Transcript Effectively Litigating Construction Claims

The Benefits and Pitfalls of
Mandatory Mediation
Provisions in Commercial
Contracts
Presented by: David Tupper,
Melanie Gaston and Chris Petrucci
Blake, Cassels & Graydon LLP
February 25, 2015 - Calgary
Outline
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Introduction
Benefits of Mediation
Pitfalls of Mediation
Enforceability and Certainty of Process
Stepped Dispute Resolution
The Limitations Act
Drafting Tips
Conclusion
Introduction
Introduction
• Mediation, in the commercial context, is a
consequence of rising litigation costs.
• There is some debate over the usefulness of
mandatory mediation.
• Mediation provisions, and their wording
should be carefully considered prior to their
inclusion in commercial agreements.
Examples of Mandatory Mediation
Clauses
• The parties agree that they will make reasonable
efforts to resolve any dispute arising between
them through good faith negotiations or mediation.
• The parties agree to use best efforts to resolve
any dispute arising between them in relation to this
agreement through negotiated or mediated
process.
Benefits of Mediation
Benefits of Mediation
• Why Mediation can be beneficial:
– Privileged and Confidential process
– Opportunity to create tailored, party specific solutions
– Relationship preservation
– Time and Cost-efficiency
– Empowerment and ownership of resolution
– Get to choose the mediator
– Accessible and Flexible
– Helps provide clarity by identifying and defining issues
Benefits of Mandatory Mediation
• Obligatory discussion
• The obligation to mediate can provide the
excuse, or scapegoat, some parties may need
to discuss resolution
• Forced early preparation
• Assists counsel with resolution efforts
Pitfalls of Mediation
Pitfalls of Mediation
• Mandatory mediation is not always desirable.
Limitations include:
– Participants must be willing
– Potentially liable third parties may not be required to
attend
– Additional costs
– Not appropriate for all disputes
– Power imbalance
Enforceability and Certainty of
Process
Is the Mediation Mandatory?
• In order to make the mediation mandatory it is
good practice to provide a clear indication such
as “shall” or “must”. It is less clear where the
mediation provision provides that a party “may”
initiate a mediation.
• In the arbitration context, where “may” is used,
courts have treated arbitration as being
permissive only in the sense that a party may or
may not choose to arbitrate
Is the Mediation Mandatory?
• However, once either party makes the
referral to arbitration, the arbitration
becomes mandatory.
• The same analysis might apply to
provisions where a party “may” initiate a
mediation, however it is not clear.
Certainty of Process
• The expectations and understandings of various
parties as to what is meant by “mediation” or
“mediated process” can vary significantly.
• Differences in the understanding of mediation
impact client expectations, preparation for
mediation, the process of mediation and the
results achieved by mediation.
Remedies for Breach
• Very difficult to establish remedies for the failure to
satisfy mediation obligations.
• Many remedies would require investigations into the
parties’ conduct subsequent to the determination of the
initial dispute, thereby creating more disputes than
resolving them.
• However, parties may include in the dispute resolution
provision an appropriate remedy for the failure to meet
the mediation requirements in order to create more
certainty.
The “Good Faith” Requirement
Contracting parties regularly add a good
faith requirement to provide enough
certainty to obligate negotiation
Bhasin v Hrynew
• In 2014 the SCC recognized the duty of
honest performance of contracts.
• At minimum parties must not lie or
knowingly mislead each other
0856464 BC LTD. V TimberWest Forest Corp.
• In 2014 the BCSC held that TimberWest did not act in good faith in
regards to their agreement to “negotiate in good faith” even though
the contracts did not contain any definition of “good faith” and did not
set out any standard against which the party’s conduct could be
measured.
• TimberWest’s conduct “…was not reasonable given the history of
the parties contractual relationship and was not honest given that
rather than pursuing a course of conduct that was in its best
interests in continuing the agreement, it was pursuing a conflicting
strategy which strategy required eviscerating the agreement to
succeed.”
Stepped Dispute Resolution
Clauses
Stepped Dispute Resolution Clauses
These clauses require parties to engage in
negotiation or mediation as a pre-condition
to commencing arbitration or litigation.
