09 March 2023
09 March 2023
This guide provides an overview of the nature and potential benefits of commercial mediation.
Over the last decade the approach taken by commercial parties towards dispute resolution has changed. While traditional forms of dispute resolution (i.e. litigation and arbitration) remain popular, commercial parties are increasingly looking to alternative forms of dispute resolution (ADR) to find methods of dispute resolution which better suit their commercial needs and deliver efficient and effective results. Mediation often provides the answer.
In this Quickguide, in addition to explaining what mediation is and how the process works, we look at the advantages mediation can offer, the circumstances in which mediation will be appropriate and the practical issues you need to consider whenever considering mediation. We conclude with a glossary of the different forms of ADR.
Mediation is a process whereby a neutral third party facilitates negotiations between the parties to a dispute to help them find a consensual outcome. The mediator is actively involved but generally has no power to adjudicate or say who is right and who is wrong. Importantly, in a mediation the parties retain ultimate control over the decision of whether to settle and on what terms.
The increasing use of mediation throughout the world has largely been attributed to the encouragement given by courts to use mediation as an aid to settlement. Many jurisdictions (such as England and Australia) have written mediation into their court processes.
The use of mediation is well established in the UK and it is now as important a form of dispute resolution as the more "mainstream" options.1 Its use is promoted across the EU member states via the European Mediation Directive.2 Other developments such as the coming into force of the Singapore Convention on Mediation3 will further the cause of mediation globally. These developments, together with the ADR centres established around the globe, ensure that commercial parties are more aware of the benefits of mediation and other forms of ADR.
Mediation can be used successfully together with arbitration or litigation - where parties agree to seek to resolve a dispute by mediation first and only proceed to arbitration or litigation if the mediation fails to produce a settlement.
Over 90 per cent. of commercial disputes are settled prior to a court or arbitration hearing. Critics of mediation therefore often question what mediation adds to the dispute compromise process that cannot be achieved through direct negotiations. However, mediation is more than simple negotiation, it is a technique for enhancing negotiation which shifts the focus from the parties' respective positions to settlement itself. Whereas negotiations usually take place between the lawyers and are part of the adversarial process, mediation is a process in itself into which all the parties – the commercial parties and their lawyers – invest time and effort. At least a day will be set aside with all key players physically present and the presence of the mediator – the independent third party – creates a sense of formality and a "day in court". This provides a structure and discipline to the negotiation, encourages negotiation and enhances the seriousness of the intention to settle.
Other advantages of mediation include:
Mediation will not be appropriate in all circumstances. In particular:
According to the main proponents of mediation: yes. CEDR (the Centre for Effective Dispute Resolution), which is a leading UK mediation services provider, claims that around 92 per cent of disputes referred to them settle by way of mediation (73 per cent on the day and 20 per cent within a short period after the mediation).5
Even if settlement is not achieved, one key benefit of mediation is that parties often leave the mediation with a better understanding of the issues in their own and the other side's case. Mediation also offers an insight into the parties' commercial as well as legal concerns which may explain why many cases that do not settle on the day settle shortly thereafter.
One of the main characteristics (and advantages) of mediation is flexibility: the identity of the mediator and the procedure and format are agreed by the parties in accordance with their commercial needs. As such, there is no universal procedure but typically, commercial mediations go through at least four main phases.
Preparation: Having agreed to mediate, the parties will need to appoint a mediator and draw up the mediation agreement. This agreement will evidence the fact that the parties have agreed to resolve their differences by mediation, and record the date and venue of the mediation, the choice of mediator and who will attend. Other issues it should cover include costs of the mediation and how these will be split between the parties, and the fact that the mediation is confidential and without prejudice. In terms of preparing for the mediation itself, the parties exchange written submissions together with any supporting documents in advance. These are usually summaries of the parties' respective legal cases and commercial positions.
Opening session: The mediation usually begins with a joint session, with the mediator and all parties in the same room. The mediator introduces himself and asks everyone else to do the same and explains the mediation process. Each party then makes a short opening statement describing their position on the dispute.
