The Perils of Multi-Tier Dispute Resolution Clauses
Vasilis F.L. Pappas, FCIArb
Partner, Bennett Jones
In recent years, multi-tier dispute clauses have become popular among both counsel and clients in large commercial agreements, particularly where parties have agreed to resolve disputes by arbitration.
These clauses provide that when a dispute arises, the parties must undertake certain mandatory steps prior to commencing arbitration proceedings in an attempt to amicably settle the dispute. These steps normally specify negotiation between senior management representatives and/or the use of mediation. These clauses have become widespread across a variety of industries, particularly in complex construction contracts, joint venture agreements, and other complex agreements where longer-term relationships are contemplated such as in the energy and mining industries.
Such clauses tend to be popular with clients who are keen on any process with the potential to minimize the likelihood of full-blown arbitration proceedings (and related expenditures). And while they may have some advantages, multi-tier dispute resolution clauses also pose a number of serious drawbacks and risks that are unfamiliar to many counsel. They are also frequently abused by parties seeking to avoid, delay, or render more costly the resolution of disputes.
This article examines the benefits and risks associated with multi-tier dispute resolution clauses, while offering practical suggestions on how those risks can be minimized.
What is a Multi-Tier Dispute Resolution Clause?
Multi-tier dispute resolution clause requires parties to undertake certain mandatory steps in an effort to settle a dispute prior to commencing formal legal proceedings. While they can be used in clauses that contemplate the resolution of disputes by way of either litigation or arbitration, they are most frequently used in agreements that contemplate arbitration.
In its simplest form, a multi-tier clause will require parties to engage in a single step prior to commencing arbitration, such as mandatory negotiations among party representatives for a defined period of time before either party can resort to arbitration. In its more complex forms, a multi-tier clause may require parties to undertake multiple mandatory steps prior to commencing arbitration, such as: negotiation by lower-level representatives, followed by negotiation by higher-level representatives, followed by formal mediation or conciliation proceedings, all within defined periods of time. By including a multi-tier clause in a contract, the parties signal that efforts should be made to settle a dispute prior to arbitration, and that arbitration will only be sought as a last resort.
Benefits of Multi-Tier Clauses
There are a number of potential benefits to multi-tier dispute resolution clauses, and it is easy to see why they are often so popular with clients. For instance:
- They provide the parties with a contractually mandated opportunity to resolve disputes amicably without incurring the costs associated with arbitration proceedings;
- They provide a contractual “cooling off period” during which the parties can reassess and re-evaluate their positions in respect of a dispute, which can often, upon reflection, enable the parties to identify ways to strike a mutually acceptable compromise that might otherwise be left undiscovered if the parties simply march on to arbitration;
- They can maximize the likelihood of fruitful, beneficial settlement discussions before entering the antagonistic and contentious context of an arbitration proceeding, during which it can often be difficult to set-aside emotions and animosity to strike a compromise;
- They can be especially useful in longer-term commercial relationships which the parties wish to avoid souring through contentious arbitration proceedings, by seeking amicable resolutions to disputes that inevitably arise from time-to-time; and
- They can enable the parties to narrow the issues to be arbitrated, by settling those issues in which they find common ground in advance of arbitration, resulting in a more efficient and cost-effective arbitration involving only those issues the parties are unable to resolve.
Thus, there are undeniable benefits to multi-tier dispute resolution clauses in which the parties are contractually compelled to undertake efforts to settle disputes amicably before proceeding to the antagonistic and contentious forum of arbitration.
Drawbacks to Multi-Tier Clauses
Unfortunately, multi-tier dispute resolution clauses also pose a number of risks that should be given careful consideration. For instance:
- The requirement of pre-arbitration negotiations, where the parties are entrenched in their positions, can lead to an unnecessary waste of time and expense;
- The obligation to conduct pre-arbitration negotiations can impair a party’s ability to secure interim measures in time-sensitive disputes;
- In complex cases, where claims are advanced in arbitration that were not specifically identified and discussed during pre-arbitration negotiations, a tribunal’s jurisdiction over those claims or the admissibility of those claims could be challenged;
- Where additional claims are discovered or developed after an arbitration has been commenced, there could be objections to a tribunal’s jurisdiction over those claims or the admissibility of those claims;
- In cases where a respondent in an arbitration advances a counterclaim that was not specifically raised or discussed during per-arbitration negotiations, the tribunal’s jurisdiction over those counterclaims or the admissibility of those counterclaims could be challenged;
- Where a limitation period is set to expire before the contractually mandated negotiation period, a claim can be time-barred from being advanced altogether; and
- Multi-tier clauses are often abused by parties seeking to prevent or delay the commencement of arbitration proceedings by endlessly arguing the opposing party has not negotiated in “good faith” during the pre-arbitration negotiations or with the genuine bona fide intent to actually achieve a settled resolution, has not disclosed sufficient information during the pre-arbitration negotiations to allow meaningful negotiations to take place, and so on. In some cases, these tactics can delay the commencement of arbitration proceedings. In others, depending on the language in a multi-tier clause, it can prevent the commencement of arbitration proceedings altogether, leaving a dispute in indefinite purgatory.
