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March 30, 2022

Mandatory Arbitration and Mediation Clauses in Commercial Contracts

Canadian businesses that do business in the United States may want their contracts to direct that alternative dispute resolution (ADR)—instead of litigation—must be employed to resolve disputes relating to the contract. While ADR is usually less expensive and takes less time than litigation, there are pitfalls that can be avoided in a well-thought-out ADR contract provision.

Important considerations include: the location of the ADR, whether to use an arbitration company, and whether to require mandatory mediation or mandatory conferences of the principals as a prerequisite for the arbitration. 

Location of the ADR Forum

There is no doubt that major coastal cities in the United States (e.g., New York City, Washington DC, Philadelphia, Miami, Los Angeles, San Francisco, and Seattle) and other large cities (e.g., Chicago and Dallas) are far more expensive in terms of mediator costs, travel and accommodation costs, and lawyer costs than midsize cities such as Buffalo, Syracuse, Rochester, and Albany. Costs in Pittsburgh and Cleveland (even though they are midsize cities) and Detroit (even though it is a large city) are in the middle of the range.
 
When selecting a forum city, Barclay Damon’s Canada-US Cross-Border Team suggests that you consider cities that are large enough to contain federal district court courthouses. Here’s why: 1) there will be more lawyers available to choose from and 2) because federal courts in the United States often have mandatory mediation programs, they generally have a list of trained arbitrators and mediators who are also practicing attorneys.

Buffalo is an ideal location for an ADR forum for several reasons, including:

  • Major border crossings with Canada 
  • A very busy federal court
  • Many good, reasonably priced commercial and business law firms
  • Many experienced arbitrators and mediators

Should the Contract Designate an Arbitration Company?

Barclay Damon’s Canada-US Cross-Border Team recommends against designating arbitration or mediation under the rules of arbitration companies, such as American Arbitration Association or International Chamber of Commerce. Our experience with these organizations is that their administrative process is cumbersome, they contain rules that can be exploited by an experienced opponent who wants to slow down the case, they are expensive, and they sometimes, surprisingly, have fewer good choices for arbitrators.

Instead, we recommend that the ADR clause designates that the arbitrator must be a lawyer on the local federal district court’s mediator list; however, we also recommend that the ADR clause contains language (such as, “unless the parties otherwise agree”) to allow the flexibility to select a good arbitrator who may not be on the federal court list.

If you choose not to use an outside company, then the ADR clause should describe how the mediator or arbitrator will be selected and how the arbitration will be conducted. As to the conduct of the arbitration, as in AAA, ICC, JAMS, and others, the arbitrator should be, and is, in control of that, but they should be directed to facilitate a fair process and a speedy conclusion. The sample ADR clause at the end of this article addresses these issues.

Should the Contract Require a Mandatory Effort to Settle, Such as Mediation or a Meeting of the Principals? 

In Barclay Damon’s Canada-US Cross-Border Team’s experience, requiring the principals to meet as a prerequisite of arbitration is rarely successful and serves to delay the resolution of the dispute. Instead, we strongly favor the provision of mandatory mediation, because the presence of a trained neutral often results in settlement.

With the above guiding principles in mind, below is a sample dispute resolution clause. Note that there are self-executing deadlines in the ADR clause, which are intended to keep the dispute moving quickly to ultimate resolution.

Sample ADR Clause

Dispute Resolution:

All disputes relating to the performance of this contract will be resolved via mediation and then arbitration. No dispute will be resolved by litigation except that the parties may apply to the state court where the arbitration is conducted to confirm or challenge the arbitrator’s award. Either party may initiate dispute resolution by serving a written “Demand for Mediation and Arbitration” on the other party. The mediation, and arbitration if mediation fails, must take place in [insert city and state]. Within three business days of service of the demand, the initiating party will serve on the receiving party a list of mediators maintained by the United States district court located in [insert city and state]. If the court also maintains biographies of the mediators, the biographies must be served with the mediator list. Within two business days of service of the mediator list, the receiving party will strike three names from the list and inform the initiating party of the stricken names. Within two business days thereafter, the initiating party will then strike three names from the list and inform the receiving party of the stricken names. The parties will continue striking names in this manner, except that the time period for striking names will be one business day per round, until only three names remain. Within one business day thereafter, the initiating party will then contact any one of the remaining mediators, copying the receiving party, to request that the mediator agree to be engaged and to conduct the mediation within 10 business days of receiving the request. If the mediator is unavailable to conduct the mediation within 10 days, then the initiating party will immediately contact either of the two remaining mediators in the same manner, and if that person is unavailable to conduct the mediation within 10 days, then the initiating party will contact the remaining mediator in the same manner.

If the mediator determines that the mediation is unsuccessful, then within five business days of that determination, the mediator will become the arbitrator and conduct binding arbitration of the parties. If either party serves on the opposing party an objection to the mediator becoming the arbitrator, then the party that does not object will select any name from the mediator list to be the arbitrator and promptly contact that person.

The arbitrator will conduct an initial meeting of the attorneys for the parties within five business days of accepting the engagement as arbitrator. At the initial meeting, the arbitrator will determine what, if any, discovery is permitted, will set a date for the conduct of the arbitration hearing, and will issue any other rules or requirements that the arbitrator believes will facilitate a fair process and a speedy conclusion to the arbitration. The arbitrator will issue the award within 10 business days of the close of the arbitration hearing.

The arbitrator will award legal fees and costs to the prevailing party.

The parties will split the mediator and arbitrator fees and expenses equally, except that the arbitrator is free to award these fees and expenses to either party as part of the arbitration award.

The arbitrator will apply the law of [insert the law of the state that governs the contract] in determining the rights and obligations of the parties.

Notwithstanding the requirements of this dispute resolution section of the contract, if the parties mutually agree in writing, they can alter any of said requirements.
 

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