Multi-Tier Dispute Resolution Clause

Introduction

Multi-tiered dispute resolution clauses are even termed escalation, multi-step, or “ADR first” agreements. Both parties understand that if an issue arises, they will use a process-based approach, which may include negotiation, mediation, or conciliation, along with expert determination or arbitration, if appropriate.[1] These preliminary procedures are designed to help both parties to resolve any disputes before taking the subject to court or arbitration. Such articles often begin with an obligation to negotiate, including bringing in top management or involving being involved in conciliation or mediation processes. The adjudicatory process (arbitration) is the final tier of these clauses to speed up the resolution of disputes, and it is employed only if the initial stages have failed. Multi-tier provisions are found in all of these types of construction contracts, service contracts that need specialised knowhow, and turnkey contracts.[2]

One of the most critical questions is whether the non-adjudicatory portions of these articles, such as the tiers requiring dialogue and/or mediation, are mandatory and enforceable. Let us say a party does not do anything, in the beginning, to move forward in the talks or mediation, and submits an arbitration request instead. These initial efforts are a requirement to further arbitration, correct? The outcome of this lawsuit will be decided by tribunals or courts. Should the parties complete the preliminary stages of a conflict before initiating arbitration proceedings? Respondents in several International Chamber of Commerce (ICC) cases have taken exception to the request’s admissibility because they could not comply with the arbitration requirement, which required them to negotiate amicably.[3] A court will grant a motion to proceed with a case only if it believes that an arbitration agreement may exist and will allow the Arbitral Tribunal to make the ultimate determination of whether the parties have upheld their end of the agreement.

This clause is of critical importance, but it must be crafted with great care. If the wording is unclear, then it could lead to uncertainty and the unenforceability of the agreement. While scholars, courts, and Arbitral Tribunals have been split on the enforceability of such consensual and non-deterministic forms of conflict resolution. One school of thought holds that the non-determinate nature of the clauses makes them impossible to enforce, while the other holds that the parties’ choice of such clauses should be given precedence and so be binding and enforceable.[4]

Commonly adopted tiers in multi-tier clauses

When used to refer to alternative dispute resolution (ADR), it can be defined as a variety of dispute resolution techniques that do not include the court or arbitration. As such, avoid the imposition of any mandatory obligation.[5] These are in contradistinction of arbitration and litigation, which are judicial processes leading towards binding obligations; therefore, categorised as more formal processes. Some of the commonly adopted ADR methods that form part of the hierarchy in a multi-tiered dispute resolution clause leading finally to an arbitration process are —

Negotiation.— Negotiation is a well-accepted technique in commercial contracts.  It is a non-binding method in which direct discussions are used to arrive at a probable conclusion, and a third party is not used. A properly written conflict resolution clause that describes the subject-matter to be negotiated and the negotiating method and composition of the group may reduce or even eliminate the chances of the disagreement lingering. While a poorly conceived clause could cause any binding dispute resolution mechanism to be delayed, on another side, appropriately crafted clauses could expedite the process.[6]

Mediation.— Mediation envisions a skilled expert who serves as a neutral facilitator by aiding the parties in reaching a mutually agreeable settlement to the problem, all while staying outside the resolution process itself.[7] This type of practice is sometimes referred to as mediation, which involves a voluntary agreement on the side of both parties or a court-sponsored program. Aiding in the consolidation of trust between the parties and removing any psychological barriers results from the technique. To ensure that the third party’s intervention is not counterproductive and gives the parties control, the procedure begins with the parties’ consent.

Expert Determination.— A third person facilitated process expert determination is similar to arbitration – it results in a binding decision.[8] The critical distinction between the two, depending upon immunity from liability. An arbitrator in arbitration has immunity from liability, whereas an expert must bear liability for carelessness. Even further, the difference results from the way the binding judgment is enforced. In the absence of voluntary compliance by the parties, an arbitral award is enforceable under the New York Convention on the Enforcement of Foreign Arbitral Awards, 1958[9], but an expert determination can only be enforced through judicial actions.

