Does a mediation clause in the contract make it unlawful to proceed directly to arbitration, even after termination?

Hamish lal

‘I have a quick question: The contract contains a mediation clause before we can go to arbitration – but we didn’t go to mediation – do you think we are good to arbitrate? Oh, we terminated the contract – not sure if that removes the need to mediate?” This hurried question from in-house counsel raises an array of elegant legal issues. 

Put simply, these are as follows: Was mediation mandatory? Was mediation a condition precedent to arbitration in all circumstances or did disputes referred after termination have a direct route to arbitration? Was the mediation clause sufficiently clear and setting an objective process for the mediation? Could arbitration be commenced and then paused to allow compliance with the mediation step? 

The court has discretion to stay proceedings commenced in breach of an enforceable dispute resolution agreement. But is a stay feasible when it comes to arbitration?

This is a fascinating topic. The English High Court typically supports the enforcement of an alternative dispute resolution step in a multi-tier dispute resolution procedure. A recent example is Ohpen Operations UK Ltd vs Invesco Fund Managers Ltd [2019] EWHC 2246 (TCC), where the court distilled and codified the principles applicable where a party seeks to enforce an alternative dispute resolution provision by means of an order staying court proceedings. These principles were stated as:

  • The agreement must create an enforceable obligation requiring the parties to engage in alternative dispute resolution.
  • The obligation must be expressed clearly as a condition precedent to court proceedings or arbitration.
  • The dispute resolution process to be followed does not have to be formal but must be sufficiently clear and certain by reference to objective criteria, including machinery to appoint a mediator or determine any other necessary step in the procedure without the requirement for any further agreement by the parties.
  • The court has discretion to stay proceedings commenced in breach of an enforceable dispute resolution agreement. In exercising its discretion, the court will have regard to the public policy interest in upholding the parties’ commercial agreement and furthering the overriding objective in assisting the parties to resolve their disputes.

The judge added: “There is a clear and strong policy in favour of enforcing alternative dispute resolution provisions and in encouraging parties to attempt to resolve disputes prior to litigation. Where a contract contains valid machinery for resolving potential disputes between the parties, it will usually be necessary for the parties to follow that machinery and the court will not permit an action to be brought in breach of such agreement.” The court ordered a stay to allow the mediation to take place. But is a stay feasible when it comes to arbitration? 

It is sometimes argued that non-compliance with a mandatory step is a mere breach of contract giving rise to damages

Assuming that the mediation step was a “shall” obligation and that it was sufficiently clear and certain by reference to objective criteria, the fundamental problem for in-house counsel is that reference to arbitration in the absence of mediation means that there is a procedural irregularity. This would mean that an arbitral tribunal cannot be appointed or that the arbitral tribunal would not have the requisite power or jurisdiction to decide the dispute or indeed to order a stay to allow mediation to take place. It is sometimes argued that non-compliance with a mandatory step is a mere breach of contract giving rise to damages. Another and stronger view is that a precondition to arbitration has not been satisfied and so there can be no arbitration full stop. JT Mackley & Co Ltd vs Gosport Marina Ltd BLR [2002] 367 provides law to support the foregoing. In this case an attempt was made under the ICE Conditions (6th Edition) to refer a matter to arbitration in the absence of an engineer’s decision. The attempt failed, with the judge making it clear “a decision of the engineer is a condition precedent to the entitlement of a party to a contract which incorporates the ICE Conditions to refer a dispute to arbitration”.

Patently, the “error” in not mediating can of course have a detrimental impact on the party’s financial and strategic position. The fact that termination has occurred may not automatically assist in-house counsel. This is because clear words are needed in the contract to establish a separate dispute resolution procedure (without mandatory mediation) for disputes referred after termination. This is a valuable point in the sense that contract drafters may wish to dispense with alternative dispute methods after termination (perhaps because the commercial imperatives of amicable solutions are less pressing). 

In-house counsel was not happy. What could she do? A request for arbitration had been produced and filed and the commercial team were simply not prepared to mediate. Fortunately, in-house counsel recalled Connex South Eastern Ltd vs M J Building Services Group plc [2005] 1 WLR 3323 where the Court of Appeal said that statutory adjudication could be commenced at any time. Adjudication to the rescue.

Hamish Lal is a partner in Akin Gump Strauss Hauer & Feld