Tuesday, 10 March 2015

Mediation Clauses in Contracts


Premier Khruschev (L) and President Kennedy (R) shake hands in 1961.
Picture courtesy of Wikimedia Commons.


MEDIATION CLAUSES IN CONTRACTS provide a method of "alternate dispute resolution". Alternate to going to court, that is, which is called "litigation".  While sometimes going to court is unavoidable, as a general rule it is an expensive exercise and the "winner" doesn't usually recover their full costs. It also tends to take time, although court systems all over the world have become better organised with the use of technology and are pushing cases through faster.

Accordingly, if you are entering into a contract, in whatever role, it is worth your while to make sure that there is an ADR or "mediation clause" in your contract. Things to look for in an ADR clause:

  • It should be process oriented. The courts protect their jurisdiction. It is a citizen's right to take disputes before the courts. Therefore, an ADR clause can't say that the courts' jurisdiction is excluded. What is can say is that the parties agree to do certain things before they choose to launch the ballistic missiles and go to court.
  • It should be flexible. ADR clauses are usually drafted to have a two-stage procedure. First: negotiation; second: mediation. There is often a method included for selecting a mediator: if the parties cannot agree, someone is nominated to do that for them.
  • It should have an exception for urgent injunctions. In some situations, the risk of loss is so high that a party must take immediate court action to prevent a situation becoming disastrous. The parties can agree that ADR processes will not prevent an urgent injunction being obtained. Most of the time, courts will impose conditions on granting injunctions that protect the position of the party being restrained, e.g. an undertaking from the party asking for the injunction to  pay the other party's costs in the event that a court action (claim) doesn't proceed.
  • It should be compulsory. There is little point having an ADR clause if it is optional. The parties should bind themselves to engaging in ADR in good faith as a precondition of being able to launch litigation (except for urgent injunctions).

The ADR clause in contracts is often considered to be one of the boring "boilerplate" clauses that fill up the boring rear end of contract documents. But, like all contract clauses, if these clauses are not designed properly the parties can find themselves in a difficult situation  in the event that a dispute arises.

This blog post is not intended as legal advice and does not create a lawyer/client relationship with any reader. It discusses the law that applies in Australia, which may or may not be similar to the law in other countries. If you would like to read more information about legal topics, please visit the Irving Law website at http://irvinglaw.com.au where we have a Learning Resources page. You are also invited to subscribe to our quarterly newsletter via the form on our website.



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