Orlofsky ADR Services

A New Twist on a Contractual Mediation Requirement

Arbitration clauses are increasingly common in both commercial and consumer contracts, and some of those clauses now require that the parties mediate before commencing an arbitration.  Such a clause can be beneficial because, while parties all know the advantages of an early settlement, many litigators view an early request for mediation as tantamount to an acknowledgment of the weakness of their position.  A contractual mediation requirement enables early settlement discussions without triggering this real or perceived problem.

One problem with such mediation clauses, however, is that they can be difficult to enforce.  The remedy for a violation of such a clause might be nothing more than a stay of the arbitration pending completion of a mediation, and just asking for such a remedy might trigger the “fear of showing weakness” concern the clause was intended to eliminate.

In Makeen v. Woodstream Falls Condo. Ass’n (In re Makeen), B.A.P. (10th Cir. 2020), the court noted that the mediation clause at issue provided for $25,000 in liquidated damages if a party failed to comply with the mediation requirement, a provision that would seem to single-handedly eliminate any enforcement issues for a mediation requirement.  The court did not, however, deal with whether the liquidated damages provision was enforceable, and Illinois, like virtually all jurisdictions, has specific requirements for such clauses to be enforceable.

My takeaway:  Given that that a liquidated damages provision will not likely cause any harm, and that it also has a fair shot at being enforceable, it would seem worthy of inclusion in many contractual mediation provisions.

Covid Update:  If you’ve been wondering whether to mediate by Zoom or any other video platform, take the leap.  Parties and mediators are getting increasingly comfortable with this procedure and finding similar rates of settlement.