Mediation Before Arbitration — Should Your Contract Require It?

A growing number of commercial contracts include multi-step dispute resolution clauses that require the parties to attempt mediation before initiating arbitration or litigation. The logic is straightforward: mediation is faster, cheaper, and less adversarial than arbitration or court, and disputes that can be resolved through a facilitated negotiation should be. But mandatory mediation clauses are not universally beneficial, and how they are drafted determines whether they add value or simply create an additional procedural hurdle before the parties can get to real dispute resolution.

What Mediation Is — and Is Not

Mediation is a structured negotiation facilitated by a neutral third party — the mediator — who helps the parties communicate, identify their interests, and explore potential resolutions. Unlike an arbitrator or a judge, a mediator does not decide the dispute. Mediation is non-binding: if the parties do not reach an agreement, either party can walk away and proceed to arbitration or litigation. The mediator’s role is to facilitate, not to adjudicate.

The American Arbitration Association (AAA) administers mediation services in addition to arbitration. The AAA’s 2024 data shows that AAA mediation filings involved $12 billion in aggregate claims, with disputes settling in a median of 114 days — a timeline that reflects mediation’s potential as an efficient resolution mechanism when the parties are motivated to resolve.

The Case for Mandatory Mediation Before Arbitration

For business relationships where the parties have an ongoing commercial relationship and a shared interest in resolving disputes without destroying that relationship, a mediation-first requirement can be valuable. It creates a structured opportunity to resolve the dispute before the more adversarial and expensive arbitration process begins. It also signals to both parties that the contract was designed with resolution in mind, not just winning.

The AAA’s own Commercial Mediation Procedures can be incorporated into a contract alongside its Commercial Arbitration Rules, creating a seamless med-arb escalation process administered by a single organization familiar with both stages. The combination can reduce the friction of transitioning from mediation to arbitration if mediation is unsuccessful.

When Mandatory Mediation Adds Delay Without Value

Mandatory mediation clauses can be counterproductive in certain situations. When one party has engaged in clear misconduct — misappropriation of funds, deliberate breach of contract, fraud — requiring the aggrieved party to go through a mediation step before pursuing remedies adds cost and delay without a realistic prospect of resolution. A party that has been defrauded is not typically in a position to negotiate a compromise with the party that defrauded them.

Similarly, when emergency relief is needed — to stop ongoing harm, to freeze assets, to enforce a non-compete — a mandatory mediation step can allow the harm to continue while the parties go through the preliminary dispute resolution process. Well-drafted escalation clauses typically carve out emergency relief from any pre-arbitration requirements.

Drafting the Escalation Clause

If a mediation-before-arbitration structure makes sense for a particular contract, the escalation clause should address several practical issues. It should specify the mediation rules and administrator, establish a time limit for the mediation process before either party can proceed to arbitration, and identify who selects the mediator and how costs are shared. It should also include carve-outs for emergency injunctive relief and for situations where one party refuses to participate in good faith.

A clause that requires mediation but does not specify a timeline or a mechanism for declaring the mediation at an impasse can trap the aggrieved party in an indefinite pre-arbitration process while the other party runs out the clock.

Business owners reviewing or negotiating dispute resolution provisions in their contracts should consult with a business attorney to evaluate whether a mediation step makes sense for their specific business relationship and, if so, how to draft the clause to ensure it functions as intended rather than as an obstacle to resolution.

---

Disclaimer

The legal and business issues discussed in this post vary depending on the specific facts and circumstances of each situation. This post is for informational purposes only and does not constitute legal advice. It is not an offer for Russo Law LLC to represent any party, nor does it create an attorney-client relationship. No action or inaction should be taken based on the information provided without seeking professional legal counsel. This post is intended for businesses in New York and New Jersey and may not reflect laws in other jurisdictions.

Do not send confidential or sensitive information through this website or in response to this blog post. Unsolicited information does not create an attorney-client relationship and should not be treated as privileged or confidential.