From mediation to arbitration

In times of uncertainty, the community will require clear-headed dispute resolution practitioners to carefully guide disputing parties to just and appropriately tailored resolutions of their disputes.

Calls have been made by industry leaders to implement rapid and one-size-fits-all processes, such as ‘binding mediation’, to deal with what some anticipate could result in an avalanche of cases, particularly in the property sector.

There is no such process as a ‘binding mediation’. Mediation by its very nature empowers the parties to reach their own agreement. It ought not be confused with determinative processes such as litigation, arbitration and expert determination.

A skilled mediator will be well versed in a range of processes that may assist the parties to move beyond deadlocks towards finality of their grievances. It may simply not be possible to guide the parties to a complete settlement in the negotiations that take place within the parameters of a mediation.

A wise outcome may be to enable all, or parts, of the dispute to be determined by a separate binding process. Some cultures are supportive of hybrid processes such as med-arb whereby the mediator abandons the facilitative element of the process and moves herself or himself to a determinative process that has as its object the delivering of a final and binding award.

The med-arb process can be fraught with danger. In our legal system legitimate concerns regarding procedural fairness exist in respect to one person transitioning from mediator to arbitrator.

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Competing arguments have been made regarding the utility and appropriateness of med-arb. State legislatures have intervened and settled the debate. Med-arb is permitted in all Australian states and territories, provided that the strict provisions of disclosure and party consent, as required by section 27D of the various Commercial Arbitration Acts, are complied with.

Written consent of the parties to proceed to arbitration before the same person who was previously acting as mediator is needed after the mediation component of the process has run its course.

Most experienced third-party neutrals prefer not to mix up dispute resolution processes. Different mind-sets and approaches are required. Many arbitrators also practise as mediators (and vice versa), but follow convention and refrain from switching roles in the one matter.

In Ku-ring-gai Council v Ichor Constructions Pty Ltd [2018] NSWSC 610, the arbitrator completed the arbitral hearing and before delivering his award invited the parties into a process before himself which the court later deemed to be a mediation.

The mediation failed and the award was then delivered. The provisions of section 27D were not followed. Written consent of the parties was not obtained after the mediation had failed to produce an agreement. Justice McDougall of the Supreme Court of New South Wales found that the arbitrator had no mandate to continue the arbitral proceedings following his acting as mediator.

This deeply unsatisfying outcome whereby three mixed processes before the one person did not produce a result could have been avoided had clearer heads prevailed, and legislation complied with. No joy was found for the award creditor or indeed the arbitrator in the Court of Appeal which upheld McDougall J’s decision: Ku-ring-gai Council v Ichor Constructions Pty Ltd [2019] NSWCA 2.

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All may not be lost if the parties cannot reach agreement at their mediation. The parties may not reach agreement in terms of the disposition of the substantive issues between them, but may find better processes to resolve their remaining differences than proceeding with litigation. Discrete issues may be hived off for expert determination.

Alternatively, a more private setting to resolution in an open court may be in both parties’ interests, such that they agree to move their dispute before an experienced arbitrator. If this is the case, careful drafting is required to ensure a smooth transition. A poorly drafted arbitration agreement may lead to further frustration and unnecessary time and expense.

A key aspect of a well-drafted arbitration agreement is the definition given to the scope of the arbitral process. Care needs to be taken.

In Inghams Enterprises Pty Limited v Hannigan [2020] NSWCA 82, the arbitration clause was ultimately found by the New South Wales Court of Appeal to be too narrow. The arbitration agreement in question was confined to disputes concerning “any monetary amount payable and/or owed by either party to the other under this Agreement”.

It was ultimately found that a damages claim was not a dispute concerning a monetary amount payable under the Agreement. That is, there is a distinction between amounts payable or owed under a contract and remedies which arise by operation of the common law.

Such an unfortunate result could have been avoided had more care been given to the drafting of the arbitration clause. Had the parties used more conventional wording such as “any dispute arising out of or in connection with the Agreement” then it is likely that the outcome would have been very different.

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Arbitration clauses often consist of only a few sentences or a short paragraph or two in the middle of many pages (potentially lever arch folders) of the substantive parts of a contract. That small part of the contract determines the entire procedural rights of the parties should disputes arise. Precision is required. Parties and their advisors could be well served by reviewing the 2010 International Bar Association Guidelines for Drafting International Arbitration Clause. These guidelines set out considerations that also have domestic applicability.

