Reed Smith Client Alert

‘Tiered’ dispute resolution or ‘escalation’ clauses are increasingly common in commercial contracts. Their intention is clear: to try and ensure the parties engage in commercial discussions or a form of alternative dispute resolution before commencing a formal arbitration or litigation process in the event of a dispute. While such intention is clearly sensible, the effects of non-compliance have now given rise to a number of English court judgments. Recent developments are examined below.

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.