Commercial Mediation

This guide provides an overview of the nature and potential benefits of commercial mediation.

Over the last decade the approach taken by commercial parties towards dispute resolution has changed. While traditional forms of dispute resolution (i.e. litigation and arbitration) remain popular, commercial parties are increasingly looking to alternative forms of dispute resolution (ADR) to find methods of dispute resolution which better suit their commercial needs and deliver efficient and effective results. Mediation often provides the answer.

In this Quickguide, in addition to explaining what mediation is and how the process works, we look at the advantages mediation can offer, the circumstances in which mediation will be appropriate and the practical issues you need to consider whenever considering mediation. We conclude with a glossary of the different forms of ADR.

What is mediation?

Mediation is a process whereby a neutral third party facilitates negotiations between the parties to a dispute to help them find a consensual outcome. The mediator is actively involved but generally has no power to adjudicate or say who is right and who is wrong. Importantly, in a mediation the parties retain ultimate control over the decision of whether to settle and on what terms.

The increasing use of mediation throughout the world has largely been attributed to the encouragement given by courts to use mediation as an aid to settlement. Many jurisdictions (such as England and Australia) have written mediation into their court processes.

The use of mediation is well established in the UK and it is now as important a form of dispute resolution as the more "mainstream" options.¹  Its use is promoted across the EU member states via the European Mediation Directive.² Other developments such as the coming into force of the Singapore Convention on Mediation³ will further the cause of mediation globally. These developments, together with the ADR centres established around the globe, ensure that commercial parties are more aware of the benefits of mediation and other forms of ADR.

Mediation can be used successfully together with arbitration or litigation - where parties agree to seek to resolve a dispute by mediation first and only proceed to arbitration or litigation if the mediation fails to produce a settlement.

Why mediate?

Over 90 per cent. of commercial disputes are settled prior to a court or arbitration hearing. Critics of mediation therefore often question what mediation adds to the dispute compromise process that cannot be achieved through direct negotiations. However, mediation is more than simple negotiation, it is a technique for enhancing negotiation which shifts the focus from the parties' respective positions to settlement itself. Whereas negotiations usually take place between the lawyers and are part of the adversarial process, mediation is a process in itself into which all the parties – the commercial parties and their lawyers – invest time and effort. At least a day will be set aside with all key players physically present and the presence of the mediator – the independent third party – creates a sense of formality and a "day in court". This provides a structure and discipline to the negotiation, encourages negotiation and enhances the seriousness of the intention to settle.

Other advantages of mediation include:

• the fact that parties can engage without being seen to lose face as mediation is a planned part of the dispute resolution process;
• the mediator can be entrusted with the "true" position of each party as to where it will settle, hence he can help the parties to bridge the gap between them since he will know how wide the gap truly is as opposed to the parties' public statements;
• a mediator does not judge the issues but facilitates agreements which can be committed to in a binding form;
• the process is consensual – either party can walk away;
• the process is forward-looking and can maintain the business relationship between the parties more effectively than litigation/arbitration, which are both retrospective and antagonistic forms of dispute resolution;
• what is said in mediation is confidential and without prejudice (up to the point where agreement is reached)⁴; and
• the parties are able to agree on solutions that would be beyond the scope of a judge or an arbitrator, for example, finding a "win/win" solution by introducing commercial issues not the subject of an existing dispute.

Limitations of mediation

Mediation will not be appropriate in all circumstances. In particular:

• where the parties require emergency relief, for example, a court injunction (although mediation may be able to assist in resolving the underlying dispute);
• where a legal or commercial precedent needs to be set;
• where one or more of the parties wishes the case to be heard in public;
• it is unlikely to add value if the parties themselves are capable of handling direct negotiations efficiently and effectively; or
• if it is clear that the other side has no intention to settle but just wants to use mediation as a delaying tactic.

Does it work?

According to the main proponents of mediation: yes. CEDR (the Centre for Effective Dispute Resolution), which is a leading UK mediation services provider, claims that around 92 per cent of disputes referred to them settle by way of mediation (73 per cent on the day and 20 per cent within a short period after the mediation).⁵

Even if settlement is not achieved, one key benefit of mediation is that parties often leave the mediation with a better understanding of the issues in their own and the other side's case. Mediation also offers an insight into the parties' commercial as well as legal concerns which may explain why many cases that do not settle on the day settle shortly thereafter.

How does it work?

One of the main characteristics (and advantages) of mediation is flexibility: the identity of the mediator and the procedure and format are agreed by the parties in accordance with their commercial needs. As such, there is no universal procedure but typically, commercial mediations go through at least four main phases.

