Why is it a good idea to include an ADR clause in your commercial contract?
It is now standard practice to insert an ADR Clause into any commercial contract. At its simplest, an ADR clause allows the contracting parties to agree that if a dispute arises, they will use an alternative form of dispute resolution (such as mediation) as a step prior to, or at least alongside, court action or binding arbitration. An effective ADR Clause will usually save time and costs, as well as potentially preserve valuable commercial relationships.
An ADR clause both leaves commercial parties in control and provides parties with a simpler way of resolving a dispute prior to court or arbitration proceedings, but also significantly offers parties a constructive way of proceeding beyond stalled or ineffective negotiations.
Since the introduction of the Civil Procedure Rules in 1998, courts in England and Wales (as well as many other jurisdictions) will expect parties to consider ADR and there can be severe costs consequences for parties in failing to engage with ADR appropriately, with parties unable to recover legal costs post trial to which they would otherwise be entitled. The courts’ commitment to encouraging parties to use mediation and other ADR processes has only been strengthened by the introduction of the Jackson Reforms in England and Wales in April 2013 and Lord Justice Briggs in 2016.
Globally, many jurisdictions have similar provisions in relation to ADR and it is important that contracting parties are aware of any legal obligations that they have in relation to ADR.
There are multiple advantages to inserting an ADR clause into a commercial contract:
How to insert an effective ADR clause
There are various key points which need to be considered when constructing an ADR Clause. The example clause that ProMediate provides will cover these points but the following is a checklist for the draftsperson of some key areas to consider:
1. Post deadlocked negotiations
As a first stage before any ADR clause is activated, there is likely to be a period of time when the parties will resort to some form of negotiation or discussion of the issues. An ADR clause should clearly identify the point when it can be considered that negotiations have failed (for example by giving a time period after certain key representatives have met to attempt to resolve the issue). This means that the parties can move on to considering other methods for resolving their dispute and thus progress the issues. An additional benefit to having an ADR clause is that in itself it can be used as a tool within the negotiation phase to encourage early settlement or more productive negotiations.
2. Pre-litigation
The clause can clarify whether court proceedings can run in parallel with the ADR process or be stopped whilst ADR is attempted. In England and Wales one cannot oust the jurisdiction of the court, but the court will stay proceedings to allow parties to honour their agreement to mediate. A party’s right to seek injunctive or declaratory relief or to avoid a time bar by agreement will always be preserved. The prospect of settlement may be higher before the lines of battle have been drawn by a hostile step of commencing court proceedings/arbitration. The draft clause provides that litigation or arbitration may be commenced or continued unless the parties agree otherwise.
3. Single or multi-step clause
There are differences between having an ADR Clause which references a multi-stage procedure (e.g. moving from negotiation to mediation to arbitration or going to litigation) or one which references a single process such as mediation. The choice is whether to move straight to mediation or to combine different ADR processes, for example to provide for direct negotiations followed by mediation if the negotiations fail. Multiple processes provide a clear structure. However, it may be that not all processes (e.g. arbitration) are desired by the contracting parties.
4. Time limits/time span
To be effective, it is better to provide for a clear process and timetable. The Clauses have built in timescales which make the clauses more effective. This can be adapted by the contract’s draftsperson to suit the organisation or the sector’s usual practice or specific needs – for example a need for quick resolution to keep business running, or longer timeframe to allow for compliance with other legal requirements. However, one of the key purposes of having a clause is to compel the other party to mediate with you in a timely manner.
Further the Draft covers termination provisions under section 9 – Conclusion of the Mediation.
5. Identifying procedural rules
Reference to an agreed set of procedural rules for the mediation or ADR process is critical to ensure that the clause has sufficient certainty.
Your clause will be more effective if you refer to a known and accepted model mediation procedure and institution under whose auspices the mediation can be conducted.
6. Decision makers
You may want to identify the decision makers engaging in the ADR process e.g. managing director, CEO.Identifying the relevant decision makers can be helpful in providing clarity, however, it is not strictly necessary to do so. As an alternative, you can simply refer to the parties, leaving the decision as to appropriate attendees to the relevant time. Under the Draft attendees are encouraged to come with full authority to settle and thus the parties can be satisfied that the other side have the power to resolve the dispute fully.
7. Cautionary statement
These clauses are meant to be adapted within the frame of your commercial contracts. Amendments such as those stating the mediator will issue a decision in case of non-settlement, or ones that jeopardise the confidentiality of mediation, may end up in the clause being ineffective.
We advise that parties, when adapting these clauses, avoid using the terms ‘Binding Mediation’ and the ‘Deciding Mediator’. This is because Mediation is distinct from adjudicative processes such as Arbitration and is voluntary in nature. Arbitration, like litigation, provides a binding decision imposed by an independent third party. Mediation on the other hand seeks to help parties achieve their own binding agreement through a mutually acceptable commercial and legal solution. To avoid ineffectively conflating Mediation and Arbitration, if parties wish to include, as part of their dispute resolution process, a final, binding stage, we suggest the use of the multi-tiered process.
If you require verification, guidance or further information, please contact enquiries@promediate.co.uk and speak with one of our advisors.
To be effective ensure that you have:
Model clauses
1. Simple mediation clause
WORDING
‘If any dispute arises in connection with this agreement, the parties agree to enter into mediation in good faith to settle such a dispute and will do so in accordance with the ProMediate Mediation Procedure. Unless otherwise agreed between the parties within 14 days of notice of the dispute, the mediator will be nominated by ProMediate .’