A checklist of matters that parties, and their advisors, might wish to consider are as follows:

• Institutional or ad hoc arbitration – In exchange for a relatively modest fee, arbitral institutions can assist the parties and the arbitrator with the entire arbitral process. This may be quite advantageous, particularly for practitioners who have had only limited experience with arbitration processes. Institutions also have tried and tested arbitration clauses that parties are at liberty to adopt.
• Arbitration rules – Parties may be well served by adopting an established set of arbitration rules. There are rules for both institutional and ad hoc arbitration.
• Scope – As noted above, the parties should define the scope of what is to be arbitrated broadly.
• Place of arbitration – The parties ought to select the place, or seat, of an arbitration which becomes its juridical home. The place of an arbitration does not determine the substantive law that governs the dispute but rather the procedural law that is to be applied. It is also referred to as the lex arbitri. Queensland is a safe place for an arbitration as it is well served by state-of-the art legislation, courts and a legal profession.
• Number of arbitrators – The parties should specify the number of arbitrators. In domestic matters often the parties are well served by simply having one arbitrator. Often in large and complex international matters the parties will prefer a tribunal of three.
• Method of selection – The arbitration clause ought to deal with how arbitrator(s) are selected and fall-back mechanisms when the parties cannot reach their own agreement. For example, there are times when the President of the Queensland Law Society is called upon to make an appointment. There are a number of QLS members who are experienced and skilled arbitrators who can be appointed directly by the parties or by the President (where the parties are deadlocked).
• Language of arbitration – This may have relevance for international matters.
• Governing law – The parties ought to specify (in another part of their contract so as not to be confused with the procedural law of the arbitration) the substantive law that is to apply to the contract and subsequent disputes.
• Optional extras – Arbitration can be a ‘choose your own adventure’. The parties may wish to add in some additional features to their process. For example, the parties may wish to impose limits on document production, or stipulate the maximum time for the arbitral process or delivery of the award. They may wish to mandate the qualifications of arbitrators. They may stipulate how the arbitral tribunal is to deal with costs (such as requiring that costs follow the event or are borne by the parties equally irrespective of the outcome).
• Multi-tier dispute resolution – Particular care is required in terms of clauses that establish some form of tiered dispute resolution. Often construction contracts require senior executive negotiation before the dispute can proceed through to mediation, expert determination and possibly arbitration. Careful drafting is required to ensure that the various processes are aligned such that all parts of the dispute can smoothly transition through each stage of its journey.
• Multi-party arbitrations – Infrastructure projects may involve many different parties such as principals, contractors, subcontractors and suppliers. It may be that there is a resolve for all disputes arising from this project to be referred arbitration. There are many complexities with such an approach. A multi-party arbitration clause or agreement ought to be carefully drafted. It ought to have regard to the particular circumstances of the project and each of the parties. Specialised advice is usually needed.
• Multi-contract arbitration clauses – It is common for a single transaction between two parties to involve several related contracts. The parties should avoid specifying different dispute resolution mechanisms in their various contracts. Consideration can be given to some overriding protocol or dispute resolution agreement which sits above the various contracts and is incorporated by reference in all contracts.

While mediators, the parties and the parties’ advisors may be particularly keen to keep the parties out of courts in this time of uncertainty, great care is required in transitioning to a process such as arbitration (or indeed expert determination).

While the parties’ interests can be well served through an efficient arbitral (or expert determination) process conducted by an experienced practitioner, it is imperative that process starts with a sure footing. In terms of drafting an arbitration clause or arbitration agreement, careful consideration of the above checklist may assist.

When in doubt, the safest course, for those practitioners with limited arbitration experience, may be to simply have recourse to arbitration clauses and rules that are published by reputable arbitration institutions and available on their websites.

Sometimes, re-inventing the wheel can produce unintended risks and unfortunate consequences, including undermining the integrity of the arbitral process, as arose in the cases mentioned above.

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This article appears courtesy of the Queensland Law Society Alternative Dispute Resolution Committee. Russell Thirgood is an independent international arbitrator who has chambers in London with Int-Arb Arbitrators along with an office in Brisbane.