What the Mediation (Civil and Commercial Disputes) Act means for businesses, boards, investors and contracting parties
Date: 23rd July 2026
Sri Lanka’s commercial dispute resolution framework is entering an important new phase. The Mediation (Civil and Commercial Disputes) Act No 13 of 2026 introduces a statutory framework for the mediation of civil and commercial disputes, giving legal recognition to a process that is designed to be facilitative, confidential, and commercially pragmatic.
For businesses, this development is more than a procedural reform. It invites a broader reconsideration of how disputes are managed from the point of contract negotiation through to enforcement. In a market where commercial relationships, reputational risk and management time are often as important as legal rights, mediation offers a structured route to resolve disputes without necessarily escalating them into adversarial proceedings.
Sri Lanka has long recognised the value of alternative dispute resolution, particularly through arbitration. The new mediation framework complements, rather than replaces, litigation and arbitration. Its importance lies in the fact that it creates a legally recognised pathway for parties to attempt settlement in a manner that is private, flexible and capable of preserving business relationships.
Why mediation matters to business
Commercial disputes are rarely confined to legal questions. They often include business pressures, cash-flow concerns, project delays, stakeholder expectations, regulatory sensitivities, and long-term relationship considerations. A court or arbitral tribunal may determine liability and award remedies, but those processes do not always address the wider commercial interests that sit behind a dispute.
Mediation is different. It allows parties to explore solutions that a court or tribunal may not be able to order. These may include revised payment schedules, amended delivery milestones, continued supply arrangements, renegotiated commercial terms, confidentiality commitments, apologies, operational adjustments, or forward-looking settlement structures. For boards and senior management, this flexibility can be valuable where preserving enterprise value is more important than securing a narrow legal victory.
Dispute resolution clauses will require closer attention
One of the most commercially significant features of the Act is its treatment of mediation agreements. Where parties have agreed to mediate disputes, the Act contemplates that a court will not entertain proceedings unless a certificate of non-settlement has been produced. This gives practical significance to mediation clauses and means they should no longer be treated as standard boilerplate.
Businesses should consider whether their dispute resolution clauses clearly state when mediation must be commenced, how the mediator or mediation service provider will be selected, what timeline will apply and how mediation will interact with arbitration or litigation if settlement is not achieved.
It is also important to preserve access to urgent relief. The Act recognises that parties may still need to approach court in limited circumstances, including for interim or injunctive relief. This is critical in commercial matters where delay may cause irreparable harm.
Confidentiality as a strategic advantage
Confidentiality is often one of the principal reasons commercial parties choose alternative dispute resolution. The Act reinforces this by requiring mediators, parties and other participants to maintain confidentiality in respect of matters discussed during mediation. Statements made in mediation are generally treated as without prejudice and are not admissible in court, arbitration or other dispute resolution proceedings, subject to recognised exceptions such as disclosure required by law or enforcement of a settlement agreement.
This is highly relevant for businesses. Commercial disputes may involve pricing models, trade secrets, intellectual property, customer information, shareholder matters, internal governance issues, financing arrangements and regulatory concerns. The ability to discuss these matters in a protected setting can reduce reputational risk and allow parties to speak more candidly about settlement options.
The prohibition on audio and visual recording, whether mediation is conducted physically or virtually, further strengthens the privacy of the process. This is particularly important as commercial parties increasingly use technology-enabled dispute resolution mechanisms.
A process centered on decision-makers
The Act places emphasis on the direct participation of parties. Where a party is a body corporate, Government department or legal person, it must be represented by an officer expressly authorised to represent the party and reach a settlement. This is a practical and important requirement.
Mediation is most effective when those at the table have authority to make decisions. In commercial disputes, delay often arises because negotiations are conducted through layers of correspondence without the involvement of individuals who can evaluate business risk and approve settlement. By requiring appropriate authority, the Act encourages meaningful engagement and reduces the likelihood of mediation becoming a purely formal step before litigation.
Legal advisers will nevertheless continue to play a significant role. Counsel can assist in assessing legal risk, preparing the client for mediation, structuring settlement proposals, identifying enforceability issues and ensuring that any settlement agreement accurately records the rights and obligations of the parties.
