Dispute Resolution Clauses – When will they ever learn?

In Sulamerica CIA Nacional de Seguros SA and others v Enesa Engenharia SA and others [2012] EWCA Civ 638 the Court of Appeal was faced again with a touchy-feely mediation clause. In this case the terms of an insurance policy required the parties to attempt to resolve disputes “amicably by mediation” and, if that failed, to refer them to arbitration. As we shall see later, arbitration threw up its own separate issues, but the problem of uncertainty still plagues mediation clauses.

The Mediation Clause

At first blush, the mediation clause looks comprehensive:

11. Mediation

“If any dispute or difference of whatsoever nature arises out of or in connection with this Policy including any question regarding its existence, validity or termination, hereafter termed as Dispute, the parties undertake that, prior to a reference to arbitration, they will seek to have the Dispute resolved amicably by mediation. All rights of the parties in respect of the Dispute are and shall remain fully reserved and the entire mediation including all documents produced or to which reference is made, discussion and oral presentation shall be strictly confidential to the parties and shall be conducted on the same basis as without prejudice negotiations, privileged, inadmissible, not subject to disclosure in any other proceedings whatsoever and shall not constitute any waiver of privilege whether between the parties or between either of them and a third party. The mediation may be terminated should any party so wish by written notice to the appointed mediator and to the other party to that effect. Notice to terminate may be served at any time after the first meeting or discussion has taken place in mediation. If the Dispute has not been resolved to the satisfaction of either party within 90 days of service of the notice initiating mediation, or if either party fails or refuses to participate in the mediation, of if either party serves written notice terminating the mediation under this clause, then either party may refer to the Dispute to arbitration. Unless the parties otherwise agree, the fees and expenses of the mediator and all other costs of the mediation shall be borne equally by the parties and each party shall bear their own respective costs incurred in the mediation regardless of the outcome of the mediation.”

However, it contained no mechanism for appointing a mediator or for resolving any dispute as to who the mediator should be nor did it set out what procedure was to be followed.

The Court had no hesitation in agreeing with the judge that this mediation clause was unenforceable:

“I have little doubt that the parties intended condition 11 to be enforceable and thought they had achieved that objective. In those circumstances the court should be slow to hold they have failed to do so. However, in order for any agreement to be effective in law it must define the parties’ rights and obligations with sufficient certainty to enable it to be enforced. The task of the court when questions of this kind arise, therefore, is to determine whether the clause under consideration fulfils that requirement. Although clauses providing for mediation and other forms of dispute resolution procedure are becoming increasingly common, I do not think it helpful to go beyond that in attempting to define the minimum ingredients necessary to enable such provisions to be given legal effect. Each case must be considered on its own terms.”

The minimum that will be required is a defined mediation process or reference to the procedure of a specific mediation provider. As Moore-Bick LJ said at §36:

“No provision is made for the process by which [mediation] is to be undertaken and none of the succeeding paragraphs touches on that question. I agree with the judge, therefore, that condition 11 is not apt to create an obligation to commence or participate in a mediation process.”

The lesson is clear: to ensure that the clause will be effective (i) the prescribed mediation procedure must be specified and (ii) the form of words used must also make it clear that the parties unequivocally submit their disputes to that procedure.

Arbitration

This case is also a timely reminder that where more than one law may be engaged, it is crucial to identify the law governing the arbitration in the agreement. Here Brazilian law was the law of the contract, but the seat of the arbitration was London (and, therefore, English arbitral law applied).  The Court of Appeal held that there was no rule of law that the proper law of the arbitration agreement (which was separable from the substantive agreement) was that of the seat. However, the proper law of the substantive agreement was not necessarily that of the arbitration agreement either.  The court had to perform a three-stage enquiry as to whether there was express choice, implied choice or whether the arbitration agreement was governed by the law that had the closest and most real connection. Here:

1. there was no express choice of law for the arbitration agreement;
2. for fact specific reasons, there was no implied choice of Brazilian law. Most importantly, applying Brazilian law would have meant that the arbitration agreement was only enforceable with the insured’s consent. It was entirely inconsistent with the choice of London as the seat of the arbitration, thereby subjecting it to the provisions of the Arbitration Act 1996, that the parties should have intended Brazilian law to apply.;
3. Because the parties had chosen London as the seat of the arbitration the agreement to resolve disputes had its closest and most real connection with the law of the place where the arbitration was to be held and whose law would provide the supporting and supervisory jurisdiction.

In practice it is rare for arbitration clauses to contain express choice of law provisions. However, where, as with Brazilian law, the proper law of the contract is not sympathetic to arbitration, care needs to be taken.   Once again the lesson is clear: Beware the boilerplate, a little thought in drafting can save a fortune in costs later.