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Are You Including a Mediation Provision in Your Real Estate Contracts?

September 25, 2017

Overview

Businesspeople and their lawyers have long discussed whether to include an arbitration clause in their leases, construction contracts and other real estate agreements. The questions that guide that decision include: Who will be deciding the dispute? Will arbitration truly be less expensive? How quickly does a dispute get resolved through arbitration? But another question should be asked more frequently: Should we include a clause that requires mediation before arbitration or litigation? Asked a different way, why wouldn’t you want a clause designed to resolve a dispute without having to prepare a complaint or arbitration demand, engage in discovery, or wait for a judge, jury or arbitrator to rule on the dispute?   

Mediation is a confidential process in which the parties, with the help of an impartial person, try to reach a settlement. Unlike arbitration, a mediator is not empowered to make any factual or legal determinations or enforce any provisions of the contract. Instead, the mediator facilitates a structured negotiation between the parties with the goal of finding a mutually acceptable solution.

Mediation requires the disputants to spend a day, or sometimes less or more, arguing the merits of their positions, proposing potential solutions, and negotiating deal points. One of the primary selling points of mediation is that the parties retain control over the outcome of their dispute. Over the last thirty years, mediation has gained favor as the preferred method for resolving cases already in litigation, but in most instances mediation occurs after the parties have already incurred substantial legal fees and costs. Mediation is increasingly emerging as a viable alternative to initiating arbitration or a lawsuit and waiting to negotiate later.   

Mediation clauses in contracts are typically part of a tiered approach to dispute resolution, often requiring meetings between key executives, followed by mediation, and only after informal negotiations and mediation have failed, allowing the parties to arbitrate or litigate. Construction contracts contained the tiered approach before most other commercial agreements. The specific types of disputes that might arise under the contract at issue should influence how the dispute resolution clause is drafted, taking into account timing requirements inherent in those disputes.

For example, if a dispute is likely to require immediate resolution to avoid project delays, clouds on title, use restrictions or financing issues, it often makes sense to identify a mediator or mediation service in the contract and provide for a short turnaround for participation. On the other hand, if the types of disputes most likely to arise under the contract are more complex and would typically benefit from a more deliberate or creative process, the schedule should include additional time for mediation preparation. 

Mediation appeals to those real estate leaders who pride themselves on their ability to resolve disputes amicably. Mediation commonly follows efforts by leaders to resolve the dispute in a way that each believes is reasonable, but where the efforts have stalled because the parties perceive the dispute through different lenses. The involvement of a mediator has several advantages to move the parties beyond impasse. When the dispute has led to a high degree of tension and an emotional response, the ability of the parties to tell their story to an impartial person provides an opportunity to vent without the risks of further injuring the relationship. An experienced mediator will also provide both sides with a reality check, to ensure they fully understand the strengths and weaknesses of their positions and the risks they face should they elect to proceed to arbitration or litigation. Lastly, bringing the parties together for the express purpose of finding a solution to a problem leads to a higher degree of creativity.  In real estate disputes in particular, there is a great deal of room for creative ideas to overcome the obstacles to settlement.  

Mediation also appeals to those business leaders who have been through enough litigation to know that they want to avoid it. Mediation works. A 2016 survey of mediators of commercial disputes in the UK conducted biennially since 2010 has reported success rates between 67% and 75% on the day of mediation and between 86% and 90% on the day of the mediation or within a short time thereafter. Mediators in Washington anecdotally report similar success rates. 

Critics of mediation clauses contend that mediation is successful in part because the parties participate voluntarily and that the likelihood of settlement increases if parties agree to mediate after a dispute arises without a contract requirement. However, experience shows that even compelled mediations are successful. Mediation has continued to be successful in litigation when courts require it. Agreeing to mediation prior to any disputes prevents parties from imposing unrealistic conditions on mediation or concluding that mediation is a waste of time because the informal settlement discussions have been unsuccessful. Once a conflict surfaces, the parties can expend their energy on getting to an agreement that resolves the conflict, rather than facing the hurdle of first having to agree to mediate. Mediations are very often successful even when both parties are convinced that settlement is impossible.   

Even mediations that fail to result in a settlement provide benefit to the parties in litigation. The parties are able to narrow the issues on which the litigation is focused and create useful starting points for future settlement negotiations.

In 2011, the Board of Governors (“BOG”) for the Washington State Bar Association (WSBA) assembled a task force to study ways to reduce the escalating costs of civil litigation. The task force issued its final report on June 15, 2015, which is published on the WSBA website. In 2016, those efforts resulted in the BOG tasking a committee with drafting a rule to require mandatory mediation in the early stages of most civil litigation in Washington’s Superior Courts. Any rule would have to be adopted by the Washington State Supreme Court before taking effect, but the trend toward increasingly earlier mediations is inevitable.  Real estate leaders should routinely evaluate whether to include a mediation clause in contracts.  

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