Dispute Adjudication Boards.— Dispute Adjudication Boards (DABs) are created under a distinct agreement. Many firms have adopted the International Federation of Consulting Engineers’ model clauses and procedures since they are considered an industry standard (FIDIC). The DABs are dedicated to resolving any concerns that emerge while the contract is in effect, and they keep this up for the duration of the agreement. These Boards serve multiple purposes; they are both preventive and restorative. The usage of these particular terms in international construction and engineering contracts is increasing. When it comes to large initiatives supported by the World Bank, such forums can be found with a total value above $50 million.[10] One of the ICC’s Rules, called the ICC Dispute Board Rules, includes three alternative Dispute Boards, which it terms the Dispute Resolution Board, the Dispute Adjudication Board, and the Combined Dispute Board.[11]

Arbitration.— The private technique of conflict settlement known as arbitration is a final and binding solution when all parties agree. Unlike Judges, arbitrators appointed by the parties via an agreement do not have to adhere to the same strict standards of procedure and law that apply in courts but can instead follow the procedure and substantive law that fits the particular situation as spelled out in the arbitration agreement’s framework. All of these international agreements, as well as national arbitration legislation and even the rules that govern arbitrations, have all helped increase the binding nature of the process.

Indian position in terms of enforceability

Although frequently included in dispute resolution clauses, the legal status of pre-arbitration procedures in India is uncertain. According to the data, courts have had to deal with this topic multiple times, and there have been contradictory results. One approach, in general, has been that of the courts, which generally have taken two approaches. For the most part, courts have ruled that all pre-arbitration procedures must be carried out, including things like gathering evidence and issuing subpoenas. Courts, in general, consider voluntary and non-mandatory pre-arbitration steps to be applicable (the minority opinion).

In M.K Shah Engineers & Contractors v. State of M.P.[12], the Supreme Court held that the prerequisites procedures mentioned in the arbitration clause are essential in nature. Parties cannot bypass or skip the prerequisites to invoke arbitration directly.

In Simpark Infrastructure (P) Ltd. v. Jaipur Municipal Corpn.[13], the Rajasthan High Court held that the procedure of dispute resolution has to be made a condition precedent for invoking arbitration. In this case, the clause stated that the parties will resolve the dispute amicably as a condition precedent.

In Tulip Hotels (P) Ltd. v. Trade Wings Ltd.[14], the Bombay High Court held that the pre-arbitral step was mentioned in the clause as a mandatory procedure to be followed for invoking arbitration. The procedure mentioned in the clause is mandatory in nature to invoke arbitration.

In Nirman Sindia v. Indal Electromelts Ltd.[15], the Kerala High Court on the escalation clause was of the opinion that:

  1. … When the parties to a contract agree to any special mode for resolution of the disputes arising out of the agreement and they are bound to comply with the mode prescribed under the agreement. Without resorting to the first step provided for the resolution of the dispute in the agreement they cannot jump to the second step or to the final step to settle the disputes between the parties.

However, some of the High Courts have taken a divergent view on the same “Whether the clause is mandatory or directive in nature.” The Bombay High Court while analysing the issue in S. Kumar Construction Co. v. Municipal Corpn. of Greater Bombay[16] held that the language of the clause was not able to establish a mandatory nature of pre-arbitral steps.

On the other side, the Delhi High Court (DHC) has adopted a firm position. The Delhi High Court in legion of cases has held that the pre-arbitral steps or multi-tier dispute resolution clause is directive in nature. In Ravindra Kumar Verma v. BPTP Ltd.[17] the Court has considered pre-arbitral requirements as a directive and not mandatory. In Sikand Construction Co. v. SBI[18] and Saraswati Construction Co. v. East Delhi Coop. Group Housing Society Ltd.[19] and a legion of cases, the Delhi High Court has reiterated the pre-arbitral steps as not mandatory requirement for invoking arbitration.

