Avoiding Litigation Through Mediation Contract Clauses

{3 minutes to read}  Alan Gettner and I recently published an article in the Fall 2018 issue of New York Dispute Resolution Lawyer that described a simple method of using a mediation clause in a contract to avoid costly litigation. The gist of it is a relatively short “notice and disclosure” provision in the contract that requires parties to:

1. Notify the other side of any dispute before commencing a lawsuit.
2. Provide relevant documents and information about the dispute.

Here is the entire provision:

A party who wishes to make a claim for breach of this contract or indemnification hereunder shall give written notice to the party from whom damages or indemnification is claimed with reasonable promptness after its discovery of the facts and circumstances giving rise to the claim, and shall promptly provide the other side with all pertinent information and documents in its possession regarding the claim and its resulting damages. To the extent that providing such information is not practical, the claiming party will permit the other party to inspect such books and records in its possession relating to the claim as the other party may reasonably request. Within 30 days after receipt of such notice and such information and documents or completion of such inspection, the other party shall notify the claiming party whether it accepts the claim or contests it.

I would add the following to this provision: “Whether the claim is accepted or contested, the parties agree that before commencing any litigation, they will first mediate the dispute in a four-hour session with a mutually agreed upon mediator. The parties will evenly split the cost of such mediation.”

Those 190 words could lead to direct discussions and negotiations that otherwise often don’t occur until after months or years of litigation and legal fees that could run to hundreds of thousands, or even millions of dollars. Alan used this language in a complex transaction and it helped resolve a dispute that might easily have dragged on and on, with negative consequences for all.

But this approach is just as applicable to smaller transactions or contracts. The key to resolving many disputes is to get the negotiation/discussion ball rolling. When a dispute arises, many parties and attorneys are loath to make the first move for fear of betraying weakness. Using this provision sets up an automatic process removing that concern. Instead, the parties exchange information — which they will have to do anyway in a lawsuit — and get down to working things out. And even if that part is unsuccessful, they probably  will have narrowed the issues to be litigated and cut the time and cost of discovery in half.

Let me know your thoughts and whether you have ever used something like this to resolve a dispute and/or avoid litigation.

Gary Shaffer
Shaffer Mediation
Gary@ShafferMediation.com