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Multi-tiered dispute resolution clauses. What are they? Why include them? Are they enforceable?

Many construction contracts (in common with other commercial contracts) now contain what are known as multi-tiered dispute resolution clauses. By these clauses, the parties agree at the outset on a number of stages of ADR before a party can commence proceedings in respect of a dispute. They can be relatively straight-forward (single-step) procedures that simply require a negotiation or mediation. Or, they may be more complex and consist of a series of meetings between increasingly senior representatives of the parties, followed by mediation and/or some other form of ADR.

Multi-tiered dispute resolution clauses have the benefit of enabling parties to resolve disputes without having to resort to litigation or arbitration. There are obvious cost benefits, more flexible solutions are available and the parties’ commercial relationship is more likely to survive a dispute that is resolved amicably.

However, where arbitration is the selected final means of dispute resolution, a multi-tiered dispute resolution clause will, if it is enforceable and has not been complied with, prevent an arbitrator from having jurisdiction in relation to a dispute. The jurisdictional issue does not arise in litigation since the courts have an inherent jurisdiction in respect of disputes before them. That said, a court may decide to stay proceedings that have been commenced by a party who has failed to comply with all applicable conditions precedent and there are potentially adverse costs consequences where a party has unreasonably refused to engage in mediation (see Halsey v Milton Keynes General NHS Trust).

Are multi-tiered dispute resolution clauses enforceable?

Traditionally, multi-tiered dispute resolution clauses were not enforceable even when the steps were expressed in mandatory terms since they were regarded as an agreement to agree (Walford v Miles).

The turning point came in 2002 in Cable & Wireless v IBM UK, when Colman J decided that a mandatory obligation to engage in a clearly defined process was enforceable. Clauses referring to an objectively identifiable procedure, such as the CEDR Model Mediation Procedure, were likely to be enforceable.

Fast-forward to 2012.

In Sulamerica CIA Nacional De Seguros SA v Enesa Engenharia SA, the relevant clause provided that:

“If any dispute or difference of whatsoever nature arises out of or in connection with this Policy… the parties undertake that, prior to a reference to arbitration, they will seek to have the Dispute resolved amicably by mediation.

The mediation may be terminated should any party so wish by written notice to the appointed mediator and to the other party to that effect. Notice to terminate may be served at any time after the first meeting or discussion has taken place in mediation.

If the Dispute has not been resolved to the satisfaction of either party within 90 days of service of the notice initiating mediation, or if either party fails or refuses to participate in the mediation, of if either party serves written notice terminating the mediation under this clause, then either party may refer to the Dispute to arbitration.”

Both at first instance (before Cooke J) and in the Court of Appeal, this clause was considered to be insufficiently clear to constitute a condition precedent to arbitration. There was no unequivocal requirement on the parties to engage in mediation, no provisions for the appointment of a mediator and no identified process that would govern the mediation.

In Wah v Grant Thornton, the clause provided as follows:

“(a) Any dispute or difference… shall in the first instance be referred to the Chief Executive in an attempt to settle such dispute or difference by amicable conciliation or an informal nature…

(b) The Chief Executive shall attempt to resolve the dispute or difference in an amicable fashion. Any party may submit a request for such conciliation regarding any such dispute or difference, and the Chief Executive shall have up to one (1) month after receipt of such request to attempt to resolve it.

(c) If the dispute or difference shall not have been resolved within one (1) month following submissions to the Chief Executive, it shall be referred to a Panel of three (3) members of the Board to be selected by the Board… The Panel shall have up to one (1) month to attempt to resolve the dispute or difference.

(d) Until the earlier of (i) such date as the Panel shall determine that it cannot resolve the dispute or difference, or (ii) the date one (1) month after the request for conciliation of the dispute or difference has been referred to it, no party may commence any arbitration procedures in accordance with this Agreement.”

Hildyard J considered this to be insufficiently certain as to amount to a condition precedent to the commencement of an arbitration. The clause did not identify the form the conciliation process was to take, who was to be involved, any minimum obligations in terms of the steps required of the chief executive in the first instance or the panel in the second.

A clear warning had been sounded. To be enforceable, it was not enough that a clause identified a recognised form of ADR. The question was “whether the obligations and/or negative injunctions it imposes are sufficiently clear and certain to be given legal effect”.

In Wah v Grant Thornton, the test for enforceability was held to be whether, without further agreement:

  • The clause provided a sufficiently certain and unequivocal commitment to commence a process.
  • From the process, the steps each party was required to take to put the process in place were discernable.
  • The process was sufficiently clearly defined to enable the court to determine objectively:
    • what, under that process, was the minimum required of the parties to the dispute in terms of their participation in it; and
    • when or how the process would be exhausted or properly terminable without breach.

The waters are muddied

The judgments in Sulamerica and Wah v Grant Thornton offered a degree of certainty. However, just when everyone thought that it was possible to advise on the enforceability or otherwise of such a clause, a new judgment was published that muddied the waters again.

In Emirates Trading Agency Llc v Prime Mineral Exports Private Ltd, the court considered the following clause:

“in case of any dispute or claim… the parties shall first seek to resolve the dispute or claim by friendly discussion. Any party may notify the other of its desire to enter into consultation to resolve a dispute or claim. If no solution can be arrived at between the parties for a continuous period of 4 (four) weeks then the non-defaulting party can invoke the arbitration clause and refer the disputes to arbitration.”

One might have thought that all that had gone before would strongly suggest a clause requiring “friendly discussion” would be unenforceable. Not so said Teare J.

In what must be regarded as (at least) a little surprising, he held that this clause was mandatory and enforceable, that “friendly discussions” were a condition precedent to the right to refer a claim to arbitration. The obligation to seek to resolve disputes by friendly discussions was said to import an obligation to seek to do so in good faith.

Earlier authorities that would have held this clause unenforceable were distinguished on the basis that:

“an obligation to resolve a dispute by friendly discussions in good faith has an identifiable standard, namely, fair, honest and genuine discussions aimed at resolving a dispute.”

Where are we now?

The test in Wah v Grant Thornton gave some degree of certainty. It is not yet clear whether and if so, to what extent Teare J’s decision in Emirates Trading will be followed. However, if more of these multi-tiered dispute resolution clause are found to be enforceable, some interesting issues will arise, particularly in terms of compliance.

One thought on “Multi-tiered dispute resolution clauses. What are they? Why include them? Are they enforceable?

  1. Wah v Grant Thornton has recently been approved in Peterborough City Council v Enterprise Managed Services Ltd [2014] EWHC 3193 (TCC).

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