Perhaps the single greatest risk associated with multi-tier clauses is that a number of courts and arbitral tribunals around the world have held that the pre-arbitral steps in multi-tier clauses constitute jurisdictional conditions precedent to the commencement of arbitration. In other words, they have ruled that where a party fails to strictly comply with the pre-arbitral steps in a multi-tier clause, a tribunal does not have jurisdiction to hear a dispute.
This can have devastating consequences in circumstances where it is determined that a party has not strictly complied with the pre-arbitration steps in a multi-tier clause. For example, if a claimant commences an arbitration without strictly complying with the pre-arbitral steps in a multi-tier clause, and a limitation period expires while the arbitration is pending, a finding that the pre-arbitral steps constituted jurisdictional conditions precedent can result in the arbitration being dismissed and the claimant being time-barred from pursuing its claims.
Similarly, if a claimant fails to carry out pre-arbitral steps in a multi-tier clause and successfully obtains a final award against the respondent, a determination by a national court after the conclusion of the arbitration that the pre-arbitral steps constituted jurisdictional conditions precedent could result in the award being set-aside or not enforced for lack of jurisdiction.
Other national courts and arbitral tribunals have been less extreme in their views regarding the lack of compliance with pre-arbitral steps in multi-tier clauses, holding that while such pre-arbitral steps do not constitute jurisdictional conditions precedent, they do still constitute binding conditions precedent and failure to comply with them in respect of any claims could result in those claims being dismissed by a tribunal for lack of admissibility. This could again lead to a situation where a claim becomes time-barred if a limitations period expires while an arbitration is pending, or significant wasted time and resources arbitrating claims that are ultimately determined to be inadmissible for failure to comply with pre-arbitral steps in multi-tier clauses.
As a result, while multi-tier dispute resolution clauses do have a number of benefits, they do bring with them significant risks.
Practical Suggestions When Negotiating Multi-Tier Clauses
In light of the risks associated with multi-tier clauses, consideration should be given to whether a multi-tier clause should be included in an arbitration clause at all. Indeed, there is nothing to prevent the parties from seeking to engage in amicable negotiations or mediation prior to—or even after—the commencement of arbitration proceedings, regardless of whether the parties’ dispute resolution clause formally requires them to do so.
However, in the event that a multi-tier clause is desired, it is strongly recommended the clause should specify precisely what the parties’ obligations are, and that efforts should be made to avoid ambiguous or generic statements simply requiring that the parties negotiate or undertake mediation proceedings prior to the commencement of arbitration. For example, the clause should specify:
- what event triggers the commencement of the negotiation or mediation period (g., a written notice);
- the precise period over which the parties must negotiate or mediate prior to commencing arbitration;
- precisely what party representatives must participate in the negotiations or mediation (g., the parties’ chief executive officers);
- precisely how the negotiations or mediation are to take place (g., in person, by telephone, by virtual platform, or otherwise);
- precisely how many negotiation or mediation sessions are required, if any; and
- what event triggers the termination of the negotiation or mediation requirement (g., the expiration of a defined period of time).
Where the parties incorporate negotiation or mediation in a multi-tier clause, they should also avoid using ambiguous statements that require the parties to negotiate or mediate in “good faith”, to avoid either party being able to attempt to pre-empt an arbitration by asserting that, while its counterpart may have participated in negotiation or mediation as required, it did not do so bona fide or in good faith. Likewise, efforts should be made to avoid provisions requiring the disclosure of detailed information relating to disputes during the pre-arbitral steps of a multi-tier dispute resolution process that could enable a party to prevent the commencement of an arbitration by endlessly alleging that insufficient information has been disclosed.
Additionally, where the parties wish to incorporate multiple tiers of pre-arbitral steps (e.g., negotiation among low-level representatives, followed by negotiation among higher-level representatives, followed by mediation), the transition between the different tiers should be outlined in detail so that the sequence of procedures can be clearly followed and enforced.
