Opinion: A simple mediation clause could avoid costly litigation

When dealing with difficult or ­intransigent disputants, having the ability to use a neutral to facilitate a negotiated settlement can be invaluable.

Having in place the mechanism to do this is a wise move. This can be done without price by the inclusion of a simple clause in the ­underlying contract requiring that the parties mediate any disputes that arise, thus saving much pain, money and time further down the road by avoiding stalled negotiations and litigation.

The Centre for Effective Dispute ­Resolution’s (CEDR) 2010 Mediation Audit, a survey including general counsel, showed that as many as 90 per cent of the organisations surveyed now include mediation clauses in some of their ­commercial, IT, employment or supplier contracts.

A further survey of transactional departments of City law firms showed that a ­number of major firms now include a ­mediation clause as an option in their ­standard form of precedent documentation for clients to select when entering into ­commercial contracts. Long-term ­infrastructure, PFI and other international ­contracts increasingly have escalation clauses which include reference to mediation.

Trial lawyers aside, few people enjoy ­litigation. It is costly, disruptive and can escalate to a level where no one benefits. Companies manage how they conduct their day-to-day operations carefully, but ­surprisingly neglect to manage the potentially largest and most disruptive ­factor in their business: their disputes. In mediation clients retain control over their dispute and often solve them the way they solve other issues in their business, commercially, yet it can be easier to invoke if mediation is referred to in the original contract.

In the past couple of years there has been a noticeable increase in referrals to the CEDR where chief executives have wanted to mediate and have been ­successful ­without any formal litigation or ­arbitration. The disciplined approach to negotiation afforded by the mediation framework is now a tool that senior ­businessmen are using.

The moment formal litigation starts a client loses an amount of control over what happens. Once engaged in litigation, the rules of procedure and evidence will largely dictate how the case is conducted. As defendant (short of meeting the claim) the client cannot stop the process and must respond to pleadings and undertake lengthy invasive processes such as disclosure and witness statements. Even the claimant cannot stop the process without risking often considerable costs liabilities.

A client has no control over the final outcome, as the court decides the case on the merits, not the commercial reality of the situation. A judgment may therefore be disproportionately damaging in terms of publicity or precedent for more claims, or a client simply may not be able to pay, putting both sides at risk.

The CEDR reports that the value of cases mediated each year is now approximately £5.1bn and that in 2010 the commercial mediation profession will save business around £1.4bn in wasted management time, damaged relationships, lost productivity and legal fees – 89 per cent of cases settling on the day of mediation or shortly after. But many parties do not know enough about mediation or do not use it often or early enough. The January 2010 report by Lord Justice Jackson into civil ­litigation costs said that alternative dispute resolution is still under used and needs to be promoted widely.

A simple clause requiring that parties to a contract mediate prior to issuing formal proceedings is all that is needed. A more comprehensive clause might state how to refer to mediation, appoint a mediator, the timescale in which it would be done and when to bypass the process if legal rights need protection.

Eileen Carroll, deputy chief executive, and Kate Jackson, mediator, Centre for Effective Dispute Resolution