. Where the former still accords sophisticated commercial parties with an opportunity to achieve an early resolution of the dispute at their own election, a ‘may’ is preferable.
When is mediation appropriate?
While many commercial parties will mediate at some stage of a dispute, be it an informal or formal mediation, having an express written agreement to do so can be highly beneficial for various (and hopefully obvious) reasons. For example, a formalised mediation step will clarify the circumstances arising between parties which trigger the mediation process. A common requirement is that the parties have: (1) served a notice of dispute; (2) made some attempt at good faith negotiations between the senior representatives of the contracting parties; and/or (3) that a certain period of time has elapsed. These requirements remove ambiguity as to when or whether the parties can or should mediate. They also assist in alleviating a party’s concern of showing “weakness” if they are the first to suggest mediation.
The foregoing is particularly helpful where contracting parties are less sophisticated, the subject matter of the dispute has crystallised and is not complex and the quantum in dispute is low, bringing with it a general willingness amongst the parties to avoid costly adversarial procedures. These factors are usually seen to make the dispute ’ripe’ for mediation. Mediation can also (unless specific and rare circumstances prevail) guarantee that the dispute, or at least what is discussed and admitted to during mediation remains confidential. A formal mediation clause (particularly those incorporating institutional rules) can provide further assistance by prescribing the mediation process, including whether the parties are required to attend a minimum number of sessions; how a mediator is appointed; and the allocation of costs.[3]
Mediation as ‘condition precedent’ to arbitration
Pros
It is open to parties to include a mediation clause of the kind described above, as condition precedent to commencing arbitration (or litigation). This usually takes the form of a multi-tiered dispute resolution clause, otherwise known as a cascading clause.[4] Pursuant to such a clause, parties are generally required to undertake formal mediation before commencing arbitration or litigation, which must occur within a certain time period.[5] In the right circumstances, there are many advantages to mandating pre-arbitral mediation, including by:
- providing parties with an opportunity to resolve points of contention in a more cost-effective and time efficient manner than arbitration;
- stipulating a contractual “cooling off period” for parties to examine and evaluate whether they can reach a compromise without resorting to the more adversarial circumstances of arbitration;
- enabling parties to maintain long-term commercial relationships and avoid causing a breakdown in those relations, which may result in reputational damage; and
- narrowing the areas of contention that will be dealt with in arbitration by settling or at least refining those issues prior to commencing proceedings. In doing so, the arbitration can be run more efficiently, limiting costs and delays.[6]
Cons
On the other hand, forcing parties to mediate can also lead to unnecessary costs and delays where those parties’ contractual and commercial circumstances are incompatible with mediation, including where:
- the parties are so entrenched in their positions, they are unlikely to reach any agreement or compromise;
- the parties are forced to seek interim measures in a time-sensitive dispute, which would be better assisted by those remedies accorded in a formal arbitral or litigation process;
- one or both parties take advantage of the relative informality of mediation and do not approach the process in good faith, leading to wasted costs;
- a statutory limitation period is due to expire before the mandated mediation period comes to an end, such that the claim may be precluded; and
- the subject matter of the dispute is particularly complex, involving multi-faceted legal claims.[7]
Institutionalisation of mediation – is it appropriate?
The abovesaid, mediation processes are becoming increasingly institutionalised in a manner which can be analogised to some extent, to arbitration and consequently offer similar advantages.[8] By example, in Australia, we have the Australian Disputes Centre (ADC), and Singapore also has two well-established mediation centres, the Singapore International Mediation Centre (SIMC) and the Singapore Mediation Centre (SMC), all which aim to streamline the mediation process and strengthen its credibility.[9] The centres are particularly helpful in providing standardised procedural mediation rules (see ADC Guidelines for Commercial Mediation (2019), SIMC Mediation Rules (2014) and the SMC Mediation Procedure Rules (2022)) , which parties can adopt when conducting their mediation, and which can be administered and enforced by those centres. Other well-known mediation procedural rules include the International Chamber of Commerce Mediation Rules (2014). These rules go some way toward removing the ambiguity typically associated with mediation, and lessening its ‘ad-hoc’ nature, leading to its increased popularity in more complex, cross-border disputes.
