The Benefits and Pitfalls of Mandatory Mediation Provisions in Commercial Contracts

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1 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, Calgary

2 Outline Introduction Benefits of Mediation Pitfalls of Mediation Enforceability and Certainty of Process Stepped Dispute Resolution The Limitations Act Drafting Tips Conclusion

3 Introduction

4 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.

5 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.

6 Benefits of Mediation

7 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

8 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

9 Pitfalls of Mediation

10 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

11 Enforceability and Certainty of Process

12 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

13 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.

14 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.

15 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.

16 The Good Faith Requirement Contracting parties regularly add a good faith requirement to provide enough certainty to obligate negotiation

17 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

18 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.

19 Stepped Dispute Resolution Clauses

20 Stepped Dispute Resolution Clauses These clauses require parties to engage in negotiation or mediation as a pre-condition to commencing arbitration or litigation.

21 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]

22 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.

23 The Limitations Act

24 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.

25 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 Howe- Baker 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.

26 Drafting Tips

27 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.

28 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

29 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

30 Drafting Tips (Cont d) 3. 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

31 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

32 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.

33 Conclusion

34 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.

35 Questions?