Preparation: Having agreed to mediate, the parties will need to appoint a mediator and draw up the mediation agreement. This agreement will evidence the fact that the parties have agreed to resolve their differences by mediation, and record the date and venue of the mediation, the choice of mediator and who will attend. Other issues it should cover include costs of the mediation and how these will be split between the parties, and the fact that the mediation is confidential and without prejudice. In terms of preparing for the mediation itself, the parties exchange written submissions together with any supporting documents in advance. These are usually summaries of the parties' respective legal cases and commercial positions.

Opening session: The mediation usually begins with a joint session, with the mediator and all parties in the same room. The mediator introduces himself and asks everyone else to do the same and explains the mediation process. Each party then makes a short opening statement describing their position on the dispute.

Private meetings (often called "caucus sessions"): The parties break off into separate rooms and the mediator travels between them, seeking to clarify their positions and helping them design an acceptable settlement. The mediator will use different techniques to try and facilitate the process, for example, reminding the parties of the risks of going to trial, the costs they would be saving if they settled and probing the case for weaknesses. Unless instructed, the mediator will not pass information from one party to another. Depending on the mediator's and/or the parties' preferred approach, the parties may or may not return to further joint sessions. The mediator may also encourage the parties to negotiate directly without their lawyers.

Conclusion: If successful a final joint meeting is held to record the agreed terms of settlement, usually in the form of a legally binding contract. Mediations can go on well into the early hours and are not always concluded at the end of the first day; attempts between the parties can continue for a period of time after the mediation day is concluded. If this still proves unsuccessful then one party to the mediation agreement will give notice to terminate the mediation.

What are the practical issues?

Mediation is a dispute resolution process in itself and there are various issues that anyone considering or embarking on mediation should consider.

Providing for mediation in the contractual dispute resolution clause

When drafting a contract it is possible to build mediation into the contractual dispute resolution process. This not only ensures that mediation is automatically considered once a dispute arises but means that parties do not lose face by suggesting mediation; it is simply the operation of the contract. The disadvantage is the timing as the beginning of the dispute may be too early for the parties to realistically agree a compromise (see below). For more detail on the drafting issues, see the Ashurst Quickguide: Tiered Dispute Resolution Clauses.

When to mediate

The decision to mediate can be taken at any time during a dispute, and if mediation is agreed once the litigation/arbitration is under way, the judge/arbitrator has the power to stay (postpone) the case pending completion of the mediation. The earlier the decision to go to mediation is taken, the greater its capacity to limit the parties' costs exposure. Parties are also less likely to have become entrenched in their respective positions. Conversely, the later the decision is taken, the more the respective parties will know about the merits of their case and the more able they are to assess the risks and likely expense of proceeding to trial/arbitration. The procedural rules that will apply to the dispute may also require the parties to consider ADR at different stages of the dispute.₆

Choosing the right mediator

This can be critical to the success of the mediation. Most mediators of commercial disputes are lawyers but legal training is not a necessary qualification and other professionals, such as engineers or architects, often act as mediator. They can be appointed via mediation services providers (who often have panels of accredited mediators) or parties can elect to agree their own mediator. If there is a mediation clause in the contract this will often provide the method for appointment.

As regards the qualities you should look for, selecting someone solely on the basis of professional seniority is no guarantee. There are other dynamics to consider such as the possession of appropriate mediation skills and/or technical knowledge, the person's ability to undertake sufficient preparation, their personality and cultural issues. If possible, working with the other parties to the dispute to select a mediator independently based on past experience is preferable and if consensus cannot be reached, use a mediation services provider to select the mediator.

Can a judge or arbitrator act as mediator?

In circumstances where arbitration proceedings or court proceedings have already started and the judge or arbitrator is familiar with the case, it may seem appropriate for the judge or arbitrator to act as mediator. Few issues would arise where the mediation resulted in a settlement, but if the parties were unable to settle and returned to their dispute, difficulties will arise in that as mediator, the judge or arbitrator will have been privy to without prejudice information. In such circumstances, the judge or arbitrator's impartiality is potentially compromised. For this reason appointment of the judge or arbitrator to act as mediator is not recommended.⁷

Who should attend?

It is usual for one representative from each of the parties to attend with their solicitor. It is not common for barristers or experts to attend. Each party's representative will need to have sufficient authority to negotiate and enter binding agreements. Parties may play games during the mediation with authority claiming that although an offer looks good, it will be impossible to get authority to accept it. This is avoided by ensuring a firm commitment to having decision makers present in advance, preferably agreed in the mediation agreement. It may be appropriate or necessary for parent companies or other group companies to be involved. If the parties are unable to settle claims without the authority of their insurers then a representative from the insurer, with due authority to agree to the settlement, also needs to attend the mediation.