However, the institutionalisation of mediation has been criticised by many who maintain that it leads to greater inflexibility by favouring uniformity over preserving what was always intended to be an informal and versatile method of dispute resolution[10], particularly where the process is non-binding if there is no settlement agreement. By contrast, and in light of the present difficulty of enforcing mediation agreements, others have expressed support for the standardisation of the mediation process, including improving the ease with which mediated settlement agreements can be enforced.[11]
Enforcing mediation agreements – is it enough?
As a result, and adjacent to its institutionalisation, increasing efforts have been made toward improving the enforcement process of mediation settlement agreements. For example, the Singapore Mediation Act 2017 allows parties to apply to Singapore courts to record their mediated settlement agreement as a court order.[12] Under section 12 of the Act, a mediated settlement agreement is enforceable as a court order should parties breach the terms of the agreement, much like an arbitral award.[13]
On an international scale, the Singapore Mediation Convention (formally known as the United Nations Convention on International Settlement Agreements Resulting from Mediation, 20 December 2018), provides a uniform, efficient mechanism for parties to enforce the terms of a mediated settlement agreement in other jurisdictions. This is akin to the framework provided, for the enforcement of international arbitral awards under the 1958 New York Convention on the Recognition and Enforcement of Arbitral Awards (more commonly known as the “New York Convention”).[14] The primary intention of the Singapore Mediation Convention is to promote the use of mediation for the resolution of cross-border commercial disputes as a more efficient, less costly mechanism of dispute resolution than arbitration or litigation.[15] However, while the New York Convention has been adopted by 172 States,[16] the Singapore Convention has only been adopted by 10 States.[17] The stark difference in uptake suggests that commercial parties are not quite ready to formalise what has always been a relatively informal, ad-hoc and flexible process. Even if more States were to ratify the Singapore Mediation Convention, they would need to enact domestic laws to support its adoption.
Further, unlike the New York Convention, under the Singapore Mediation Convention, while parties have the benefit of ease of enforcement of the mediated settlement agreement, the parties are not able to enforce the agreement to mediate. They are therefore not protected if an opposing party did not comply with the agreement to mediate, requiring the enforcing party to resort to other mechanisms.
Conclusion
In the absence of international support for the Singapore Mediation Convention, cross-border enforcement of mediated settlement agreements (at least for present purposes) remains very much dependent on contract law. This, combined with the potential of wasted costs and time where the parties do not undertake the process in good faith and / or the dispute is not, at the mandated time, ripe for mediation, means that mediation as a “must” in a cascading dispute resolution clause is unlikely to provide a better solution in commercial disputes, particularly those involving multiple parties, high quantum and complex legal issues. Given that commercial parties to a dispute are always entitled to mediate (even when it is not contractually prescribed), if mediation is to be mandated in cascading dispute resolution clauses, then a “may” is more suitable. That way, parties have the option and are encouraged to pursue this avenue if it aligns with the circumstance of the dispute.
Endnotes
[1] United Nations Convention on International Settlement Agreements Resulting from Mediation, opened for signature on 8 May 2019, (entered into force 12 September 2020).
[2] United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature on 10 June 1958, (entered into force 7 June 1959).
[3] Langlois Avocats, ‘Drafting a Mediation Clause: Important Factors to Consider’ (June 2018) <https://langlois.ca/drafting-mediation-clause-important-factors-consider/>.
[4] Global Arbitration Review, ‘Five Years Later: Update on Multi-Tier Dispute Resolution Clauses as Jurisdictional Conditions Precedent to Arbitration’ (August 2022) < https://globalarbitrationreview.com/guide/the-guide-energy-arbitrations/fifth-edition/article/five-years-later-update-multi-tier-dispute-resolution-clauses-jurisdictional-conditions-precedent-arbitration>.
[5] Joachim Delaney, ‘Dispute resolution clauses: Risks, options and drafting tips’ (2014) 1(3) Alternative Dispute Resolution Law Bulletin 57, 57 – 59.
