Mediation Before Litigation or Arbitration?
There is much to be said for mediation. Although it is usually non-binding, many cases that would otherwise drag through lengthy and costly litigation can be resolved by a neutral mediator who facilitates a settlement between cooperating parties. On the other hand, where the parties are at each other’s throats, even a miracle worker might not be able to get them to reach an amicable resolution of their dispute. Must they, too, go through a “futile” mediation process before commencing arbitration or a lawsuit?
A recent Appellate Division case holds that where the contract requires mediation before commencing an action or proceeding, the failure to exhaust the mediation process will result in the dismissal of the litigation.
In Archstone Development LLC v. Renval Construction LLC, the contractor, Renval, was paid a deposit to engage subcontractors pursuant to its contract with the owner, Archstone. They apparently did not use the funds for that purpose and they were sued by Archstone for breach of contract and fraud. Once the action was commenced, Renval moved to dismiss it on a number of grounds, including Archstone’s failure to pursue mediation.
The AIA A101 standard form of agreement requires mediation as a “condition precedent” to bringing any further arbitration or litigation. Archstone argued that the early negotiations concerning the deposit constituted a separate and distinct agreement that was not subject to the mediation provision in the contract. However, the court held that such negotiations were “superseded by the construction agreement pursuant to the latter agreement’s merger clause” (eliminating all prior agreements). Therefore, futile or not, the parties were obligated to pursue mediation as a condition of pursuing the dispute in another forum.
As an aside, the court also dismissed the fraud cause of action, holding that the allegation that Renval “misrepresented their intent to use a deposit to engage subcontractors” did not constitute fraud but was merely a breach of their contract.
Not all contracts require mediation as a condition precedent to litigation or arbitration. But when they do (as in many form AIA contracts), mediation must be pursued. Overworked courts are eager for excuses to whisk matters off their plates and, from their perspective, a mandatory mediation clause is a no-brainer.
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Further information on arbitration can be found on our blog:
Never Signed an Arbitration Clause? Not a Problem
Arbitration Clause Not "Incorporated By Reference"