Pre-Litigation Mediation: Mitigating the Damages Involved in Litigation

by Matt Thiry, Esq.

The parties have retained counsel, a lawsuit has been filed, and the parties are intertwined in what will likely be a costly and time-consuming battle where even the winner loses to some degree.  If this battle could have ended before it began, would it not have been worth at least an effort?  If time, money, and relationships could have been preserved, wouldn’t that have been a better business decision?  Business contracts provide an opportunity for the parties to provide a means to mediate any disputes before those disputes result in litigation.

The Benefits of Pre-Litigation Mediation

Inserting a provision into business contracts requiring the parties to mediate prior to filing a lawsuit or initiating an arbitration proceeding is a proactive measure that can be taken by businesses to find a resolution to the dispute before the dispute becomes public.  Moreover, pre-litigation mediation provides an opportunity for the parties to preserve their ongoing business relationship, while litigation usually results in irreparable fractures to these relationships.  Mediation provides an opportunity for businesses to have control in the outcome of the dispute without waiving their rights to pursue subsequent litigation in the event resolution is not obtained.  Even if the mediation does not successfully resolve the entire dispute, time and money can be saved through narrowing the contested issues, while giving the parties the opportunity to gauge the level of interest in engaging in litigation.

Given the benefits pre-litigation mediation can provide to businesses, why isn’t it more popular among those without a contractual requirement to mediate? This can be attributed to several factors; however, the most easily identifiable reason is perception.  Requesting pre-litigation mediation when not required by the contract can be perceived as weakness by the requesting party.  While this perception is illogical, ill-informed parties may not be willing to take the risk of being perceived as weak.  However, including the mediation provision in the underlying contract takes away this perception.  Also, requesting the pre-litigation mediation required by the contract has the opposite impact.  Instead of the request being perceived as weakness, the request is a showing that your client is getting prepared to move forward with litigation.

The Value of a Pre-Litigation Mediation Provision

Consider the practical applications of a pre-litigation mediation provision in the context of the governing documents of a partnership, limited liability company, or corporation.  Litigation between business partners often results in the destruction of the business, and losses for all parties.  If the governing documents contained a pre-litigation mediation provision, the parties would be forced to consider opportunities to resolve the dispute before the business is irreparably harmed by the battles of litigation and before the matter becomes public.  This concept is no less applicable to distribution agreements, independent contractor agreements, service agreements, etc.  All types of business relationships can benefit from having an opportunity to circumvent a problem before it gets out of hand.

When inserting a mediation provision into a contract, be mindful of completeness and mechanics.  Simply stating that the parties agree to mediate before litigating, alone, is not a best practice.  As is the case with all contractual terms, it is better to be more specific as to what is being agreed to by the parties.  Consider including language addressing how a mediation demand is to be made, how a mediator will be selected, and whether the parties will provide pre-mediation position statements to the mediator.  It is ordinarily easier to agree on these concepts while the parties are forming the contractual relationship, as opposed to once a dispute has surfaced.  Also, consider whether arbitration is a better alternative for the dispute in the event mediation is not successful.

When negotiating and preparing your next business contract, consider inserting a pre-litigation mediation requirement so that your client’s interests can be best served.  After all, clients are not ordinarily averse to the idea of saving time, money, and business relationships.

 

Matt Thiry, Esq. is a registered mediator and arbitrator with significant commercial litigation experience. He mediates and arbitrates disputes in areas of business, fiduciary, real estate and probate. To book Matt for your next mediation or arbitration, please call 678-320-9118 or click here to schedule online.