(vii) Mediation and escalation

Mediation. Once it comes to litigation, the termination of the contract is almost inevitable. Therefore, in complex or relational contracts in which unwinding the contract may give rise to another source of dispute, providing for mediation may be desirable.

It is a matter of best practice to link the mediation and arbitration provisions to each other. Normally, you would probably want to have mediations coordinated and administered by the same institute as a subsequent arbitration (if any). Each arbitration institute mentioned above also provides for ADR (‘alternative dispute resolution’) procedures (see their websites for text model clauses). Many people believe that mediation has no reasonable chance of success if one of the parties does not sincerely wish to settle the dispute. Therefore, a mediation clause is primarily a voluntary procedure, albeit that the admissibility of an obligatory mediation clause before arbitration may vary. This subtlety depends on the actual wording of the provision.

Escalation clauses. In contractual relationships between major parties that regularly do business with each other, an ‘escalation clause’ providing for the escalation of a dispute to the principal executive officers would be another means of dispute settlement. The idea behind an escalation clause is that the party who threatens the relationship between the parties should subsequently face internal discussions as to whether and how the senior executives must be involved (including any career-limiting effects of such involvement). In other words, both parties will go up the hierarchical ladder of their organisation upon the occurrence of a contractual triggering event. The senior executives selected should not have been directly involved in the dispute, but need to have the authority to bind the party they represent.

An escalation clause contains several incentives. The persons directly involved in the dispute may be reluctant to escalate, given the ‘shameful’ implication that they were not able to settle the matter themselves. Moreover, senior executives will spend only as much time on the matter as their (financial or strategic) interest justifies and will settle as quickly and pragmatically as possible. Such escalation would be effective if they must consider the higher desirability of all relationships between the parties or if they can compromise on other disputes or irregularities as well.