2. Simple mediation clause including time and notification
WORDING
‘If any dispute arises in connection with this agreement, the parties agree to enter into mediation in good faith to settle such a dispute and will do so in accordance with the ProMediate Mediation Procedure. Unless otherwise agreed between the parties, within 14[working] days of notice of the dispute, the mediator will be nominated by ProMediate. To initiate the mediation a party must give notice in writing (‘ADR notice’) to the other party[ies] to the dispute, referring the dispute to mediation. A copy of the referral should be sent to ProMediate.
[If there is any point on the logistical arrangements of the mediation, other than the nomination of the mediator, upon which the parties cannot agree within 14 [working] days from the date of the ADR Notice, where appropriate, in conjunction with the mediator, ProMediate will be requested to decide that point for the parties having consulted with them.]
Unless otherwise agreed, the mediation will start not later than [28] [working] days after the date of the ADR notice.’
3. Simple mediation clause including time, plus reference to court proceedings in parallel
WORDING
‘If any dispute arises in connection with this agreement, the parties agree to enter into mediation in good faith to settle such a dispute and will do so in accordance with the ProMediate Mediation Procedure. Unless otherwise agreed between the parties within 14[working] days of notice of the dispute, the mediator will be nominated by ProMediate To initiate the mediation a party must give notice in writing (‘ADR Notice’) to the other party[ies] to the dispute, referring the dispute to mediation. A copy of the referral should be sent to ProMediate.
[If there is any point on the logistical arrangements of the mediation, other than the nomination of the mediator, upon which the parties cannot agree within 14 [working] days from the date of the ADR Notice, where appropriate, in conjunction with the mediator, ProMediate will be requested to decide that point for the parties having consulted with them.]
Unless otherwise agreed, the mediation will start not later than [28] [working] days after the date of the ADR Notice. The commencement of mediation will not prevent the parties commencing or continuing court proceedings/arbitration.’
4. Simple mediation clause including time, plus reference to no court or arbitration proceedings until mediation terminated
WORDING
‘If any dispute arises in connection with this agreement, the parties agree to enter into mediation in good faith to settle such a dispute and will do so in accordance with the ProMediate Mediation Procedure. Unless otherwise agreed between the parties within 14[working] days of notice of the dispute, the mediator will be nominated by ProMediate. To initiate the mediation a party must give notice in writing (‘ADR Notice’) to the other party[ies] to the dispute, referring the dispute to mediation. A copy of the referral should be sent to ProMediate.
[If there is any point on the logistical arrangements of the mediation, other than the nomination of the mediator, upon which the parties cannot agree within 14 [working] days from the date of the ADR Notice, where appropriate, in conjunction with the mediator, ProMediate will be requested to decide that point for the parties having consulted with them.]
Unless otherwise agreed, the mediation will start not later than [28] [working] days after the date of the ADR Notice. No party may commence any court proceedings/arbitration in relation to any dispute arising out of this agreement until it has attempted to settle the dispute by mediation and either the mediation has terminated or the other party has failed to participate in the mediation, provided that the right to issue proceedings is not prejudiced by a delay.
5. Multi-tiered process:
Negotiation – Mediation – Arbitration or Litigation
WORDING
‘If any dispute arises in connection with this agreement, a director [or other senior representatives of the parties with authority to settle the dispute] will, within [14][working] days of a written request from one party to the other, meet in a good faith effort to resolve the dispute.
If the dispute is not wholly resolved at that meeting, the parties agree to enter into mediation in good faith to settle such a dispute and will do so in accordance with the ProMediate Mediation Procedure. Unless otherwise agreed between the parties within 14[working] days of notice of the dispute, the mediator will be nominated by ProMediate To initiate the mediation a party must give notice in writing (‘ADR Notice’) to the other party[ies] to the dispute, referring the dispute to mediation. A copy of the referral should be sent to ProMediate.
[If there is any point on the logistical arrangements of the mediation, other than the nomination of the mediator, upon which the parties cannot agree within 14 [working] days from the date of the ADR Notice, where appropriate, in conjunction with the mediator, ProMediate will be requested to decide that point for the parties having consulted with them.]
Unless otherwise agreed, the mediation will start not later than [28] [working] days after the date of the ADR Notice.’
Version 1: ‘The commencement of mediation will not prevent the parties commencing or continuing court proceedings/arbitration.’ |
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Version 2: ‘No party may commence any court proceedings/arbitration in relation to any dispute arising out of this agreement until it has attempted to settle the dispute by mediation and either the mediation has terminated or the other party has failed to participate in the mediation, provided that the right to issue proceedings is not prejudiced by a delay.’ |
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6. International mediation clause
WORDING
‘If any dispute arises in connection with this agreement, the parties will attempt to settle it by mediation in good faith in accordance with the ProMediate Mediation Procedure and the mediation will start, unless otherwise agreed by the parties, within 28 days of one party issuing a request to mediate to the other. Unless otherwise agreed between the parties, the mediator will be nominated by ProMediate.
The mediation will take place in [named city/country; city/country of either/none of the parties] and the language of the mediation will be [English]. The Mediation Agreement referred to in the Model Procedure shall be governed by, and construed and take effect in accordance with the substantive law of [England and Wales].
If the dispute is not settled by mediation within [14] days of commencement of the mediation or within such further period as the parties may agree in writing, the dispute shall be referred to and finally resolved by arbitration. ProMediate shall be the appointing body and administer the arbitration. ProMediate shall apply the UNCITRAL rules in force at the time arbitration is initiated. In any arbitration commenced pursuant to this clause, the number of arbitrators shall be [1-3] and the seat or legal place of arbitration shall be [London, England].