Costs, prescription and litigation strategy
The Act also introduces incentives for constructive participation. In awarding costs in civil or commercial proceedings, a court may consider whether a party unreasonably refused to participate in mediation. This provision may influence litigation strategy, particularly where a party declines mediation without a sound commercial or legal reason.
Importantly, the Act provides that the mediation period is excluded when calculating prescription. This reduces the risk that a party will be prejudiced by attempting settlement before commencing formal proceedings. For businesses, this is a valuable protection because it allows genuine settlement discussions to take place without compromising the preservation of legal rights.
Together, these provisions are likely to encourage earlier engagement with disputes. Parties may be less inclined to adopt purely tactical positions if refusal to mediate could carry cost consequences and if participation in mediation does not undermine limitation protections.
Court-referred mediation and the future of commercial litigation
A notable feature of the Act is the ability of courts to refer civil or commercial disputes, or parts of such disputes, to mediation where appropriate. This is potentially significant for Sri Lanka’s dispute resolution culture. It recognises that not every dispute before court necessarily requires a fully contested adjudication.
Court-referred mediation may be especially useful where the legal issues are intertwined with commercial interests, where parties have an ongoing relationship, where the dispute can be narrowed, or where early settlement would reduce costs and delay. The Act also provides a timeframe for court-referred mediation, with the Mediation Service Provider required to conclude the process within 60 days from receipt of the court order, subject to extension where there is a prospect of settlement.
If used effectively, court-referred mediation could reduce the burden on the court system while giving commercial parties a structured opportunity to resolve disputes at an earlier stage.
Settlement agreements: flexibility with enforceability
A common concern with mediation is whether a settlement reached through the process will be enforceable. The Act addresses this by providing for settlement agreements to be binding and by allowing a party to apply to have such an agreement entered as a decree of the High Court within the stipulated timeframe.
This mechanism is important because it bridges the gap between commercial flexibility and legal certainty. Parties can craft a settlement that reflects their business needs, while retaining the ability to convert that settlement into an enforceable court decree if necessary.
The Act also recognises grounds on which a settlement agreement may not be entered as a decree of court, including incapacity, lack of finality, serious breach of mediator standards, undisclosed conflict of interest, public policy concerns, and matters that are not capable of settlement by mediation under Sri Lankan law. These safeguards are important to maintain the integrity of the process.
Implications for foreign investors and cross-border transactions
For foreign investors and counterparties entering into Sri Lankan transactions, the Act provides an additional layer of comfort. It is worth noting that Sri Lanka gave effect to its ratification of the Singapore Convention on mediation (the United Nations Convention on International Settlement Agreements resulting from Mediation) by the enactment of Act no. 5 of 2024, which provides for the recognition and enforcement of international mediation settlement agreements. A statutory mediation framework which recognizes settlement agreements resulting from the mediation of commercial disputes, whether conducted locally or overseas, signals that Sri Lanka is continuing to develop its alternative dispute resolution architecture in line with modern commercial expectations.
In cross-border transactions, mediation can be particularly useful where parties wish to preserve a commercial relationship, avoid publicity, manage cultural or communication differences, and reach a solution that is faster and less costly than contested proceedings. Where mediation is combined with arbitration or litigation as part of a multi-tier dispute resolution clause, it can operate as an early filter before disputes escalate.
However, careful drafting of dispute resolution clauses in contracts will be essential. Parties should ensure that such clauses are clear, workable and aligned with the overall dispute resolution strategy of the transaction. Ambiguous escalation clauses can themselves become a source of dispute.
Practical steps for businesses
Businesses should consider taking the following steps in light of the new Act:
Conclusion
The Mediation (Civil and Commercial Disputes) Act marks a significant development in Sri Lanka’s commercial legal landscape. Its value lies not merely in creating another dispute resolution mechanism, but in encouraging a more commercially constructive approach to conflict.
For businesses, the Act presents an opportunity to reduce dispute-related costs, protect confidential information, preserve commercial relationships, and achieve outcomes that are tailored to business realities. For boards and senior management, it also reinforces the importance of treating dispute resolution as part of governance, risk management, and value preservation.
As commercial transactions and stakeholder expectations continue to evolve, the ability to resolve disputes efficiently and confidentially will be an increasingly important business advantage. The new mediation framework gives Sri Lankan businesses and their counterparties a timely and practical tool to do so.
Ayomi Aluwihare
Partner
Shreyan Fernando
Associate