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Twice in recent months, Israeli clients contacted us concerning disputes with American companies pursuant to contracts that provided for “two-tier” dispute resolution — namely, that the parties would attempt mediation and, only if mediation failed, would they refer the dispute to binding arbitration. In both cases, although the agreement specified the name of an arbitral institution in the US to appoint the arbitrator (if needed), the contract was silent as to the mechanism for appointing the mediator.
One of the first questions posed by our clients in the above situation was: whether the parties implicitly authorized the arbitral institution to appoint a mediator (obviously at the earlier stage, when there was a possibility that there would be no need for arbitration).
We address the above issue in this post. (A related issue is “how and when” should a claimant involved in a two-tiered dispute resolution process put an end to the mediation. That issue – which is very important – is beyond the scope of this post and will be addressed in a future post of ours.)
- Intention of the parties governs:
One of the arguments in support of the position that the parties implicitly authorized the arbitral institution to appoint a mediator is a practical one – that almost every major arbitral institution (including the International Chamber of Commerce, the American Arbitration Association, and JAMS) also routinely appoints mediators, and it is reasonable to assume that the parties would prefer to deal with the bureaucracy of one institution and not two.
Nonetheless there is no American or Israel judicial decision holding that, when the mediation clause is silent as to the appointment process, the fact that the parties named a specific arbitral institution for the (possible) arbitration stage implicitly authorizes that institution to select the mediator.
American and Israeli courts generally treat the mediation stage and the arbitration stage as separate contractual mechanisms, and they hesitate to infer procedural terms (such as the appointing authority for a mediator) unless consent to such power is implicit in the contract.
- Courts usually decline to infer mediator-selection mechanisms:
In interpreting the typical multi-tier dispute-resolution clause scenario (mediation then (if necessary) arbitration), courts typically treat the mediation stage as a condition precedent to the commencement of an arbitration. At the same time, courts typically treat the details of the mediation procedure as an issue of contract interpretation. In a case in which the contract is silent regarding how the mediator is to be chosen, courts generally look for (i) possible post-contract agreement of the parties, or (ii) institutional rules that might have been incorporated by reference in the contract. When both (i) and (ii) are absent, the court usually will conclude that the responsibility for the appointment of a mediator belongs with the court.
The reasoning behind such approach is the general rule that mediation is consensual, and the identity of the mediator is ordinarily a term upon which the parties must agree, whether directly or indirectly. (The most common indirect means is a contractual reference to an appointing authority). When the parties have not so agreed, then the obligation to attempt mediation is treated like every other contractual obligation – if the details are not provided for by the parties, the court will “fill in the blanks.”
Such an approach is consistent with the general rule of contract interpretation under American law, as embodied in the Second Restatement of the Law of Contracts, section 204:
“When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court.”
The above-described approach concerning mediator appointment is also consistent with the general rule of contract interpretation under Israeli law, as embodied in sections 25 and 26 of Israel’s Contracts Law (General Part, 1973).
When a court sees its job as including “filling in the blanks,” then it is unlikely to see an arbitral institution as implicitly authorized to appoint the mediator.
- Most judicial decisions that have been required to strew “mediate-then-arbitrate” clauses have focused on timing, not on mediator selection:
Most of the case law regarding “mediate then arbitrate” clauses have dealt with whether mediation is an enforceable condition precedent to arbitration – as opposed to the question of who appoints the mediator. See Kemiron Atl., Inc. v. Aguakem Int’l Inc. 290 F.3d. 1287, 1291 (11th Cir. 2002); HIM Portland, LLC v. DeVito Builders, Inc., 317 F.3d 41 (1st Cir. 2001)
The case law generally has held:
- If the clause is sufficiently certain, then the mediation requirement is enforceable;
- If procedural details (such mediator selection) are missing, the court might still enforce the obligation to attempt mediation, while leaving the parties to work out the mechanics; and
- If one party has tried to commence an arbitration, the court will stay arbitration until the parties attempt mediation.
These decisions do not hold that the arbitration institution automatically becomes the mediator-appointing authority.
- Institutions generally shy away from “overreaching”:
Although arbitral institutions generally are “in the mediation business,” any such institution has an interest in not appearing to overreach in the exercise of its jurisdiction. If an arbitral institution were to appoint a mediator in connection with a dispute arising from a “mediate then arbitrate” agreement that is silent as to mediator appointment, and if one of the disputants were to decide not to cooperate with the mediation procedure, then the next logical stage (in most cases) would be the commencement of an arbitration. However, in such a situation, the responding party could preserve its right to assert that the condition precedent to the commencement of the arbitration was not fulfilled and that, therefore the arbitration should not have commenced. Under such a scenario, any resulting arbitral award could be challenged in court.
From the perspective of the reputation of the arbitral institution, in a situation in which there is any doubt as to the jurisdiction to appoint the mediator, a possible challenge in court to the arbitral award would not be “worth the trouble” of exercising mediator appointment in any one case.
Therefore, whenever there is a doubt regarding the method for appointment of the mediator in connection with a two-tiered clause, an arbitral institution has an understandable self-interest in not exercising appointment jurisdiction.
In summary:
A. There is no recognized authority holding that designation of Institution X for arbitration implicitly empowers Institution X to appoint the mediator. Courts generally require express language or incorporation of an institution’s mediation rules before reaching that result;
B. A careful draftsman makes sure that the mediation clause is clear as to the mechanism for the appointment of the mediator.