A preliminary negotiation requirement in arbitration clauses: an opportunity for early mediation.

Increasingly often, dispute resolution clauses are considered an integral part in commercial contracts.

Many of these clauses, especially in the B2B context, present a multi-tiered structure providing for different dispute resolution processes in escalating sequence. The processes most commonly provided for in multi-tier ADR clauses are direct negotiation, mediation and arbitration, but other resolution mechanisms and hybrid processes are being developed used particularly in relation to industry-specific contractual forms and customs.

B2b contracts often contain a dispute resolution agreement requiring the parties to entertain direct, good faith negotiations among the principals in order to attempt an amicable resolution of the dispute before commencing litigation, arbitration or another binding process.

Properly drafted multi-tier clauses would typically include a timeframe within which negotiations must occur. Only when direct negotiation attempted and the term is elapsed, are the parties allowed to bring a legal action in the competent forum.

Direct negotiation prerequisites frequently include the further requirement that the CEO, or another high level officer of the respective companies, participate in the negotiations. The direct involvement of top-level managers in the attempt of resolving a dispute amicably highlights the critical importance for the parties of avoiding litigation.

Multi-tier dispute resolution clauses are designed to promote cost-effective and fast resolution of controversies and to protect parties from the possibly irreversible, negative consequences of an adversarial legal proceeding on their relationship and businesses.

Companies try to avoid litigation for many reasons. Some of the main concerns include:

• Having to divert precious financial resources to legal costs, and in some cases litigation reserves
• Loosing current business from the issues in dispute
• Destroying the long-term commercial relations that could be critical in the development of future business
• Negatively affecting the stock price and/or the valuation of a business by initiating a formal process that could require public disclosure and/or result in detrimental publicity.
• Damaging the company’s reputation in a specific industry or relevant market;
• Losing control of a decision made by a third party (arbitrator, judge, jury etc.)

What happens when the parties initiate direct negotiation discussions?

When a matter escalates to the CEO of a company or other high level manager, it implies that the lower level discussions of the issues failed to produce a satisfactory solution. The matter may be further complicated by the often unintentionally biased presentation to the CEO of the facts that led to the dispute from members of his team directly involved in the original conflict.

At this point, the top-level manager handling the case has a contractual duty to engage in good-faith negotiations with his counterparty and is likely facing two different sets of concerns. First, the business-related concerns listed above and also strategy-related concerns on how to handle the dispute legally.

The legal-strategy-concerns often include:

• Showing weakness in their position
• Revealing information that could become detrimental in an adversarial setting
• Sparking tense communication and caustic reactions among high ranked executives, which could compromise any possibility of protecting the business interests in dispute.

The high level of complexity and the need for protection of a wide set of interrelated interests in disputes may limit the openness and effectiveness of the inter-management direct negotiations. Furthermore, the information asymmetry that may be influencing the parties’ respective views frequently widens the gap in their positions.

It can be very challenging for a CEO to balance all the elements involved in such a discussion while simultaneously adopting a constructive approach, maintaining assertiveness, protecting the business’ interests and the possible future litigation strategies.

Here are some of the reasons why mediation can be an effective tool at this early stage:

• An effective, involved mediator can help the parties define the scope of the discussion and clarify and frame the issues in a neutral fashion that can be seen by both sides.
• A skilled mediator will assist the parties in setting a constructive tone for the discussion and will facilitate the exchange of messages allowing the parties to overcome communication barriers and psychological obstacles occurring in direct negotiations such as confirmation biases and reactive devaluation.
• Mediation can provide a protected confidential environment for the parties to exchange information and hear each other’s concerns and perspectives openly without compromising their respective positions.
• Through mediation, the parties have an opportunity to discuss, assess and develop the full spectrum of issues involved, including the legal aspects, the business interests and even personal concerns without limiting the discussion to who is right or wrong.
• Mediation allows the parties to resolve past issues and to shape solutions for the future in the same process.

Corporate executives and counsel may feel reluctant to engage in mediation at a very early stage of a dispute, and often, such reluctance seems to derive from the fact that the parties need to acquire more information to have a better assessment of the case and more defined strategy.

However, sophisticated litigators and corporate counsel alike know that mediation is an opportunity for them and their clients to be in control of the process as well as of the outcome. If more information is needed, the mediation process can include any form of exchange of documents and information among the parties in time-efficient and cost-effective ways, within the protection of mediation confidentiality.

Mediation is an effective tool even in the very early stages of most cases, especially in b2b disputes in which a company’s image, publicity and commercial relationships are precious assets to be preserved.

Mediation can be seen as an exercise in thorough understanding of all the elements involved in a dispute before deciding which path is most appropriate under the specific circumstances and whether to initiate formal, adversarial legal proceedings that could have irreversibly damaging consequences.

Luckily, a protected informal environment that promotes collaborative discussions over adversarial posturing frequently stimulates the participants' rational critical thinking as well as their creative problem-solving capabilities. Indeed, more often than not, parties, advisors and mediators working together are able to find and craft alternative solutions that are preferable to litigation for both sides of the dispute.