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1 Oct 2024 Supreme Court clarifies effect of mediation clauses in relation to legal proceedings

Agreements regularly include a so-called mediation clause. This clause means that parties agree with each other to first attempt mediation in the event of a dispute before any legal action is taken. Mediation is a method of conflict resolution without court proceedings, which is low-threshold and often cost- and time-saving. Nevertheless, in practice, the mediation clause sometimes raises questions, for instance when, despite including a mediation clause in an agreement, one of the parties nevertheless initiates legal action without starting mediation first. A recent Supreme Court ruling shows how this should be dealt with.

What is a mediation clause and when is it used?

A mediation clause is a provision in an agreement stating that parties to a dispute will first try to resolve the dispute through mediation before initiating court proceedings. Mediation is a form of dispute resolution in which a neutral third party, the mediator, helps parties reach a solution together. This can be advantageous as it is usually faster, cheaper and less burdensome than litigation. Moreover, mediation parties are in control of the outcome.

Mediation clauses are often used in business contracts, including, for example, shareholder agreements, to prevent escalation of conflicts. Especially in long-term collaborations, the importance of preserving the relationship can be high. Mediation can help in this respect. Moreover, mediation offers more flexibility and control to parties, as they can negotiate the solution themselves, instead of a judge or arbitrator imposing a decision.

What was at stake in the case under consideration by the Supreme Court?

The case considered by the Supreme Court involved two parties: CSW and PPSB, both active in occupational health services. In 2017, PPSB sold its shares in a subsidiary company to CSW and also provided a loan in the process. Their agreement included a mediation clause, agreeing that disputes would be resolved initially through mediation. If mediation did not yield a result, the dispute would be settled through arbitration.

In 2018, a dispute arose between CSW and PPSB, following which PPSB commenced arbitration proceedings without prior mediation. CSW invoked the mediation clause and asked the arbitrator to stay the proceedings or decline jurisdiction because no mediation had yet taken place. The arbitrator rejected this request and went into the substance of the dispute.

CSW did not leave it at that and went to the trial court with an application to set aside the arbitral awards. CSW argued that no legally valid arbitration agreement existed because mediation had not been attempted. The court rejected this position and ruled that the mediation clause in this case should not be interpreted to mean that mediation was compulsory. CSW subsequently appealed in cassation to the Supreme Court.

Judgment of the Supreme Court

The Supreme Court ruled that the interpretation of a mediation clause always depends on what the parties could reasonably expect from each other based on the text of the clause and the circumstances of the case. A mediation clause may in some cases impose an obligation to try mediation before initiating legal proceedings, but this need not always be the case, the Supreme Court said. In fact, it comes down to the interpretation of the clause.

In this particular case, the Supreme Court ruled that the court of appeal had rightly interpreted the clause to mean that there was no obligation to mediation. CSW's cassation appeal was therefore dismissed. This meant that the arbitrator's ruling on the dispute between CSW and PPSB could stand.

What is interesting about this ruling is that the Supreme Court emphasised that even if a mediation clause in an agreement mandatorily prescribes mediation, the judge or arbitrator is not automatically obliged to stay the proceedings if one of the parties has failed to comply. This may depend on the circumstances, for example, if mediation no longer seems useful or if the case is too urgent and no further delay should be incurred.

You can read the full judgment here .

Conclusion

The Supreme Court ruling provides clarity on the effect and enforceability of mediation clauses in (business) contracts. It is important for parties to carefully consider the wording and expectations when drafting such a clause, as the intention of the parties is considered important. In addition, the Supreme Court emphasises the court's discretion to determine whether to stay proceedings when a party has failed to comply with the mediation clause.

Do you have questions about (drafting) a mediation clause or its assessment? Or do you have questions about business agreements, such as a shareholders' agreement? Or do you need more information about mediation and whether it is a suitable option in your situation? The experienced lawyers and mediators at SPEE advocaten & mediation will be happy to assist you.

SPEE advocaten & mediation Maastricht