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November 28, 2017 Articles

International Commercial Mediation: Brief Update on Developments in Enforceability

By Erin Gleason Alvarez

Your client has a contract for services with a business located outside the United States. Although the relationship between the parties is long-standing, your client has expressed dissatisfaction with service quality over the last year. Repeated appeals for improvement have been rebuffed, and the client is now aggravated and losing sales as a result of the decline in service.

The contract includes an arbitration clause, but your client fears that initiating an action would cause irreparable harm to the relationship. Your client would like the partnership to continue if possible and fears that an adversarial process would tarnish any possibilities for improved relations. You would like to suggest mediation but fear that without an international convention to support the enforceability of any settlement achieved, these efforts might be futile. What might happen if you need to go outside the United States to try to enforce the settlement?

Enforceability of mediated settlements in international commercial disputes is a legitimate concern in many jurisdictions and a topic that has been taken up by the United Nations Commission on International Trade Law (UNCITRAL). A number of UNCITRAL working group meetings have been held to examine whether an instrument is needed to enforce international commercial settlement agreements that result from conciliation or mediation. The initiative is still under review to date.

Earlier this year, New Jersey recognized the importance of enforceable agreements in this space by enacting the New Jersey International Arbitration, Mediation, and Conciliation Act, N.J. Stat. 2A:23E, which took effect on May 7, 2017. This article addresses client preferences for mediation, particularly in international commercial disputes; obstacles to enforcing agreements achieved through international mediation; and mechanisms in place for overcoming these concerns, highlighting the new framework in New Jersey for enforcing agreements achieved through international mediation.

Client Preferences for Using Mediation
In the example above, your client is concerned about preserving an important business relationship but also needs to resolve a dispute that is costing the client in money and in employee exasperation. Mediation is often looked to as the preferred method for resolution in circumstances where the parties desire an amicable dispute resolution process. In mediation, the parties craft a negotiation process that is tailored to their needs with guidance and assistance from a neutral third party, the mediator. The ability to be creative and collaborative and to step outside prescribed litigation or arbitration rules is one of the most attractive features of mediation.

Mediation can also be the ideal venue for dispute resolution of claims where parties’ cultural approaches to negotiation differ. Variations in confrontation style, establishing trust in the negotiation process, and the formality required in communications can be adeptly addressed by a sensitive and informed mediator. Understanding these differences and how to leverage them to unite the parties is a unique opportunity presented in mediation.

In our example case, the parties seem to have shared a beneficial business arrangement historically. But that does not necessarily guarantee performance on a mediated agreement now. While mediation appears to be the preferred vehicle for dispute resolution here, enforcement options remain an issue.

Obstacles for Enforcement in International Mediation
Despite mediation’s many attributes, fears over enforcement in the international context endure. Unlike awards rendered in international arbitration, mediated agreements do not have widely accepted procedures in place that are specifically created to protect them.

In international arbitration, the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) obligates states to recognize and enforce arbitral awards made in other contracting states. The New York Convention has been entered into force by 157 states, thus providing parties with a reliable mechanism for making sure that an award reached in international arbitration will be enforced.

The vast majority of institutional arbitration rules include a process for recording settlements reached during the pendency of an international arbitration as consent awards, to memorialize the conclusion of the arbitration and help provide for enforcement of the agreement. (See, for example, International Centre for Dispute Resolution, International Dispute Resolution Procedures, Article 32; International Institute for Conflict Prevention & Resolution, Rules for Administered Arbitration of International Disputes, Rule 21; and International Chamber of Commerce, Rules for Arbitration, Article 33).

To accommodate parties’ desire to mediate these disputes, practices have also emerged to try to transform a mediated settlement agreement into an arbitral award. Here, a mediation may be initiated absent any arbitration; once the mediation is concluded, parties either request that the mediator memorialize the settlement in arbitral award form or secure an arbitrator separately for this purpose. The theory here is that the mediated agreement, now transformed to arbitral award, will be afforded the protections of the New York Convention. Some commentators caution that this practice has risks because laws may require that an actual dispute exist prior to the appointment of an arbitrator. Parties might also initiate arbitration, fully intending to mediate the claim after filing, to secure a consent award.

