Some Reasons for Caution When Considering Clauses that Mandate Pre-Litigation Mediation

As litigation costs continue to increase, many savvy San Diego businesses are increasing their use of pre-litigation mediation in an attempt to avoid and reduce these costs. However, there are reasons for caution if you are considering adding mandatory mediation to your business contracts or if you are being asked to sign a contract with such a provision. You should seek the advice and guidance of an experienced San Diego corporate attorney.

Most mandatory pre-litigation mediation clauses require some sort of negotiation and mediation within a certain number of days before litigation or arbitration can be filed. In this manner, the effort to negotiate and mediate becomes a precondition — almost jurisdictional — to a party’s ability to file a lawsuit. A typical contractual provision might read something like this:

“Pre-Litigation Mediation. The Parties hereto hereby agree that, prior to either Party filing a lawsuit or other proceeding regarding any disputes under this Agreement, the Parties will engage in good faith in pre-litigation mediation pursuant to the then-current rules of [MEDIATION FIRM] within 30 days before resorting to litigation, arbitration, or some other dispute resolution procedure.”

In this particular example, essentially, there is a 30-day period during which the parties are required to negotiate and attempt mediation. As noted, essentially, this 30-day period must elapse before litigation is filed and is a precondition for filing the litigation. This, then, is the first caution. By agreeing to a mandatory pre-litigation mediation, your business is giving up the right to go into court and — potentially — that right could be substantially delayed. Here are some questions to consider:

  • When does the 30-days timetable start? Many contracts require a Notice of Demand for Mediation be sent that starts the clock, but that Notice becomes yet another pre-condition for filing a lawsuit
  • With respect to a “Notice,” many questions arise: how is the Notice delivered, what is the proper form of the Notice, does it contain the proper content, etc.?
  • What happens if there is a delay in starting the mediation? Does the 30 days keep counting down or are additional days added to the count?
  • What happens if the parties cannot agree on who will conduct the mediation? How does this affect the 30-day timetable?
  • And more

The next caution relates to emergencies and injunctions. Sometimes, the dispute between the parties is extremely time-sensitive. An example might be the theft of one party’s trade secrets which are potentially going to be disclosed to a competitor. Under normal circumstances, an immediate lawsuit would be filed for injunctive relief asking the court to immediately restrain disclosure. If 30 days of pre-litigation mediation is required by the contract, then no injunction can be sought and it may be too late to prevent disclosure once the 30 days has expired. At minimum, the eventual litigation has become much more complex as the recipient of the stolen information must now be sued too.

Well, maybe the solution to that problem is a “carve-out” for injunctive relief. This brings us to the next caution with pre-litigation mediation clauses: negotiating the clause becomes a distraction for the parties and can hinder the deal itself. Once notice provisions are added and then carve-outs are added, the mediation clause is becoming complex. The parties are now needing to spend time negotiating the mechanics and mechanisms for the pre-litigation mediation. Those negotiations can distract the parties from the key objects of the business relationship. There are circumstances where the parties can become frustrated with the mediation provisions and may decide to walk away from the deal.

The next caution involves the alleged advantage of pre-litigation mediation clauses: Do they really save money? If a dispute arises that is serious and the parties are entrenched in their positions, mediation is going to be a waste of everyone’s time and a waste of money. But, because the mediation is a pre-condition for getting into court, everyone is required to go through the motions. This results in added expense which is opposite of what the mediation was supposed to accomplish. Avoid these risks and pitfalls by having all your business contracts reviewed by your trusted San Diego corporate attorney before signing them to make sure the terms meet your needs.

Call San Diego Corporate Law Today

For more information, call corporate attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard’s law practice is focused on business, transactional, and corporate matters and he proudly provides legal services to business owners in San Diego and the surrounding communities. Call Mr. Leonard at (858) 483-9200 or contact him via email. Like us on Facebook.

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