Mediation is good business

American construction lawyer Christopher Hill’s latest thoughts have been on the effectiveness of mediation. He gives three good reasons why, in his opinion, mediation works:

1. It’s cheaper than litigation,
2. Mediated outcomes can be far more flexible than those possible at trial, and
3. The parties retain ultimate decision-making control, instead of giving it up to the court.

I agree with him completely, and I have a few things to add.

What is mediation?

First, though, a quick rundown on the nature of mediation. While experienced construction-industry professionals may have as good a handle on their basic legal options as their legal advisors do, owners and managers of small- or mid-sized firms may not always be as aware of those options (indeed, if they have never had a need to know, why should they?).

Parties to construction contracts sometimes find themselves engaged in legitimate disputes as a result of common problems such as changes in site conditions, changes in the nature or scope of work, or disagreements in the interpretation of contractual terms. If parties to construction contracts cannot resolve these disputes on their own there are three basic types of dispute resolution available: (1) Litigation, which is the traditional method of appealing to the courts, and (2) Arbitration and (3) Mediation which are both forms of extra-judicial “Alternative Dispute Resolution”.

Mediation is the least formal of the three options (Arbitration, also referred to as “Binding Arbitration”, lies between the other two in terms of the formality of the process and the amount of procedural control ceded by the parties). The essential difference between mediation and the parties simply hashing things out between themselves is the inclusion of a neutral third party – a mediator – to facilitate meaningful negotiations with the end goal of a voluntary settlement. Further:

• Mediation is confidential, and any representations made in mediation are typically made without prejudice and are not admissable in court.
• The mediator does not make a ‘ruling’ for the parties, although he or she may sometimes draft formal recommendations to the parties for settlement based on their knowledge of the dispute.
• Parties can still (and probably should) seek the advice of an independant lawyer.
• When and if the parties agree to a settlement they can agree to be bound by it, but if they do not reach an agreement, they can proceed to arbitration or litigation.

Courts themselves generally like parties to attempt mediation before appealing to a judge and some jurisdictions are actually moving to require it in some cases (see Rule 37A of the Rules of the Supreme Court, 1986, SNL 1986 c42: “Court Ordered Mediation“).

Contracting for mandatory mediation

It is actually possible to build mediation right into a contract at the negotiation stage (of course this is not an option with public tenders). That is, it is possible to include a provision mandating the parties to seek settlement via mediation (or arbitration) in the event of a dispute rather than marching straight to court. Doing so is a simple measure that seeks to reduce potential costs by heading off litigation in the event that an unforeseen dispute occurs.

There are legal and strategic arguments both for and against mandatory mediation provisions. Timothy Hughes has recently posted on the merits of mandatory mediation clauses in construction contracts, in part as a response to ENR writer Don Short’s series of posts emphatically recommending against mediation and skipping straight to arbitration.

I have little to add to what they’ve already said. But I did want to make mention of the option of drafting mediation into an agreement from the start because I still think that on balance a properly-worded mediation or arbitration clause has more potential upside than down, and including a provision like that is definitely worth discussing with a professional legal advisor. This is because I am generally in favour of mediation as a path to settlement.

Mediation is good business

Along with the three non-trivial benefits of mediation mentioned by Mr. Hill – cost-effectiveness, flexibility, and control – there are other significant advantages:

• There is more room to discuss issues that are relevant to the decisions of the parties but that are potentially ‘non-legal’.
• Mediation is faster. This is part of what makes it cheaper: It cuts down on legal expenses for costly preparation for litigation and it can get parties back to work with less fooling around.
• Public relations: While having your contract dispute covered in the local media might be free exposure, it’s probably not valuable exposure. Trials happen in the public eye; mediation is far more confidential.
• Mediation helps to conserve any social or good-will capital that a firm has acquired among its peers. I believe that collegiality is generally better for business than animosity, and mediation helps to foster that between parties in a semi-competitive/semi-cooperative industry like construction.

All said, more often than not seeking mediation of contract disputes is simply good business. Lawyers should make sure that their clients understand the availablity of mediation as an option. And a party to a contract dispute, if not otherwise advised on mediation, would be wise to ask their lawyer questions about it.

Nota Bene: Mediation and Economics

For those interested in economics, there is also a social cost-benefit argument to be made in favour of mediation, although more empirical work is apparently required. See Richard A. Posner, Economic Analysis of Law, 7th ed., (New York: Aspen, 2007), pp. 604-606: “Mediation as an Aid to Settlement.”