The Corporate Prenup. Why it’s Important to Include a Dispute Resolution Clause in all your Contracts.

The other day I caught up with a colleague who has had a very successful career as a mediator. In fact, she has done well over eight thousand mediations!

I was keen to find out whether she might have seen a common pattern in terms of why things typically get messy within organisations – particularly in small to medium-sized businesses.

Rather than pinpoint a specific pattern, one thing she has observed throughout her mediation career is just how many organisations for whatever reason don’t safeguard themselves by proactively including a dispute resolution or mediation clause in their shareholder agreements or employment contracts.

Conflict is inevitable in any work environment. Whether it’s a disagreement between shareholders, a dispute with an employee, or a contractual misunderstanding with a client, conflicts can arise unexpectedly, posing challenges to the smooth operation and growth of the business.

Just as couples prepare for the unexpected by drafting prenuptial agreements, companies can protect themselves and their stakeholders by including mediation clauses in their agreements and contracts – essentially, a corporate prenup.

The last thing any business owner wants is for a dispute to jeopardise their success. That’s exactly where mediation clauses come into play – they offer a proactive and strategic approach to managing conflicts before they escalate into costly and disruptive legal battles.

Simply put, mediation clauses are provisions included in agreements and contracts that require parties to resolve disputes through mediation before pursuing litigation. Mediation is a voluntary and confidential process where an impartial third party (the mediator) facilitates communication and negotiation between the conflicting parties to help them reach a mutually acceptable resolution.

A mediation or dispute resolution clause that could be included in a contract might be worded as follows:

“In the event of any dispute, controversy, or claim arising out of or relating to this Agreement, including any question regarding its existence, validity, interpretation, performance, or termination (hereinafter referred to as a ‘Dispute’), the parties agree to first attempt to resolve the Dispute through mediation.

The parties shall jointly select a mutually acceptable mediator within [number] days of written notice from one party to the other indicating the existence of a Dispute. If the parties are unable to agree on a mediator, the mediator shall be appointed by [designated authority or organisation]. The mediation shall take place in [location] within [number] days of the appointment of the mediator …“

Litigation can be time-consuming, expensive, and emotionally draining for all parties involved. By including a mediation clause in your agreements and contracts, you’re proactively mitigating the risk of costly legal battles.

Mediation offers a collaborative and non-adversarial approach to conflict resolution, allowing parties to address their concerns constructively while preserving valuable relationships. Unlike litigation, which can drag on for months (or even years), mediation is often a more efficient and cost-effective way to resolve disputes. With mediation, you have more control over the process, timelines, and outcomes, saving both time and money for your business.

Despite the numerous benefits of including mediation clauses in agreements and contracts, some business owners still hesitate to embrace this proactive approach to conflict resolution.

One of the most common reasons for this is simply a lack of awareness and understanding. Many individuals and organisations may be unfamiliar with alternate dispute resolution methods such as mediation. They may have limited knowledge of how these processes work, their advantages over litigation, or the specific circumstances in which they are most beneficial.

There may also be misconceptions surrounding alternative dispute resolution methods that deter parties from considering them. For example, some may mistakenly believe that mediation is only suitable for certain types of disputes. Without proper education, parties may not fully understand the advantages of including mediation clauses in their agreements. They might not be aware of how these clauses can promote more efficient and amicable resolution of organisational conflicts.

When drafting mediation clauses for your agreements and contracts, it’s essential to be clear, concise, and specific.

1. Clearly define the types of disputes covered by the mediation clause, including parties’ obligations to participate in good faith.
2. Outline the steps and timelines for initiating and conducting mediation, including the selection of a mediator and the location of the mediation sessions.
3. Include provisions safeguarding the confidentiality of mediation proceedings and any information disclosed during mediation.
4. Specify the consequences of non-compliance with the mediation clause.
5. Ensure that the mediation clause survives the termination or expiration of the agreement, ensuring continued access to mediation even after the relationship between the parties has ended.

Workplace conflicts are not a matter of if, but when.

By including mediation clauses in your agreements and contracts, you’re not only safeguarding your business against the uncertainties of litigation, but also reinforcing your commitment to constructive and collaborative conflict resolution.