Mediation clauses get dropped into contracts from a template, unread. Later it turns out that the clause obliges you to go through the procedure before going to court, and the counterparty uses that to drag things out. Here is how to draft one and when it is useful.
What it is
An agreement between the parties to apply the mediation procedure if a dispute arises. It can be a separate document, or it can be a clause in the contract.
It needs to be distinguished from two similar things.
The pre-action claim procedure — a mandatory pre-litigation stage for most disputes in the commercial courts: you send the claim letter, wait thirty days, go to court. It is a formality, and complying with it is enough.
A negotiation clause — an obligation to hold talks. Softer than a mediation clause, with shorter time limits.
A mediation clause presupposes the involvement of a third party and a separate procedure with a time limit of its own.
What it gives you
First: where there is an agreement to apply the mediation procedure, the running of the limitation period is suspended for the duration of the procedure. That removes the main fear — that the time limits will expire while you are negotiating.
Second: the court will leave the claim without consideration if the parties agreed on mediation and have not completed the procedure — provided the clause is drafted as mandatory and the time limit has not expired.
Third, and this is not a legal point but the main one: the clause sets a norm of behaviour. When the contract says that in the event of disagreement the parties sit down at the table, the first step becomes easier to take — it has already been agreed in advance.
How to draft it
A bad clause is a general one: "the parties shall endeavour to resolve disputes by negotiation and mediation". It obliges no one to anything and gives you nothing.
A clause that works contains:
- the subject matter: which disputes it covers — all of them or only certain categories;
- how it is initiated: a written proposal setting out the circumstances of the dispute;
- the time limit for a reply: usually ten working days;
- the duration of the procedure: no more than thirty days, extendable by agreement;
- how the mediator is chosen: a named person, an organisation, or a selection procedure;
- allocation of costs: usually equally;
- the consequence of non-performance: the right to go to court once the time limit has expired, with no further conditions.
That last point is critical. Without a long-stop date the clause turns into an open-ended obstacle.
Where it is useful
Long-term contracts: leases, distribution, long-term works contracts, joint ventures. Wherever the relationship continues and a rupture costs more than a concession.
Shareholders' agreements between partners. A dispute between partners almost always has a non-legal component, and a court cannot deal with it.
Family agreements: prenuptial agreements, agreements about children, agreements on the division of assets.
Contracts with key clients and suppliers where the dependence runs both ways.
Where it gets in the way
In contracts where speed of recovery matters: supply on deferred payment terms, loans, leases with a risk of non-payment. Here the price of the question is time, and the clause gives the debtor a lawful way of winning it.
In contracts between manifestly unequal parties, where the stronger side uses the procedure as a filter.
In deals with one-off counterparties with whom no ongoing relationship is planned.
A simple rule of thumb: if, when the contract is breached, what you want is a writ of execution as fast as possible, you do not need a mediation clause. If you want to preserve the relationship, you do.
How to record the outcome
Whatever is agreed is recorded in a mediated settlement agreement. If the dispute is not before a court, it is worth having it certified by a notary: it then acquires the force of an enforcement document, and if it is breached you go straight to the bailiff.
If the dispute is already before a court, the agreement is approved as a court settlement.
Both options matter more than the clause itself: a deal recorded on a napkin lasts exactly until the first change of mood.
I set out how pricing works in my first reply, before any work begins.
I provide legal services through the company Kovalev & Partners LLC — kovalev.moscow. As a mediator I do not advise one individual party to a dispute.
