What are tiered dispute resolution clauses?
‘Tiered’ dispute resolution or ‘escalation’ clauses are commonly found in commercial contracts in numerous guises. They are clauses which purport to provide for a certain step or process to be followed before the dispute can be referred to arbitration or litigation.
The step or process varies from clause to clause and may be described in vague or detailed terms. However, broadly speaking, such clauses usually involve one or more of: (a) a discussion (sometimes with an explicit reference to ‘good faith’ and for a time-limited period between the parties or their senior representatives/defined individuals) and/or (b) an obligation to engage in mediation or some other form of alternative dispute resolution before the dispute can be referred to arbitration or litigation.
In 2014, we reported on the English High Court decision in Emirates Trading, which found that a clause requiring a “friendly discussion” before arbitration could be commenced in the case of a dispute having arisen, was legally enforceable, and it was assumed that a failure to comply meant that any arbitral tribunal would lack jurisdiction to determine the merits of the dispute.
The NWA case
In the recent case of NWA & FSY v. NVF & Others [2021] EWHC 2666 (Comm), the English High Court was asked to consider the effect of non-compliance in respect of the following clause:
“In the event of a dispute arising…in connection with this Agreement…the…relevant parties…shall first seek settlement of that dispute by mediation in accordance with the London Court of International Arbitration (LCIA) Mediation Procedure...
If the dispute is not settled by mediation within 30 days of the commencement of the mediation…,the dispute shall be referred to and finally resolved by arbitration under the LCIA Rules…”
It was common ground in NWA that there had been no commencement of mediation (nor any attempt by the claiming party to contact the other) before the dispute was referred to arbitration, following which the sole arbitrator issued his arbitration award.
The court was therefore asked to set aside the arbitration award on the basis that the ‘process’ in the above clause (that is, attempt mediation) had not been followed and that the sole arbitrator therefore had no jurisdiction to issue the award. However, the court emphatically declined to set aside the award and elected to follow the decision in Republic of Sierra Leone v. SL Mining Ltd. [2021] EWHC 286 (Comm), rather than follow Emirates Trading.
Thus, the English court held that the failure to follow the process in the clause (that is, not to attempt mediation) did not go to the sole arbitrator’s jurisdiction but instead went to the admissibility of the dispute.
The difference between jurisdiction and admissibility is that the consequence (if any) of the failure to mediate in accordance with the above fell to the sole arbitrator to determine, rather than the court.
The impact of the NWA case
The decision in NWA provides certainty that arbitration agreements will be upheld. This is a positive step as it means provisions which purport to be conditions precedent to arbitration are unlikely to affect the jurisdiction of an arbitration tribunal – unless the clause is drafted such that it explicitly provides this to be the case.
Nevertheless, the decision in NWA does not mean that a party can just ignore the content of such a clause and simply refer the matter to arbitration or litigation.
As the High Court of the Hong Kong Special Administrative Region Court of First Instance recently noted in C v. D [2021] HKCFI 1474 (also citing with approval Republic of Sierra Leone), the terms of tiered dispute resolution clauses are not “unimportant”, and thus the arbitration tribunal “may deal with the question as it sees fit”.
Therefore, it is still open to an arbitration tribunal to find that a clause does contain a condition precedent to arbitration and that a failure to comply means that the arbitration tribunal does not have jurisdiction. Alternatively, the breach for failure to follow the clause may sound in damages, result in costs consequences or the arbitration tribunal ordering any arbitration be stayed to allow the defined alternative dispute resolution process to take place.
Furthermore, although it seems unlikely that the English court would be keen to allow the sort of dispute in NWA to be formulated in a different way to circumvent the NWA case, it may still be possible to do so by raising the issue as an appeal on point of law (that is, the construction of the clause in question) rather than simply challenging jurisdiction. This, of course, would only be possible if the terms of the arbitration agreement or rules pursuant to which the arbitration is conducted do not preclude challenges on points of law (unlike the position in NWA).
Practical guidance
The decision in NWA undoubtedly limits the ability of a party to try and escape its contractual obligations by looking to take technical arguments in relation to non-compliance with a tiered dispute resolution clause.
Despite this, parties that wish to include such a clause in their contract are still well advised to remember that the clause should not be an afterthought when negotiating a contract. Thus, parties should ensure that the clause defines a clear process and is consistent with any time limits in the contract. In the event of a dispute arising, decisions should be taken in a timely manner to allow any process to be followed and thus minimise the ability of the other party to raise technical arguments about compliance and/or jurisdiction.
Alternatively, given the problems that tiered dispute resolution clauses can potentially create, parties may wish to consider whether it may be more desirable to simply agree a clear arbitration or exclusive court jurisdiction clause. Should a dispute then arise, some form of alternative dispute resolution can always be proposed at that time or, indeed, at any point throughout the arbitration or litigation process.
Client Alert 2021-296
