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London Maritime Arbitration

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CHAPTER 3

Mediation and arbitration

A. Introduction

3.1 Alternative Dispute Resolution (“ADR”) can refer to any procedure for resolution of disputes out of court, including arbitration.1 However, in the context of international commercial disputes (where arbitration is customary), the term is more often used to refer to methods of resolving disputes without resort to adjudication by either a court or an arbitral tribunal. ADR has become a prominent potential alternative to these conventional methods of dispute resolution because the latter are increasingly associated with unduly high costs. The term ADR is most commonly applied to procedures such as mediation or conciliation where parties negotiate a settlement agreement with the assistance of a neutral third party. Mediation and conciliation are the most common forms of ADR. Both terms have broadly similar meaning and are often used interchangeably. Mediation has now become the more common term (and the most common form of ADR) and accordingly this chapter deals specifically with mediation. 3.2 The essential difference between arbitration and ADR is that in arbitration a binding decision is imposed on the parties whereas the purpose of ADR is to enable the parties to reach their own binding agreement. In ADR the parties remain in control of the outcome so that its success depends on the parties’ cooperation and genuine willingness to compromise. The key features shared by mediation and arbitration are that they are both confidential procedures used for resolving disputes and that they are entered into by agreement. In commercial dispute mediation the neutral third party will usually be chosen by the parties. This will generally be someone with respected experience in the area of the dispute or mediation, or a senior lawyer. A number of LMAA arbitrators act from time to time in this capacity. The mediator will invariably be paid a fee agreed by the parties in advance, broadly based on the time spent in dealing with the case.

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 3.3 Mediation in shipping disputes was relatively slow to become established. This reflected a view that if compromise were a realistic possibility then this could usually be achieved without resorting to a formal procedure. Parties sometimes considered that if they could not reach a commercial settlement by themselves then mediation would be unlikely to succeed – it would be a waste of further time and money. However, perceptions have changed and parties are finding mediation increasingly attractive. Parties now have more experience of mediation and recognise that a formal procedure may be effective to resolve apparently unbridgeable differences. A reasonable settlement will generally be preferable for commercial parties to resolving a dispute by arbitration. In particular, the parties will have agreed on the outcome rather than having had a decision imposed on them and where successful, mediation is invariably cheaper, quicker and less damaging to commercial relations than arbitration. The costs consequences of refusing to mediate (see below) have also become a further incentive for parties to attempt mediation. 3.4 This chapter is intended to provide a brief introduction to mediation in relation to resolving disputes that would otherwise be determined in London arbitration. Reference to more detailed works is recommended for discussion in more depth.2

B. Agreements to mediate or use other forms of ADR

3.5 Mediation agreements in shipping contracts are relatively rare. Most shipping contracts contain a relatively simple arbitration clause: if the parties decide to mediate after a dispute has arisen then they will usually conclude an additional mediation agreement. At this stage parties may use institutional mediation rules (such as the LMAA/Baltic Exchange Mediation Terms (2009)),3 a standard form mediation agreement, or (more usually) a bespoke agreement designed to cover any specific needs of the parties. These agreements or mediation rules will usually cover matters such as the appointment process, the mediator’s fees, costs, confidentiality and the termination of the mediation process. It may be useful to agree to suspend limitation periods during the mediation process (particularly in shipping disputes with short time-bar periods), insofar as such suspension does not occur automatically under the Cross-Border Mediation Regulations.4 Ordinary contractual principles govern mediation agreements. 3.6 Some parties will include more complex dispute resolution clauses in their contracts, sometimes called escalation or tiered dispute resolution clauses, that will provide for different methods of dispute resolution. Typically, they will provide for one or more alternative dispute resolution procedures to be adopted by the parties to precede any arbitration. The wordings of such clauses vary enormously, but often provide for the following as a precursor to arbitration:
  • • the parties to negotiate in good faith;5
  • • the parties to seek to resolve the dispute by friendly discussion;6
  • •

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    the chief executives of each party to meet and endeavour to resolve the dispute amicably;7
  • • reference of a dispute for expert determination;8
  • • mediation, sometimes under specific institutional rules.9
3.7 The parties may also agree that some disputes are referred to arbitration and others to a different form of dispute resolution. The effect of any of these types of clauses will depend largely on their wording and care should be taken when drafting them to ensure that they have the intended effect.10 Where possible, the courts will modify the arbitration provisions to give effect to the intentions of the parties and to ensure that the clause works sensibly.11 3.8 Issues which commonly arise in relation to such tiered clauses are: (i) whether the initial procedures are enforceable; (ii) if so, whether they are a condition precedent to the valid commencement of arbitration; and (iii) who should decide the first two questions.

Enforceability of the clause

3.9 The initial procedures in such tiered clauses frequently envisage some form of negotiation. The traditional position under English law is that agreements to negotiate are not binding because they lack sufficient certainty to be enforced.12 However, the courts are becoming increasingly willing to give effect to the parties’ intentions in this type of clause13 and have recognised the benefits of mediation. Accordingly, the courts will give effect to provisions that parties use specific mediation procedures14 or expert determination,15 provided that they are sufficiently certain, but will not give effect to more vague or general undertakings to negotiate. 3.10 The principles were reviewed by Hildyard J in Wah v Grant Thornton:16

“Agreements to agree and agreements to negotiate in good faith, without more, must be taken to be unenforceable: good faith is too open-ended a concept or criterion to provide a sufficient definition of what such an agreement must as a minimum involve and when it can objectively be determined to be properly concluded…. The court has been in the past, and will be, astute to consider each case on its own terms. The test is not whether a clause is a valid provision for a recognised process of ADR: it is whether the obligations and/or negative injunctions it imposes are sufficiently clear and certain to be given legal effect.”17

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