Sophisticated commercial parties are increasingly choosing to incorporate complex, multi-tier dispute resolution provisions into their agreements. Rather than simply specifying the forum in which disputes will be resolved, these provisions typically require parties to submit to one or more alternative dispute resolution (ADR) processes (often including mediation, expert determination, or simple bilateral discussions between senior representatives of the parties). Compliance with these ADR processes is ordinarily expressed to be a prerequisite to commencing arbitration or litigation proceedings.
Although multi-tier dispute resolution provisions do appear to offer contracting parties (at least at the outset of their relationship) some assurance that any future disputes between them will be resolved in a proportionate and cost-effective way, they raise a number of potential issues. Most significantly, in addition to the overriding commercial issue of whether a party should agree to them at all, the English courts have traditionally been reluctant to enforce them. A number of recent cases have, however, helped to clarify the circumstances in which they will be enforceable under English law.
Further, an arbitral tribunal constituted in circumstances where the parties have failed to follow a contractual step apparently intended to be a prerequisite to the validity of the arbitration agreement (that is to say, where the parties have failed to follow the ADR process specified in the dispute resolution clause) may face challenges as to its jurisdiction. Not only do such challenges give rise to otherwise avoidable satellite litigation, they may ultimately cause an award to be invalidated.
Why Use a Multi-Tier Arbitration Agreement?
The option to negotiate a bespoke dispute resolution framework is often a compelling one, particularly for commercial parties who: (i) understand the need to plan for potential disputes from the outset of a contractual relationship; (ii) wish to avoid the time and expense of an arbitration; and (iii) are aware of the high proportion of commercial disputes successfully resolved by settlement.1
However, in most circumstances, parties wishing to engage in ADR are free to do so, regardless of any pre-existing agreement relevant to the resolution of their dispute; in fact, parties are often encouraged to do so, particularly by their legal advisors. Therefore, why seek to prescribe in advance the form(s) of ADR that the parties must put themselves through before having recourse to arbitration?
The most significant reason is that, unlike parties to proceedings before the English courts,2 parties to an arbitration are not obliged to consider ADR as a matter of course.3 Accordingly, incorporating ADR provisions in a multi-tier dispute resolution clause is the most straightforward way to ensure that the parties (at least) think about ADR.
Further, irrespective of the legal position surrounding the enforcement of a multi-tier clause (discussed below), many parties will nonetheless comply with its terms, and therefore submit to the ADR process set out in it. This is particularly true where the parties are keen to preserve their commercial relationship.
Conversely, where the parties’ relationship has irreparably broken down, although they may be unlikely to participate in an ADR process voluntarily, such a process would perhaps be less likely to succeed even if their participation were compulsory. (For example, a multi-tier dispute resolution mechanism which requires a settlement meeting between the chief executives of two companies may seem sensible at the time of negotiating a contract, but may not prove to be an effective dispute resolution technique if the individuals in question have become entrenched in their positions with respect to one another and the relevant issues).
The Enforceability of a Multi-Tier Dispute Provision Under English Law
Until relatively recently, English law simply did not recognise agreements to mediate or to negotiate.4 However, although English law still does not recognise agreements to negotiate in good faith5 and the courts continue to adopt a relatively narrow approach to interpreting agreements providing for ADR,6 a number of recent cases have helped to clarify when they will do so.
First, in Sulamerica, 7 the High Court rejected an argument that a multi-tier dispute resolution clause (which provided for mediation in advance of an arbitration) was enforceable, on the grounds that: (i) the contractual obligation to mediate was not sufficiently certain (as it did not constitute an unequivocal commitment to mediate); and (ii) the agreement did not specify in sufficient detail how the mediation was to operate (including how the mediator was to be selected). This decision was subsequently approved by the Court of Appeal.8
Several months later, in Grant Thornton, 9 the High Court again refused to enforce a multi-tier clause that provided for: (i) an “amicable conciliation” process; (ii) a further round of conciliation facilitated by a panel of three board members if the amicable conciliation process was not successful; and (iii) arbitration, if the additional round of conciliation was also not successful. The judge did not consider that the requirement for “conciliation” was sufficiently certain to constitute a condition precedent to arbitration.
The net effect of the courts’ analysis in Sulamerica and Grant Thornton is that multi-tier arbitration clauses are conceptually no different from other contractual provisions. Otherwise put, the test for enforceability “is not whether a clause is a valid provision for a recognised process of ADR; it is whether the obligations and/or negative injunctions it imposes are sufficiently clear and certain to be given legal effect”.10
In practical terms, to maximise the prospects of a multi-tier arbitration clause being enforceable, it is therefore prudent to consider the following principles:
- Keep the clause as clear and concise as possible.
- Avoid optionality. It is important that the parties be required to participate in the pre-arbitral stages (for example, use definitive language – “must” instead of “may” – and specify the time periods within which particular events must take place).
- Where relevant, ensure that the ADR process is set out in sufficient detail to avoid the need for further agreement. This may be best achieved by reference to a set of pre-existing rules (for example, the CEDR Model Mediation Procedure and Agreement). Also specify the process for appointing any person (for example, a mediator) necessary for the ADR process, including details of how they will be paid.
- Where possible, it is advisable to use (or adapt) one of the standard form multi-tier clauses published by the major arbitral institutions.
Hybrid/Carve-Out Arbitration Clauses
Hybrid and carve-out dispute resolution clauses are similar in structure to multi-tier clauses insofar as they contain multiple “layers” of dispute resolution procedure. However, instead of requiring both parties to proceed through a series of steps, they usually purport to permit one party to follow a different dispute resolution procedure to the other party. Naturally, this often results where parties are of unequal bargaining power (commonly the case in banking transactions), meaning that one party is able to insist upon much broader discretion as to the fora in which it is permitted to bring claims.
The enforceability of hybrid arbitration clauses has recently been the subject of much judicial analysis worldwide, the result of which varies markedly between jurisdictions. For example, the French Supreme Court11, in the Ms X case, has held that, as a matter of French law, a clause in the following terms was unenforceable on the grounds that it gave the bank too wide a discretion to bring a claim in any venue of its choosing:
“Potential disputes between the client and the bank shall be submitted to the exclusive jurisdiction of the Luxembourg courts. The bank reserves the right to bring its claim before the courts of the client’s domicile or any other competent court should it not make use of the clause provided for in the previous sentence”.
However, the English courts have proven more willing to enforce hybrid dispute resolution clauses. For example, in Mauritius Commercial Bank, 12 the High Court held that a one-way jurisdiction clause (permitting the claimant, a Mauritius-incorporated bank, to litigate wherever it chose) was valid. This is particularly striking in light of the factual similarities with the Ms X case decided by the French Supreme Court.
A dispute resolution clause that is not enforceable may as well not exist at all. Rather than lead to the efficient and cost-effective disposal of disputes, a clumsily worded or ill-thought-through attempt to submit to compulsory pre-arbitration ADR can have the opposite effect entirely. In the worst-case scenario, it may also risk the integrity of an arbitral award.
Therefore, it is important to think carefully before agreeing to a multi-tier dispute resolution provision and, when doing so, ensure that it is clearly and concisely drafted.
It is, of course, equally important to ensure that hybrid dispute resolution provisions are drafted with the same care. However, the enforceability of such provisions will depend heavily on the governing law of the relevant contract (even more so than is the case with a multi-tier dispute resolution clause) and the jurisdiction(s) in which claims may be brought.
English law does permit the enforcement of properly drafted multi-tier and hybrid dispute resolution clauses.