Analysis

Courts and arbitrators have employed a wide range of dispute resolution mechanisms in the event of multi-tier clauses. Many times, emphasis was put on discovering practical responses to the many specific situations, as opposed to a focus on doctrinal concerns and on more exact legal concepts. Arbitrators should ultimately be permitted to make this decision if there is a legitimate arbitration agreement in place.[20] This illustrates the principle of kompetenz-kompetenz. Arbitrators must rule on the issue of whether or not the conditions for the initiation of arbitration have been met.[21] This concludes that the correct parties to make the arrangement for performing a mediation obligation are those with authority to mandate specific performance under the applicable law. The Tribunal, not the courts, will decide this because there is an arbitration clause in the contract. Such orders may or may not be accessible in State courts as preliminary measures. An argument can be raised against such an order being preliminary or intermediate, rather than final, because it would not be in keeping with the agreement.[22]

There are also other points that must be addressed. Among these points is whether or not a failure to meet the agreement’s conditions for negotiation or mediation impacts the Tribunal’s jurisdiction. There are competing views, but the correct answer is “no” unless the parties have already agreed to exclude[23] the Arbitral Tribunal from hearing the matter if there are any delays in proceeding to the pre-arbitral phases. The Tribunal’s jurisdiction describes its authority to decide a dispute. Both parties agreed to choose a tribunal to act as a stand-in for the State courts and also agreed to exclude State courts from the arbitration agreement. To say that this depends on prior pre-arbitration steps means that a party can back out of the arbitration agreement if they fail to comply. It is difficult to believe that parties agreed to forego State courts in favour of arbitration only if, prior to the pre-arbitration negotiation and/or conciliation, the other party made it clear that he or she would not follow the agreed-upon pre-arbitration steps.[24] If a party realised that the other party would not follow the agreed-upon pre-arbitration steps, then that party would prefer to litigate rather than arbitrate the dispute. The parties did not intend this. Therefore, it should not be assumed that the process by which the parties have reached their ultimate decision-making body was influenced by the question of whether they went through the agreed-upon settlement procedures. Both Articles 13 and 14 of the UNCITRAL Model Law[25] appear to be grounded on the same conclusion. According to the document, a project of this magnitude should be accomplished by the Arbitral Tribunal with power. Also, if one were to consider the pre-arbitral steps as conditions precedent to the arbitrators’ jurisdiction (as opposed to conditions precedent to the admissibility of the request for arbitration), this could create difficulties in connection with the potential necessity of preliminary measures prior to completion of the pre-arbitral steps and could have an adverse effect on the question of lis pendens and the interruption of limitation periods.[26] In any event, the issue of whether a multi-tiered dispute resolution clause raises a valid condition precedent to the Tribunal’s authority to decide on the matter is a question of jurisdiction, which under the principle of kompetenz-kompetenz is to be decided by the Tribunal itself.[27]

The language of the clause also plays an important role in deciding the nature of the pre-arbitral steps. While drafting the clause, the draftsmen should emphasise on the words which are clear and mandatory in nature. The draftsmen can use the word “should comply” rather than “may comply” or the pre-arbitral steps should be described in more detailed manner rather than using the terms like amicable settlement. In engineering contracts, the adjudicating authority in beginning phase of dispute should not be the Engineer-in-Charge or any other head from the companies an independent mediator or lawyer should be appointed to be resolve in the beginning phase only.  Justice N.V. Ramana, Chief Justice of India in his address at the India-Singapore Mediation Summit said that mediation should be made compulsory as the first step of dispute resolution[28]. If the disputes arising from the multi-tier dispute clause can be stopped by mentioning in the clause that mediation is compulsory which needs to be followed by the parties and parties agree to abide by the pre-arbitration steps, and the non-fulfilment of the clause should not be entertained by the court or the Arbitration Tribunal.

Conclusion

Multi-tiered dispute resolution clauses use several dispute resolution procedures to handle different levels of cases, with cases proceeding through a number of dispute resolution stages as long as the first stage does not solve the issue. When one of the parties fails to abide by the steps agreed upon in the contract, issues relating to multi-tiered dispute resolution clauses are not handled properly, and thus the dispute resolution clause’s enforceability is in jeopardy. Despite the growing usage of multi-tier dispute resolution clauses around the world because of their flexibility in dealing with a wide range of issues, a few countries remain unclear on how to enforce the clauses.


