One of the most difficult issues in the law of alternative dispute resolution is whether a mediation clause creates an enforceable obligation.  That issue has an impact on related issues and rights.  If a party gets the issue wrong, it may miss a limitation period or affect its right to rely upon an arbitration or exclusive jurisdiction clause.

In recent articles I have discussed two recent decisions of the Ontario Court of Appeal in which that court apparently arrived at conflicting decisions about whether a mediation clause created an enforceable obligation.  The English Court of Appeal considered this issue in its recent decision in Sulamerica CIA Nacional de Seugros S.A. v. Enesa Enenharia S.A.

The Sulamerica decision is more famous for its holding that the law applicable to an arbitration clause is the law of the place that the parties designate as the seat of the arbitration, not the law that they designate as the law of the contract.  But hidden in the back of the decision is another important conclusion, namely, that a mediation clause is not valid unless it contains sufficient minimum details to make it enforceable.

In Sulamerica, the enforceability of the mediation clause affected whether the insurer had properly commenced arbitration proceedings. The insurance contract provided that the law applicable to the contract was the law of Brazil and that the courts of Brazil were the exclusive jurisdiction for the proceedings relating to the contract. In addition, the contract contained an arbitration clause, condition 12 of General Conditions of the contract, which stated that the seat of the arbitration was London, U.K..

The insurers gave notice of arbitration, asserting that the insured’s claim was not covered by the contract. The insured commenced an action in Brazil for an order that the insurers were not entitled to submit the dispute to arbitration and obtained an injunction restraining the insurers from commencing an arbitration proceeding. The insurers then applied to the court in the U.K. for an order restraining the insured from continuing with the proceedings in Brazil.

The insured said that the law of Brazil governed the arbitration clause and that by the law of Brazil, its participation in the arbitration was voluntary, not mandatory. The insurers said that the law of England applied to the arbitration clause and that under English law, arbitration was the exclusive remedy to determine the dispute, that the jurisdiction of the arbitral tribunal was mandatory not voluntary, and that the insured would be bound by the decision of the arbitral tribunal.

The English judge of first instance held that English law applied to the arbitration clause and issued an injunction against the further prosecution of the Brazilian action by the insured, and the English Court of Appeal upheld that decision.  In doing so, the Court of Appeal may be seen as resolving a conflict of decisions in the English courts.  The result appears to be that, absent other evidence or factors, then in the face of a contest between the law of the contract and the law of the seat of the arbitration as to which law governs the arbitration clause , the latter will win out. 

That part of the Sulamerica decision has been well discussed by the commentators. But there is another part of the decision which could be equally important.

Condition 11 of the insurance contract – the one immediately prior to the arbitration clause- required the parties to mediate before proceeding to arbitration. The insurer had not sought to mediate prior to instituting arbitration. The insured submitted that the mediation and arbitration clauses were part of a single dispute resolution regime, that mediation was a condition precedent to arbitration under that regime and, accordingly, the arbitration proceeding was premature and should be dismissed on that ground alone.

Condition 11 of the contract contained five paragraphs and some 31 lines, so it was not a “bare-bones” provision. It did not prescribe any particular mediation process, but it did clearly state that “the parties undertake that, prior to a reference to arbitration, they will seek to have the dispute resolved amicably by arbitration.” The clause contained an elaborate provision relating to confidentiality, stated the means by which the mediation could be terminated and stipulated a 90 day period for the mediation to be conducted from the date that one party started the mediation. The clause dealt with the sharing of the costs of the mediation. All in all, not a bad mediation clause.

But not good enough to be enforceable, according to the Court of Appeal.  It dismissed the insured’s submission on the ground that the mediation clause was not sufficiently precise to be enforced. It held as follows:

“…condition 11 does not set out any defined mediation process, nor does it refer to the procedure of a specific mediation provider. The first paragraph contains merely an undertaking to seek to have the dispute resolved amicably by mediation. No provision is made for the process by which that is to be undertaken and none of the succeeding paragraphs touch that question.  I agree with the judge, therefore, that condition 11 is not apt to create an obligation to commence or participate in a mediation process. The most that might be said is that it imposes on any party who is contemplating referring a dispute to arbitration an obligation to invite the other to join in an ad hoc mediation, but the content of even such a limited obligation is so uncertain as to render it impossible of enforcement in the absence of some defined mediation process.”