Preparation for negotiation

This is essential if a successful outcome is to be achieved. Parties need to be fully advised of their prospects of success and the risks of continuing to trial. Only then can they assess what their settlement options are and their best alternative to a negotiated settlement (BATNA). Unless you know what your BATNA is you cannot properly evaluate or make a settlement offer. Tax consequences of a settlement may also have an impact and these should be analysed in advance of the mediation and the tax adviser should be available to advise during the day if necessary.

Do I have to mediate?

The answer to this question very much depends on the dispute resolution clause in your contract and where your dispute will eventually be resolved; different jurisdictions adopt different positions.

As a matter of English law, if the contractual provision to mediate simply expresses an intention or desire to reach a voluntary settlement before instituting arbitration or litigation proceedings, then it is unenforceable as an agreement to agree. However, following the English High Court judgment in Cable & Wireless v IBM UK⁸, provided the clause is sufficiently clear as to what the parties have to do, for example, by naming a specific ADR procedure, it will be held to be sufficiently certain and thus enforceable.

Other jurisdictions have taken a similar approach, although there are differences and specific advice must be taken about individual jurisdictions as to the attitude of the courts to mediation clauses.

If enforceable, the courts may order any proceedings to be stayed pending mediation. If the dispute is to be arbitrated, an arbitrator may consider that the dispute is not yet admissible (and they could reject the claim on that basis or stay the proceedings to allow for mediation).⁹ Where there is a breach of a mediation clause, as well as a stay of proceedings, parties may be entitled to specific performance and/or damages. 

In the English courts, the court rules encourage the parties to consider ADR/NDR at different stages of the litigation process and a refusal to mediate or consider mediation could result in costs sanctions. While the English courts cannot compel parties to mediate, their attitude towards mediation means that parties should think very carefully before deciding not to mediate and they are increasingly adopting a tougher stance.¹⁰ In arbitration there is no such "encouragement" to mediate and the onus is on the parties to consider and organise a mediation (although anecdotal evidence suggests that there is an increasing use of mediation in international arbitration). 

In Europe, the European Mediation Directive means that those litigating in Member States' courts will no longer be able to ignore mediation. The Directive is part of an effort at the European level to promote and regulate the development of mediation. While the Directive only applies to cross border disputes some Member States have adopted its provisions in relation to purely domestic disputes. The key provisions are as follows:

• Member States must encourage the development of and adherence to voluntary codes of conduct as well as ongoing training for mediators to ensure quality control.
• Where appropriate judges may refer/invite parties to mediate.
• Agreements reached through the mediation process may be given similar status to judgments handed down by the courts to aid enforcement.
• Any submissions/disclosure made/given during a mediation may not be used in any subsequent legal proceedings and mediators may not be compelled to give evidence of such in any subsequent legal proceedings.
• A party's claim will not be time barred as a result of time spent in mediation.

Different types of ADR

Type	Explanation
Structured negotiation	This is negotiation at different levels within a corporation and often features in tiered clauses. So, for example, where a dispute arises the issues in dispute will first be negotiated by managers. If that proves unsuccessful the next stage is to move to negotiation between the senior managers and then up the chain until it ends with negotiation between the CEOs.
Early neutral evaluation	This is a process whereby the court provides a without prejudice, non-binding, early neutral evaluation at the request of the parties. This involves a particular judge in a matter or dispute providing a preliminary view on a question of law or a particular issue in dispute. It is usually more appropriate in disputes which revolve around questions of law rather than complicated issues of fact or quantum.
Expert determination	A process in which an independent third party, acting as an expert rather than a judge or arbitrator, is appointed by the parties to decide the dispute. The basis of an expert determination lies purely in contract, the parties having made a binding agreement to accept the expert's decision. If done properly it can be a very quick and cost-effective way of achieving resolution of a dispute. There are very limited rights of appeal which gives the parties finality and expert determinations tend to be used in disputes of a technical nature. For more information see our Quickguide on Expert Determination.
Adjudication	Adjudication is similar to expert determination in that it is a process in which a third-party neutral, the adjudicator, makes a binding decision on a contractual dispute. The right to refer the dispute to the adjudicator can be provided by contract or statute (which applies to construction contracts entered into after 1 May 1998). Popular for resolution of construction disputes.
Med-Arb	This is a hybrid between mediation and arbitration and can be used where mediated negotiations do not lead to a settlement. In those circumstances the parties can agree that the mediator becomes an arbitrator and issues a final and binding award on the outstanding matters. The process has been supported by various countries and institutions, including Singapore, Japan and China, but has not been greatly used in Europe. It has at least theoretical advantages but among its downsides is the risk that an aggrieved party could seize on the arbitrator's involvement as mediator to allege apparent bias or loss of neutrality. This could lead to the removal of the arbitrator or, conceivably, invalidation of an arbitral award. In addition the prospect of a mediator becoming an arbitrator can be perceived as inhibiting full and frank discussions in the mediation.
Mini Trial	A process in which a representative of each party makes a formal presentation of their best case to a panel of senior executives from each party, usually with a mediator or expert as neutral chairperson. Following the presentations the panel meets and the usual format is for the chairperson to act as a mediator between the senior executives. Unless requested by the parties the chairperson does not make a binding determination. The process is confidential and without prejudice.
Dispute Review Board	A panel (usually three neutral individuals) is appointed at the start of a project and adjudicates disputes as they arise. The decisions are binding but can be challenged via court or arbitration. They tend to be used in large-scale construction projects.

