Avoiding the Courtroom through a Mediation Clause

Posted by

Litigation costs are higher today than ever.  A recent Duke University survey revealed that litigation costs continue to rise and are consuming an increasing percentage of US corporate revenue.  Since 2000, litigation costs have increased 73% and that increase is not due to higher hourly rates but rather more lawsuits.  What is the takeaway for you Mr./Ms. Professional?  Stay out of the courtroom!  You’re reading Professional Liability Matters so you have adopted some risk management savvy but inevitably you are likely to confront some dispute despite your best efforts.  Accordingly, your engagement letter and particularly a well-tailored mediation/arbitration clause may be the perfect safety net.

Whether a particular mediation clause is enforceable varies by jurisdiction and usually takes into account a balance of public policy concerns on the one hand with the general principle that parties are free to enter into contracts.  The immediate impact of a valid mediation clause is exemplified by the recent decision of Slater-Moore v. Goeldner. In this decision the Mississippi Supreme Court dismissed a malpractice claim the plaintiff filed against her prior attorney due to a binding and enforceable arbitration clause in the attorney’s engagement letter. In that decision, the court found no grounds to revoke a valid agreement holding that such agreements “are to be liberally construed so as to encourage the settlement of disputes and the prevention of litigation, and every reasonable presumption will be indulged in favor of the validity of arbitration proceedings.”

In fact, similar clauses are often enforceable in Pennsylvania, New Jersey, New York and most other jurisdictions across the country. According to one report on mediation trends, US courts “routinely enforce” mediation clauses “as a condition precedent to litigation” and the only two exceptions to this general principle are that “parties will be foreclosed from enforcing a duty to mediate when they are responsible for previously undermining the mediation effort or where mediation would be moot.”

So what is the upside of mediation? Of course participation in mediation does not guarantee a particular result but there are certain trends that are characteristic of the ADR approach.  Many professionals are attracted to arbitration or mediation due to the potential cost savings. Other benefits that may apply include preserving relationships with an adversary, more customized agreements, avoiding a public dispute, and in some situations a quicker resolution. 

When considering a mediation clause in your engagement letters, the following tips may come in handy: 

  • Acknowledge that a dispute is not expected but may occur.
  • Note that the parties agree to submit any dispute to mediation, including disputes concerning the scope, nature, and quality of professional services, fees for professional services, and/or any other dispute arising with respect to the engagement.
  • Note that the parties agree to participate in good faith in the selection of a mediator and to equally split the mediator’s fee.
  • Require that no suit or arbitration proceeding be commenced until at least 60-90 days after the mediator’s first meeting with the involved parties.

Finally, all professionals should retain counsel to evaluate your engagement letter and to opine as to whether particular clauses, such as the mediation clause, are enforceable in your jurisdiction.