All of these steps do add a significant amount of process to mediation, which parties tend to like because it is simpler and less tied to formal rules than arbitration. Making sure that your client’s mediated agreement will be enforceable and incorporating med-arb or arb-med-arb mechanisms can be tricky and should be pursued carefully to maximize the potential for enforceability. (See also Edna Sussman, “The New York Convention Through a Mediation Prism,” 15 Disp. Resol. Mag., Summer 2009.)

Other recourse for enforcement of mediated settlements in international commercial disputes can include pursuing claims for enforcement of the agreement under contract law. But this may also be difficult in the international context, depending on the jurisdiction where enforcement is sought. Protracted cross-border litigation to enforce a mediated settlement is counterintuitive at best.

Strategies for Using International Mediation to Secure Enforceable Agreements
Enter the New Jersey International Arbitration, Mediation, and Conciliation Act, which was enacted to help promote the growth of international trade, business, and commerce in New Jersey, while also encouraging efficiency in the dispute resolution processes required of international disputes. New Jersey is the latest among a small group of U.S. states to take similar legislative actions, including California, Colorado, and Hawaii. Further, the European Union’s Directive 2008/52/EC on certain aspects of mediation in civil and commercial matters required members states to develop mechanisms to promote the enforcement of mediated settlements across borders; some states have adopted rules that allow for the recognition of settlement agreements as the equivalent of arbitral awards.

The New Jersey act defines “arbitral award” as an award that is signed by an arbitrator and that may be the result of a settlement in arbitration, mediation, conciliation, or other form of dispute resolution that involves the assistance of a neutral. The act applies to disputes between U.S. and foreign entities or among U.S. entities, where the property in question is outside the United States, performance or enforcement of the contract occurs outside the United States, or there is some other relation to one or more foreign countries. It further provides that awards issued pursuant to the act are to be enforced by any court of competent jurisdiction, as permitted by law and consistent with the Federal Arbitration Act and the New York Convention.

By defining an agreement reached in mediation, conciliation, or some other dispute resolution mechanism as one that will be afforded the protections of the New York Convention, the New Jersey act takes a progressive step toward driving efficiency and cost-effective dispute resolution in the state. The act provides for a streamlined enforcement process for international commercial disputes and will likely encourage an uptick in mediated agreements achieved in the state.

The New Jersey act also allows for application without regard to whether the place of arbitration is within or without the state so long as one of the following conditions is met:

  1. The underlying arbitration agreement expressly states that the laws of New Jersey shall apply.
  2. In the absence of a choice-of-law provision relating to the intent to arbitrate, the undertaking forms part of a contract, the interpretation of which is to be governed by the laws of New Jersey.
  3. In any other case, in which the arbitral tribunal—or other panel established pursuant to the act—decides that under applicable conflict of laws principles, the arbitration shall be conducted in accordance with the laws of New Jersey.

Thus, clients that favor mediated agreements in the international commercial context are given wide breadth in availing themselves of a New Jersey international dispute resolution scheme for settling their claims. Further, arbitrators’ power to determine that New Jersey law should apply, though it may not be specifically called for in the contract, is expressly set out in the act.

The New Jersey act may go a long way in assuaging concerns over international mediation in the hypothetical example above. Moreover, if there are not sufficient contacts with New Jersey, there are a handful of other statutes that may be of assistance instead.

Looking forward, parties may wish to leverage the New Jersey act in their dispute resolution contract clauses in order to have comfort in using international commercial mediation. And it is reasonable to assume that we should watch for similar statutes to be enacted elsewhere as parties continue to encourage enhanced efficiencies in international commercial dispute resolution.

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