Can mediation be mandatory before arbitration in a Canadian contract dispute, and what happens if one party refuses?

Based on Canadian arbitration and dispute resolution practices, here is a breakdown of your rights, cost obligations, and timeline regarding the proposed pre-arbitration mediation.

Can you insist on mediation or skip it?
Your ability to skip or insist on mediation depends entirely on the specific verbs used in your contract's dispute resolution clause.

If the contract says "Shall" or "Must" mediate: Mediation is a mandatory condition precedent. You cannot skip it. If you attempt to bypass mediation and start arbitration immediately, the other side can apply to have your arbitration "stayed" (paused) until the mediation requirement is fulfilled. Conversely, if you want to mediate and they don't, you can insist upon it because the contract requires it.​

If the contract is silent or says "May": Mediation is voluntary. You are not legally forced to pause for mediation before commencing arbitration. However, skipping it carries a hidden risk: Canadian courts and arbitrators can penalize a party for "unreasonably refusing" to mediate. This penalty usually comes in the form of an adverse cost award (paying the other side's legal fees) at the end of the case, even if you win the argument on its merits.​

Does the arbitration clause still govern if mediation fails?
Yes. The arbitration clause remains fully binding and enforceable.
Mediation is simply a preliminary step. If it fails to resolve the dispute, the "condition precedent" is deemed satisfied, and the arbitration clause effectively "activates". At that point, either party can compel the other to submit to binding arbitration as originally agreed. The contract does not become void; the process simply moves to the next stage.​

Timeline and Cost Implications
Pre-arbitration mediation generally alters the resources required as follows:

Timeline: Mediation typically suspends the "limitation period" (the legal clock for bringing a claim) while it is ongoing, meaning you won't lose your right to sue/arbitrate while negotiating. While it adds a frontend delay (often 1–3 months to organize), it avoids the 12–18+ month timeline of a full arbitration if it succeeds.​

Mediation Costs: Unless the contract states otherwise, mediation costs (mediator's fee and venue) are shared equally (50/50) between the parties. Each party pays their own lawyer.​

Arbitration Costs: If you proceed to arbitration, the cost structure changes. Canadian arbitrators generally follow the "loser pays" principle. This means the unsuccessful party is often ordered to pay a significant portion (typically 60–90%) of the winner's legal fees and arbitration costs.​

Who bears the costs if you proceed?
If mediation fails and you move to arbitration, the costs are generally treated separately:

Sunk Costs: The money spent on the failed mediation is usually gone; parties rarely recover their share of mediation fees in the subsequent arbitration award unless one party acted in bad faith during the mediation.

Final Allocation: The costs of the arbitration itself will likely be borne by the losing party. Therefore, if you refuse mediation, lose the arbitration, and the arbitrator finds your refusal to mediate was unreasonable, you could face a "double whammy" of paying the judgment plus an elevated portion of the other side's legal costs