[6] Gary Born & Marija Scekic, ‘Pre-Arbitration Procedural Requirements, A Dismal Swamp’, Practising Virtue: Inside International Arbitration (Oxford: Oxford University Press, 2016) 227, 230; Didem Kayali, ‘Enforceability of Multi-tiered Dispute Resolution Clauses’ (2010) 27 Journal of International Arbitration 6, 552-53; Oliver Krauss, ‘The Enforceability of Escalation Clauses Providing for Negotiations in Good Faith Under English Law’ (2015-2016) 2 McGill Journal of Dispute Resolution 142, 144-145; Craig Tevendale, Hannah Ambrose & Vanessa Naish, ‘Multi-tier Dispute Resolution Clauses and Arbitration’ (2015) 131 Turkish Commercial Law Review 31, 3232–33.
[7] Herbert Smith Freehills, ‘When to mediate in a dispute’ (2014) <https://www.herbertsmithfreehills.com/file/16601/download?token=5X95YouL>.
[8] Carol Liew, ‘Chapter 23: Recent Developments in Mediation in East Asia’ in ADR in Business: Practice and Issues across Countries and Cultures II (Kluwer Law International, 2010) 515 – 557.
[9] Rashda Rana, ‘How international commercial arbitration has influenced the growth of ADR in Asia’, (2014) 1(6-10) Australian Alternative Dispute Resolution Law Bulletin 116.
[10] Chief Justice Thomas Frederick Bathurst, “Perspectives on ADR And Future Trends ADR Masterclass 2018: Making ADR Work in A #Fakenews World” (Speech delivered at the ADR Masterclass 2018, Sheraton on the Park, Sydney, 11 August 2018) 4, [9].
[11] Edna Sussman, ‘The Final Step: Issues in Enforcing the Mediation Settlement Agreement’, Contemporary Issues in International Arbitration and Mediation: The Fordham Papers, 345 – 359; Eunice Chua, ‘Enforcement of International Mediated Settlements without the Singapore Convention on Mediation’ (2019) Singapore Academy of Law Journal; Norton Rose Fulbright, ‘Enforcement of mediated settlement agreements’ (2016) <https://www.nortonrosefulbright.com/en/knowledge/publications/511d2b89/enforcement-of-mediated-settlement-agreements>.
[12] Mediation Act 2017 (Singapore).
[13] Mary Walker, ‘Launch of the Singapore International Mediation Centre’ (2015) 2(1) Australian Alternative Dispute Resolution Law Bulletin 3.
[14] Ashutosh Ray, ‘Is Singapore Convention to Mediation what New York Convention is to Arbitration?’ (August 2019) Kluwer Arbitration Blog; Gibson Dunn, ‘The Singapore Convention on Mediation: New Kid on the Dispute Resolution Block Now in Force’ (October 2020) <https://www.gibsondunn.com/singapore-convention-on-mediation-new-kid-on-dispute-resolution-block-now-in-force/>; Eunice Chua, ‘The Singapore Convention on Mediation and the New York Convention on Arbitration: Comparing Enforcement Mechanisms and Drawing Lessons for Asia’ (2020) 16(2) Asian International Arbitration Journal 113.
[15] Gitanjali Bajaj and Sanjna Pramod, ‘Update: The Singapore Mediation Convention and Enforcement of Settlement Agreements in India’ (2020) DLA Piper, <https://www.dlapiper.com/en/insights/publications/2020/10/singapore-mediation-convention-and-enforcement-of-settlement>.
[16] New York Arbitration Convention, ‘In brief’ <https://www.newyorkconvention.org/in+brief#:~:text=The%20Convention%20on%20the%20Recognition,by%20more%20than%20160%20nations>.
[17] Pi legal consultancy, ‘A Brief Analysis of The Singapore Convention’ (September, 2022) Mondaq < https://www.mondaq.com/turkey/international-trade-investment/1222028/a-brief-analysis-of-the-singapore-convention#:~:text=5.,%2C%20Singapore%2C%20Qatar%2C%20Honduras>.