1.  Mediation has been a feature of the litigation landscape since the introduction of the new English court Civil Procedural Rules in 1999 (the CPR) which encourage parties to mediate their disputes rather than litigate them and give courts the discretion to impose sanctions where parties unreasonably refuse to consider or attend mediation. There has been a further shift in approach to ensure that mediation and other forms of ADR are fully integrated into the litigation process and no longer perceived as being "alternative" to litigation; the English courts are now referring to it as negotiated dispute resolution (NDR) rather than alternative dispute resolution. See for example the 2022 revision to the Commercial Court Guide.
2. European Mediation Directive 2008/52/EC, dated 21 May 2008.
3. The United Nations Convention on International Settlement Agreements Resulting from Mediation (New York, 2018) (the "Singapore Convention on Mediation") came into force in September 2020. It applies to international settlement agreements resulting from mediation and establishes a harmonised legal framework for the right to invoke settlement agreements as well as for their enforcement. The UN website provides more detail.
4. The English High Court case of Hall v Pertemps Group [2005] All ER (D) 15 (Nov) has reassured parties that "without prejudice" privilege will continue to protect communications made during a mediation. Note, however, that the exceptions to that privilege will still apply regardless of the mediation context. So, for example, the parties' discussions in mediation would be admissible where the issue was whether without prejudice communications had resulted in a concluded settlement agreement (Brown v Rice and others [2007] EWHC 625 (Ch)).
5. Statistics taken from CEDR's 2023 Mediation Audit.
6. In the English courts, the court rules provide that the parties should consider ADR/NDR at various stages of the litigation process, including pre-action.
7. The case of Glencot Development and Design Co Ltd v Ben Barrett & Son (Contractors) Ltd 2001 (BLR) 207 illustrates this. The parties started adjudication proceedings and the adjudicator was asked to stay the proceedings and act as a mediator. The mediation failed and the adjudicator issued an award. However, the losing party successfully challenged the award on the basis that the adjudicator's impartiality had been compromised as a result of the mediation.
8. [2002] 2 All ER (Comm) 1041. Recent decisions, including the Court of Appeal decision in Sulamerica CIA Nacional De Seguros SA v Enesa Engenharia SA [2012] EWCA Civ 638, make it clear that each case will be decided on its own terms but considered that for a mediation agreement to be binding, it should include: a definite undertaking to enter into mediation, clear provisions to appoint a mediator, and a clearly defined mediation process.
9. There have been several cases that have considered whether a failure to follow a mandatory ADR process prior to commencing arbitration proceedings is an issue of jurisdiction or admissibility. Recent cases, such as the English decisions in Sierra Leone v SL Mining Ltd [2021] EWHC 286 (Comm) and NWA v NVF [2021] EWHC 2666 (Comm) and the Hong Kong decision in T v B [2021] HKCFI 3645 confirm the general view that it is an issue of admissibility.
10. There have been a number of cases where the losing party at trial has successfully argued that the winning party has acted unreasonably in refusing to agree to mediate and, as such, should be deprived of its costs. The leading authority in this area is the Court of Appeal decision in PGF v OMFS [2013] EWCA Civ 1288 which sets out the test for deciding whether a party was unreasonable in refusing to mediate. Recent years have also seen a move towards mandatory mediation; in July 2021 the Civil Justice Council published a report concluding that making mediation compulsory does not breach Article 6 of the European Human Rights Convention and is, therefore, lawful. The final report, published in January 2022, recommended compulsory mediation for claims under £500.
11. Such cases involving invalidation have arisen, in the context of adjudication, in England's Technology and Construction Court. See Glencot Development and Design Co Ltd v Ben Barrett & Son (Contractors) Ltd 2001 (BLR) 207; Discain Project Services Ltd v Opecprime Development Ltd (No.2) (2001) BLR 285.