3rd Year student, BA LLB (Hons.), NMIMS School of Law, Bangalore. Author can be reached at <ashish.kumar11@nmims.edu.in>

[1]Klaus Peter Berger, Integration of Mediation Elements into Arbitration — Hybrid Procedures and Intuitive Mediation by International Arbitrators, 19 Arb. Int’l 387 (2003).

[2]James H. Carter, Issues Arising from Integrated Dispute Resolution Clauses: Part I, in New Horizons in International Commercial Arbitration and Beyond, ICCA Congress Series No. 12, 446 [A.J. van den Berg (Ed.), 2005].

[3] Alan Redfern and Martin Hunter, Law and Practice of International Commercial Arbitration 43 (2004).

[4]Dana H. Freyer, Practical Considerations in Drafting Dispute Resolution Provisions in International Commercial Contracts — A US Perspective, 15 J. Int’l Arb. 7, 9 (No. 4, 1998).

[5]Kayali, Enforceability of Multi-Tiered Dispute Resolution Clauses, 553.

[6]Dana H. Freyer, Practical Considerations in Drafting Dispute Resolution Provisions in International Commercial Contracts — A US Perspective, Journal of International Arbitration 15, No. 4 (1998), 7.

[7] Martin Hunter, The Freshfields Guide to Arbitration and ADR: Clauses in International Contracts, Kluwer Law and Taxation Publishers, 1993), 64.

[8]Alan Redfern and Martin Hunter, Law and Practice of International Commercial Arbitration, (London: Sweet & Maxwell, 2004), 50.

[9] New York Convention, 1958 (Enforcement of Foreign Arbitral Awards).

[10]Walter Mattli, Private Justice in a Global Economy: From Litigation to Arbitration, International Organization, 55 No. 4, (Autumn 2001), 920.

[11]James H. Carter, Issues Arising from Integrated Dispute Resolution Clauses: Part I, in New Horizons in International Commercial Arbitration and Beyond, 2005, A.J. van den Berg (Ed.) (Kluwer Law International, 2005), 446.

[12] (1999) 2 SCC 594.

[13] 2012 SCC Online Raj 3833.

[14] 2009 SCC Online Bom 1222.

[15]1999 SCC Online Ker 149, 442.

[16] 2017 SCC OnLine Bom 130.

[17] 2014 SCC OnLine Del 6602.

[18] 1978 SCC OnLine Del 180 : ILR (1979) 1 Del 364.

[19] 1994 SCC OnLine Del 563 : (1995) 57 DLT 343 : 1994 RLR 458.

[20] A decision by Zurich Court of Appeals of 9-11-2001, published in ZR 101 (2002), No. 21, 77-81; Bernardo M. Cremades, p. 7 et seq.

[21] Kathleen Scanlon, Country Report for the US, in Enforcement of Multi-Tiered Dispute Resolution Clauses, IBA Newsletter of Committee D (Arbitration and ADR), Vol. 6, No. 2, October 2001.

[22]Philip Naughton Q.C., Country Report for England in Enforcement of Multi-Tiered Dispute Resolution Clauses, IBA Newsletter of Committee D (Arbitration and ADR), Vol. 6 No. 2, October 2001.

[23]Robert N. Dobbins, The Layered Dispute Resolution Clause: From Boilerplate to Business Opportunity, Hastings Business Law Journal, 2005.

[24] Decision BGH, reported in (1984) Neue Juristische Wochenschrift, Heft 12, pp. 669-670.

[25] UNCITRAL Model Law on International Commercial Arbitration.

[26] Nathalie Voser, Sanktionen bei Nichterfullung einer Schlichtüngsklausel, case note decision of 15-3-1999, of the Zurich Court of Cassation, ZR 99 (2000) No. 29; ASA Bulletin 2002, pp. 376-381.(not clear please check)

[27] Craig Tevendale, Hannah Ambrose and Vanessa Naish, Multi-Tier Dispute Resolution Clauses and Arbitration, The Turkish Commercial Law Review No.1, February 2015, 37.

[28]Make mediation first step to settle disputes: CJI N. V. Ramana, The Times of India, dt. 18-7-2021, <https://timesofindia.indiatimes.com/india/make-mediation-first-step-to-settle-disputes-cji-n-v-ramana/articleshow/84515193.cms>

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