Example of a Stepped Resolution
Clause
The parties agree to attempt to resolve all dispute arising out of or in
connection with this contract, or in respect of any defined legal
relationship associated with it or from it, by structured good faith
mediation with the assistance of a mediator appointed by [mediation
institution] under its mediation rules.
If a dispute cannot be settled within a period of 30 days after the
mediator has been appointed or such longer period agreed to by the
parties, the dispute shall be referred to and finally resolved by
arbitration under the rules of the [arbitration institution]
Risks Involved with Stepped Resolution
Clauses
• When the steps in the agreed upon dispute resolution
process that precede arbitration are mandatory, courts
have indicated that the arbitrator will not have jurisdiction
until those steps are completed.
• If the parties do reach a settlement but a party defaults
on that settlement, arguably the arbitration clause cannot
be enforced as a mediated settlement has occurred.
Only when no settlement has occurred can the arbitrator
acquire jurisdiction on the strict interpretation of the
provision previously provided.
The Limitations Act
The Limitations Act
• Under s. 3 of the Limitations Act a claimant must seek a
remedial order within 2 years of the date it knew or ought to
have known that a claim existed.
• S. 51 of the Arbitration Act reinforces the notion that limitation
periods apply to Notices to Arbitrate in the same manner as
Statements of Claim.
• When arbitration is mandatory under an agreement, and one
party has failed to commence arbitration proceedings within
the limitation period, filing a statement of claim will not save
the action from being barred.
Suncor Energy Products Inc. v Howe-Baker
Engineers
• Howe-Baker began a stepped resolution process prior to the end
of the limitation period, but served a notice of arbitration after the
end of the limitation period.
• ABQB in 2010 held that the Notices of Dispute filed by HoweBaker did not commence the arbitration they simply commenced
the dispute resolution procedures.
• A Notice of Arbitration is required in order to indicate to the other
party that there is an intention to commence arbitration
proceedings
• TAKE AWAY: Parties cannot rely on the date upon which the first
step of the resolution process occurred in order to satisfy the
limitation period.
Drafting Tips
Drafting Tips for Enforceability and
Cautions
• There are many benefits to including
mandatory mediation provisions
• However, care and consideration must be
taken to ensure that the obligations
created are the most appropriate for the
parties, the nature of the transaction,
disputes likely to arise and enforceability
issues.
Drafting Tips for Enforceability and
Cautions
1. Contemplate specific time periods for mediation
• a stipulated time period can be risky if one of the parties
needs interlocutory injunctive relief
• time will be wasted if mediation efforts are undertaken
simply to satisfy the contractual requirement
• requiring that mediation take place at the earliest
possible opportunity should be a cautious exercise, as
parties may not have time to gather sufficient
information, and may be reluctant to engage in open
discourse
Drafting Tips (Cont’d)
2. Schedule mediation as a parallel process
• Scheduling mediation as a parallel process to
litigation or arbitration may be best
• Allows for flexibility to ensure that the
appropriate dispute resolution design is
undertaken when and only when the parties
have sufficient information regarding the dispute
Drafting Tips (Cont’d)
3.
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Restrict the agreement to mediate to certain kinds of
disputes
Different disputes lend themselves better to different processes
Simple collections may be best served by litigation or arbitration
Where injunctive relief may be required, mediation provisions
might be better if they are more flexible
Flexibility may be needed to allow for circumstances in which a
dispute might require the inclusion of additional parties.
TAKE AWAY: reflect on whether the mediation requirement
provision should specifically include or exclude certain types of
disputes
Drafting Tips (Cont’d)
4. Provide for a mediation implementation procedure
to increase certainty
• Include a mediation oversight body
• Include a remedy for breach of the mediation covenant
Drafting Tips (Cont’d)
5. Avoid uncertainty over whether a period of informal
discussions constitutes part of a mandated ADR
process
• In a stepped process leading to arbitration or litigation,
uncertainty over what steps are required can lead to
collateral disputes, jurisdiction arguments, extra delay
and costs.
Conclusion
Conclusion
Although there are many benefits to
mediation, mandating mediation can be
misguided and can create more problems
than it is intended to resolve, unless
sufficient consideration is given to drafting
such provisions.
Questions?