Orlofsky ADR Services

Putting Some Teeth In A Contractual Mediation Requirement

Signing a binding mediation agreementI’ve noted in the past that many contracts now require, in addition to arbitration, that the parties first mediate their dispute. Many courts have upheld such a clause, either dismissing or staying a lawsuit filed where the plaintiff failed to first request mediation. The problem with the court enforcement, however, is that, while it forces the mediation, there is no penalty for the plaintiff’s failure to proceed as required by the contract. 

Several recent decisions reflect an alternative approach. In contracts that authorize the court to award attorneys’ fees to the prevailing party in any lawsuit arising out of that agreement, the ADR clause provides that a party that filed suit without first mediating forfeits that right to fees, even if they prevail. Here, for example, is the clause from California Association of Realtors standard form California Residential Purchase Agreement (as reported in Sharifpour v. Le, 2014 WL 99124 (Cal. Ct. App. Jan. 10, 2014)): 

Attorney Fees: In any action, proceeding, or arbitration between Buyer and Seller arising out of this Agreement, the prevailing Buyer or Seller shall be entitled to reasonable attorney fees and costs from the non-prevailing Buyer or Seller, except as provided in paragraph 17A [on mediation]. 

Mediation: Buyer and Seller agree to mediate any dispute or claim arising between them out of this Agreement, … before resorting to arbitration or court action…. If … any party commences an action without first attempting to resolve the matter through mediation, or refuses to mediate after a request has been made, then that party shall not be entitled to recover attorney fees, even if they would otherwise be available to that party in any such action….

This clause gives you an option if a party fails to mediate before filing suit; you can move to compel mediation, or proceed to litigate knowing that you will not have to pay fees under the contract even if you lose. You would think parties would never run afoul of such a clause, but I have seen published decisions where fees were denied a prevailing party based on such a clause.