Private meetings (often called "caucus sessions"): The parties break off into separate rooms and the mediator travels between them, seeking to clarify their positions and helping them design an acceptable settlement. The mediator will use different techniques to try and facilitate the process, for example, reminding the parties of the risks of going to trial, the costs they would be saving if they settled and probing the case for weaknesses. Unless instructed, the mediator will not pass information from one party to another. Depending on the mediator's and/or the parties' preferred approach, the parties may or may not return to further joint sessions. The mediator may also encourage the parties to negotiate directly without their lawyers.
Conclusion: If successful a final joint meeting is held to record the agreed terms of settlement, usually in the form of a legally binding contract. Mediations can go on well into the early hours and are not always concluded at the end of the first day; attempts between the parties can continue for a period of time after the mediation day is concluded. If this still proves unsuccessful then one party to the mediation agreement will give notice to terminate the mediation.
Mediation is a dispute resolution process in itself and there are various issues that anyone considering or embarking on mediation should consider.
When drafting a contract it is possible to build mediation into the contractual dispute resolution process. This not only ensures that mediation is automatically considered once a dispute arises but means that parties do not lose face by suggesting mediation; it is simply the operation of the contract. The disadvantage is the timing as the beginning of the dispute may be too early for the parties to realistically agree a compromise (see below). For more detail on the drafting issues, see the Ashurst Quickguide: Tiered Dispute Resolution Clauses.
The decision to mediate can be taken at any time during a dispute, and if mediation is agreed once the litigation/arbitration is under way, the judge/arbitrator has the power to stay (postpone) the case pending completion of the mediation. The earlier the decision to go to mediation is taken, the greater its capacity to limit the parties' costs exposure. Parties are also less likely to have become entrenched in their respective positions. Conversely, the later the decision is taken, the more the respective parties will know about the merits of their case and the more able they are to assess the risks and likely expense of proceeding to trial/arbitration. The procedural rules that will apply to the dispute may also require the parties to consider ADR at different stages of the dispute.6
This can be critical to the success of the mediation. Most mediators of commercial disputes are lawyers but legal training is not a necessary qualification and other professionals, such as engineers or architects, often act as mediator. They can be appointed via mediation services providers (who often have panels of accredited mediators) or parties can elect to agree their own mediator. If there is a mediation clause in the contract this will often provide the method for appointment.
As regards the qualities you should look for, selecting someone solely on the basis of professional seniority is no guarantee. There are other dynamics to consider such as the possession of appropriate mediation skills and/or technical knowledge, the person's ability to undertake sufficient preparation, their personality and cultural issues. If possible, working with the other parties to the dispute to select a mediator independently based on past experience is preferable and if consensus cannot be reached, use a mediation services provider to select the mediator.
In circumstances where arbitration proceedings or court proceedings have already started and the judge or arbitrator is familiar with the case, it may seem appropriate for the judge or arbitrator to act as mediator. Few issues would arise where the mediation resulted in a settlement, but if the parties were unable to settle and returned to their dispute, difficulties will arise in that as mediator, the judge or arbitrator will have been privy to without prejudice information. In such circumstances, the judge or arbitrator's impartiality is potentially compromised. For this reason appointment of the judge or arbitrator to act as mediator is not recommended.7
It is usual for one representative from each of the parties to attend with their solicitor. It is not common for barristers or experts to attend. Each party's representative will need to have sufficient authority to negotiate and enter binding agreements. Parties may play games during the mediation with authority claiming that although an offer looks good, it will be impossible to get authority to accept it. This is avoided by ensuring a firm commitment to having decision makers present in advance, preferably agreed in the mediation agreement. It may be appropriate or necessary for parent companies or other group companies to be involved. If the parties are unable to settle claims without the authority of their insurers then a representative from the insurer, with due authority to agree to the settlement, also needs to attend the mediation.
This is essential if a successful outcome is to be achieved. Parties need to be fully advised of their prospects of success and the risks of continuing to trial. Only then can they assess what their settlement options are and their best alternative to a negotiated settlement (BATNA). Unless you know what your BATNA is you cannot properly evaluate or make a settlement offer. Tax consequences of a settlement may also have an impact and these should be analysed in advance of the mediation and the tax adviser should be available to advise during the day if necessary.
The answer to this question very much depends on the dispute resolution clause in your contract and where your dispute will eventually be resolved; different jurisdictions adopt different positions.