Finally, in light of the case law that has emerged from a number of jurisdictions (including, most prominently, the United States), it is advisable that the multi-tier clause state that it is not a binding jurisdictional condition precedent to the commencement of arbitration.
Practical Suggestions Before Initiating Arbitration
When a dispute arises, careful attention should be paid to whether there is a multi-tier clause in the parties’ agreement that will need to be satisfied prior to commencing an arbitration. Failure to do so may result in an objection from the opposing party that the tribunal has not been appropriately vested with jurisdiction or that the claims that have been advanced are inadmissible. These allegations may result in the termination of the arbitration or, at worst, lead to the set-aside or non-enforcement of an award after it has been issued.
To minimize this risk, the following steps should be undertaken, to the extent possible:
- when a dispute arises, all limitation periods or time considerations should be immediately reviewed, so that ample time is provided for the pre-arbitral steps to be carried out to avoid any time-bar or prescription issues;
- all steps required by the multi-tier clause should be carefully performed prior to commencing arbitration;
- the commencement, performance and completion of all pre-arbitral steps should be carefully memorialized in writing so that there is a clear documentary record of the parties’ compliance;
- prior to commencing the pre-arbitral steps, the claims that will be advanced in the arbitration should be carefully identified and assessed, with expert assistance if at all possible, to ensure that all claims that will be made in the arbitration form part of the pre-arbitral negotiations or mediation, and written notice should be provided of all such claims prior to commencing the pre-arbitral procedure. This will prevent a counterparty from asserting that specific claims made in the arbitration were not previously raised as required by the multi-tier clause to challenge a tribunal’s jurisdiction or to challenge the admissibility of any claims made. If insufficient time is available to undertake this prior to commencing the pre-arbitral steps, the disputes at issue should be framed as broadly as possible in the party’s notice and during the negotiations or mediation to ensure that all claims raised in the arbitration can be linked back to the pre-arbitration discussions; and
- in the event that the respondent is served with notice of the commencement of the pre-arbitral steps by the claimant and the respondent anticipates it will advance counterclaims in a future arbitration, the respondent should ensure that all potential counterclaims form part of the pre-arbitral negotiations or mediation and that written notice of them is provided so that the claimant cannot seek to have such counterclaims dismissed for lack of jurisdiction or lack of admissibility. Ideally, the respondent should identify and assess the counterclaims that will be advanced in the arbitration, with expert assistance if at all possible, to ensure that all such counterclaims specifically form part of the pre-arbitral procedure. However, if insufficient time is available, the counterclaims should be framed as broadly as possible to ensure that all counterclaims raised in the arbitration can be linked back to the pre-arbitration discussions.
It is recommended that parties engage experts well in advance of the commencement of the pre-arbitration procedures required by a multi-tier dispute resolution clause, if at all possible. It is not unusual for parties to defer the engagement of experts until after an arbitration has been commenced, and for those experts to identify additional claims or to further develop claims that have been previously advanced. Given the risk that such claims could be dismissed for lack of jurisdiction or admissibility if they are not specifically identified during the pre-arbitration negotiation or mediation phase, it is recommended that those experts be engaged and their views canvassed well in advance of commencing a dispute resolution process under a multi-tier clause so that all potential claims are captured in the pre-arbitration negotiations or mediation.
Multi-tier dispute resolution clauses have real potential benefits. However, they should be incorporated in any commercial arrangement with a high degree of caution given the risks that they pose. Generic or ambiguous boiler-plate clauses should be avoided at all costs.
By the same token, when a dispute arises in the face of a multi-tier dispute resolution clause, counsel should carefully ensure that they are strictly complied with given the very serious ramifications associated with non-compliance. Pre-arbitral steps in multi-tier clauses cannot be ignored or avoided, and careful attention should be paid to any such clauses.
Biography of the author:
Vasilis Pappas is head of Bennett Jones’ Arbitration, International Arbitration, and Investor-State Arbitration Practice Groups. He is a recognized leader in the fields of domestic and international arbitration, and has represented companies all over the world in complex disputes in a diverse range of sectors, with particular expertise in construction disputes. Prior to joining Bennett Jones, Vasilis practiced for eight years in New York City with a leading international law firm. He now works out of Bennett Jones’ Vancouver and Calgary offices, and is an adjunct professor at the University of Calgary’s Faculty of Law, where he teaches domestic and international commercial arbitration. Vasilis also sits as arbitrator in a wide range of disputes, is a Fellow of the Chartered Institute of Arbitrators, and is on the Canadian roster of arbitrators for the International Chamber of Commerce and the Vancouver International Arbitration Centre, among other institutions.
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