The Court of Appeal also rejected the insured’s argument that, at the very least, the insurer was required to show that, as a matter of fact, it had satisfied condition 11.  The court held that if “mediation is not defined with sufficient certainty, the condition cannot constitute a legally effective precondition to arbitration.”

This conclusion raises a number of difficulties:

First, mediation is usually considered to be a consensual process requiring no agreement on process. If that is so, it is difficult to see why certainty of process is an essential element for its validity.  In Sulamerica, the English Court of Appeal has applied to the details of the mediation process the certainty requirements found in the law of contract which relate to the making of a contract. Is that necessary or appropriate? If the mediation process is voluntary, why is the agreement to mediate not sufficient?  If a party does not want to mediate, it can immediately state that position and the mediation may be at an end, but why should the parties not be obliged to at least take that step without further agreement on the process?

There is an ongoing debate, at least in North America, about the effort that a party to a mediation agreement must demonstrate before it has complied with a duty to mediate. Some say none; some say that there must be at least some good faith effort to mediate. But the Court of Appeal appears to pre-empt that debate by requiring that the details of the mediation process must be sufficiently clear from the beginning before any obligation to mediate can come into being. 

Second, it seems unlikely that most mediation clauses satisfy the “sufficient certainty” requirement established by the Court of Appeal.  In order to do so, it is likely that the mediation agreement will have to refer the mediation to an arbitral or mediation institute. Agreements to engage in ad hoc mediation may, almost by definition, be unenforceable since those sorts of agreements usually leave the parties with the flexibility to choose the mediator and the “style” and procedures adopted by a particular mediator. Even mediation institutions will have to review their rules to ensure that they are “sufficiently certain”.

 Third, different courts may have different views on this issue.  Those views may have a dramatic impact on limitation periods.  If an obligation to mediate arises, then the limitation period may well be extended.   

As I noted in my article dated July 17, 2011 the Ontario Court of Appeal held in L-3 Communication Spar Aerospace Limited v. CAE Inc that an enforceable obligation to mediate had arisen in that case and accordingly the cause of action did not accrue and the limitation period did not start to run until the mediation was over.

In L-3 Communications, the agreement in question contained no details about the mediation process.  It simply stated that when the parties “had not agreed” then they could proceed to arbitration.  The Ontario Court of Appeal found that was sufficient to create a duty to mediate so that the cause of action did not accrue and the limitation period did not start to run until that occurred.  Had the Ontario Court of Appeal applied the logic of the English Court of Appeal in Sulamerica, presumably it would have concluded that there was no enforceable mediation clause, and the plaintiff’s cause of action accrued once the conditions for liability had occurred without any necessity for those conditions to include mediation.   

As I noted in my article dated May 5, 2012, in another decision of the Ontario Court of Appeal, Federation Insurance Co. of Canada v. Markel Insurance Co of Canada, that court held in 2012 that wording similar to that considered in the L-3 Communications decision did not give rise to an enforceable obligation to mediate.  The result in Federation Insurance appears to be different than the decision in L-3 Communications and more consistent with the decision in Sulamerica

All of the above may leave those drafting agreements wondering about what exactly to put into a mediation agreement to make it binding.  It may leave those suing to enforce rights under those agreements wondering whether to first start an action or mediate.  The decision to sue or mediate first may, like in Sulamerica, simply affect or delay the determination of which tribunal – court or arbitrator – is the proper tribunal. But more troubling is the limitation problem. 

Making the decision to mediate, and not to commence the action, may result in the limitation period being missed.  With this risk, a party may be well advised to “sue first and mediate later”, unless the opposing party agrees to extend the limitation period in the meantime. 

See Heintzman and Goldsmith on Canadian Building Contracts, 4th edition, Chapter 10, part 6

Sulamerica CIA Nacional de Seugros S.A. v. Enesa Enenharia S.A., [2012]EWCA Civ. 648

Arbitration – Mediation – Enforceable Agreement – Choice of Law – Choice of Forum – Limitations – Insurance

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                       July 5, 2012

www.constructionlawcanada.com

www.heintzmanadr.com