Can The Courts Order A Party To Go For Mediation?

By Chu Ai Li, Partner of Azman Davidson & Co.

Mediation is a dispute resolution process which involves an external party (the mediator) helping to facilitate settlement negotiations between two or more disputing parties. The object of mediation is for the disputing parties to try to reach an agreement to settle their disputes without the need for the parties to resort to formal dispute resolution processes such as arbitration and litigation. Mediation has clear advantage over formal dispute resolution processes in that mediation takes up significantly less time and a fraction of the costs as compared to formal dispute resolution processes.

A number of modern standard form construction contracts have included provisions for mediation. These provisions include clause 34.0 of the PAM Contract 2018[1], clause 35.0 of the AIAC Standard Form of Building Contracts 2019[2] and clause 48.6 of the CIDB Standard Form of Contract for Building Works 2022[3]. It is also becoming increasingly common for bespoke construction contracts to include mediation clauses.

Despite the inclusion of mediation clauses in construction contracts, it is not a common practice in the Malaysian construction industry for project owners and their contractors to mediate their disputes. This is because the contract provisions for mediation are commonly worded in a non-mandatory or permissive way (for example, the parties “may” refer their disputes to mediation) and usually state that the reference of disputes to mediation shall not be a condition precedent for arbitration (see, for example, clause 34.2 of the PAM Contract 2018[4] and clause 35.2 of the AIAC Standard Form of Building Contracts 2019[5].

In the event a project owner and a contractor have entered into a construction contract containing a mediation clause and the contractor is keen to refer their dispute to mediation but the project owner is not keen to do so, do the Courts have the power to order the project owner to comply with the mediation clause?

The decision of the Singapore High Court in the recent case of Maxx Engineering Works Pte Ltd v PQ Builders Pte Ltd [2023] SGHC 71 has paved the way for a party to a construction contract containing a mandatory mediation clause to seek a court order to compel the other party to refer their disputes to mediation in accordance with the mediation clause.

The Maxx Engineering Works Pte Ltd v PQ Builders Pte Ltd case involved a sub-contract between a main contractor and its sub-contractor. The sub-contract contained this mediation clause:

54. If a dispute arises between the parties under or out of or in connection with this Sub Contract [sic] or under or out of or in connection with the Sub-Contract Works, the parties shall endeavor to resolve the dispute through negotiations. If negotiations fail, the parties shall refer the dispute for mediation at the Singapore Mediation Centre in accordance with the Mediation Rules for the time being in force. For the avoidance of doubt, prior reference of the dispute to mediation under this clause shall not be a condition precedent for its reference to arbitration by either party nor shall it affect either party’s rights to refer the dispute to arbitration under Clause 55 below.

Without referring the dispute to mediation, PQ Builders Pte Ltd (“PQB”) referred the dispute between the parties to arbitration in accordance with the arbitration clause found in the sub-contract. Maxx Engineering Works Pte Ltd. (“MEW”) filed a court action seeking an order to compel PQB to refer the dispute to mediation on the basis that the parties were legally obligated under clause 54 of the sub-contract to do so.

In the court action, PQB argued that the parties were not under a contractual obligation to refer their dispute to arbitration first before resorting to arbitration, relying on the part of the provision that expressly stated that reference of a dispute to mediation shall not be a condition precedent for reference of a dispute to arbitration. In response, MEW argued that the use of the wording “shall refer” in clause 54 (“the parties shall refer the dispute for mediation”) which was in a similar vein as the arbitration clause (“the parties shall refer the dispute to arbitration”) meant that the parties must refer their dispute to both mediation and arbitration.  MEW’s submission was not that the parties must mediate before proceeding with arbitration but that the parties must refer the dispute to mediation even if the parties had commenced arbitration. The High Court judge accepted MEW’s argument and held that clause 54 imposed a legal obligation on the parties to refer their dispute to mediation if negotiation had failed. Applying the general principles and considerations for specific performance, the High Court judge granted an order for specific performance to compel PQB to perform its contractual obligation to refer the dispute to mediation.

In summary, the question whether the Courts have the power to compel a party to a construction contract containing a mandatory mediation clause to go for mediation has been answered with a rousing “Yes” in the Singapore High Court decision of Maxx Engineering Works Pte Ltd v PQ Builders Pte Ltd. However, it is uncertain whether the Courts would exercise such power to compel a party to mediate in a case involving a non-mandatory mediation clause such as the mediation clauses found in the Malaysian standard form construction contracts.

[1] 34.1 Upon the written agreement of both the Employer and Contractor, the parties may refer any dispute for mediation. If the parties fail to agree on a mediator after twenty one (2 1) Days from the date of the written agreement to refer the dispute to mediation, any party can apply to the President of Pertubuhan Akitek Malaysia to appoint a mediator. Upon appointment, the mediator shall initiate the mediation in accordance with the PAM Mediation Rules or any modification or revision to such rules.

[2] 35.1 Notwithstanding Clause 34.1, the Employer and the Contractor, or either of them, may refer their dispute as to any matter arising under or out of or in connection with the carrying out of the Works and whether in contract or in tort, or as to any direction or instruction or certificate of the CA or as to contents of or granting or refusal of or reasons for any such direction, instruction or certificate, for mediation in accordance with the AIAC Mediation Rules.

[3] (a) Parties may refer dispute or difference of whatsoever kind between the Employer or the Superintending Officer and the Contractor in connection with or arising out of the Contract or, whether during the execution of the Works or after their completion and whether before or after any determination of the Contractor’s employment, to mediation by way of notice to the other party with a copy to the Superintending Officer of his intention to refer disputes or difference to mediation (hereinafter referred to as “Request for Mediation”).

[4] 34.2 Prior reference of the dispute to mediation under Clause 34.1 shall not be a condition precedent for its reference to adjudication or arbitration by either the Contractor or the Employer, nor shall any of their tights to refer the dispute to adjudication or arbitration under Clause 37.0 of these Conditions be in any way prejudiced or affected by this clause.

[5] 35.2 For the avoidance of doubt, prior reference of the dispute to mediation under Clause 35.1 shall not be a condition precedent for its reference to arbitration by either the Contractor or the Employer, nor shall any of their rights to refer the dispute to arbitration pursuant to Clause 34.0 be in any way prejudiced or affected by this Clause.