As a matter of English law, if the contractual provision to mediate simply expresses an intention or desire to reach a voluntary settlement before instituting arbitration or litigation proceedings, then it is unenforceable as an agreement to agree. However, following the English High Court judgment in Cable & Wireless v IBM UK8, provided the clause is sufficiently clear as to what the parties have to do, for example, by naming a specific ADR procedure, it will be held to be sufficiently certain and thus enforceable.
Other jurisdictions have taken a similar approach, although there are differences and specific advice must be taken about individual jurisdictions as to the attitude of the courts to mediation clauses.
If enforceable, the courts may order any proceedings to be stayed pending mediation. If the dispute is to be arbitrated, an arbitrator may consider that the dispute is not yet admissible (and they could reject the claim on that basis or stay the proceedings to allow for mediation).9 Where there is a breach of a mediation clause, as well as a stay of proceedings, parties may be entitled to specific performance and/or damages.
In the English courts, the court rules encourage the parties to consider ADR/NDR at different stages of the litigation process and a refusal to mediate or consider mediation could result in costs sanctions. While the English courts cannot compel parties to mediate, their attitude towards mediation means that parties should think very carefully before deciding not to mediate and they are increasingly adopting a tougher stance.10 In arbitration there is no such "encouragement" to mediate and the onus is on the parties to consider and organise a mediation (although anecdotal evidence suggests that there is an increasing use of mediation in international arbitration).
In Europe, the European Mediation Directive means that those litigating in Member States' courts will no longer be able to ignore mediation. The Directive is part of an effort at the European level to promote and regulate the development of mediation. While the Directive only applies to cross border disputes some Member States have adopted its provisions in relation to purely domestic disputes. The key provisions are as follows:
This is negotiation at different levels within a corporation and often features in tiered clauses. So, for example, where a dispute arises the issues in dispute will first be negotiated by managers. If that proves unsuccessful the next stage is to move to negotiation between the senior managers and then up the chain until it ends with negotiation between the CEOs.
Early neutral evaluation
This is a process whereby the court provides a without prejudice, non-binding, early neutral evaluation at the request of the parties. This involves a particular judge in a matter or dispute providing a preliminary view on a question of law or a particular issue in dispute. It is usually more appropriate in disputes which revolve around questions of law rather than complicated issues of fact or quantum.
A process in which an independent third party, acting as an expert rather than a judge or arbitrator, is appointed by the parties to decide the dispute. The basis of an expert determination lies purely in contract, the parties having made a binding agreement to accept the expert's decision. If done properly it can be a very quick and cost-effective way of achieving resolution of a dispute. There are very limited rights of appeal which gives the parties finality and expert determinations tend to be used in disputes of a technical nature.
For more information see our Quickguide on Expert Determination.
Adjudication is similar to expert determination in that it is a process in which a third-party neutral, the adjudicator, makes a binding decision on a contractual dispute. The right to refer the dispute to the adjudicator can be provided by contract or statute (which applies to construction contracts entered into after 1 May 1998). Popular for resolution of construction disputes.
This is a hybrid between mediation and arbitration and can be used where mediated negotiations do not lead to a settlement. In those circumstances the parties can agree that the mediator becomes an arbitrator and issues a final and binding award on the outstanding matters. The process has been supported by various countries and institutions, including Singapore, Japan and China, but has not been greatly used in Europe. It has at least theoretical advantages but among its downsides is the risk that an aggrieved party could seize on the arbitrator's involvement as mediator to allege apparent bias or loss of neutrality. This could lead to the removal of the arbitrator or, conceivably, invalidation of an arbitral award. In addition the prospect of a mediator becoming an arbitrator can be perceived as inhibiting full and frank discussions in the mediation.
A process in which a representative of each party makes a formal presentation of their best case to a panel of senior executives from each party, usually with a mediator or expert as neutral chairperson. Following the presentations the panel meets and the usual format is for the chairperson to act as a mediator between the senior executives. Unless requested by the parties the chairperson does not make a binding determination. The process is confidential and without prejudice.
Dispute Review Board
A panel (usually three neutral individuals) is appointed at the start of a project and adjudicates disputes as they arise. The decisions are binding but can be challenged via court or arbitration. They tend to be used in large-scale construction projects.