Multi-tiered dispute resolution clauses are a common feature of modern arbitration agreements. Typically, these provide that the parties to a contract are precluded from bringing a dispute to arbitration until they have complied with certain prerequisite steps (the so-called "conditions precedent" to arbitration). However, despite their seemingly straightforward character, the enforceability of multi-tiered dispute resolution clauses is frequently uncertain and can sometimes be challenged, allowing a party to submit a dispute to arbitration without complying with them. Indeed, the ambiguous and problematic nature of these clauses has led some scholars to refer to the topic as a "dismal swamp".1
Ultimately, the question of whether a multi-tiered dispute resolution clause is binding will have to be determined on a case-by-case basis, depending on the specific wording of the arbitration agreement as well as the lex arbitri of the contract. Whilst it is always important to consult with a firm of legal experts when dealing with such a nuanced topic, a handful of guiding principles can be gleaned from the ways in which courts and tribunals have previously approached the question.
Certainty of Terms
Perhaps most important of all, the terms of any multi-tiered dispute resolution clause must be sufficiently certain to be enforceable. As noted by an English court in Ohpen, such a clause "must be sufficiently clear and certain by reference to objective criteria [...] without the requirement of any further agreement by the parties."2
As such, the agreement in Sulamérica,which held that "prior to a reference to arbitration, [the parties] will seek to have the Dispute resolved amicably by mediation" was unenforceable because it did not refer to any particular mediation process or even provide any instruction for the selection of the mediator.3 The crux of the issue is that, even if an obligation to comply with the multi-tiered dispute resolution clause were found, it would be nearly impossible for the court to determine whether or not the parties had complied with it.
One option to avoid similar issues is to refer directly to specific alternative dispute resolution rule sets or to particular providers of these services, such as JAMS or the CEDR. Clauses which do so are significantly more likely to be considered as introducing binding conditions precedent on the parties.
However, pre-arbitral tiers involving ad-hoc procedures can also be binding. In the Channel Tunnel Case, for instance, a requirement for an ad-hoc expert determination prior to initiating arbitration was held to be binding.4 What is crucial is that a multi-tiered dispute resolution clause is sufficiently clear to be enforced by the courts with reference to objective criteria. As such, Kayali describes the importance of "formulat[ing] the transition from one step to another" within such a clause.5
Requirements to Negotiate in Good Faith
In a similar vein, courts in a number of jurisdictions have held that mere agreements to negotiate are unenforceable due to an inherent lack of certainty in their terms.6 The same is true of any agreement to utilise best endeavours to resolve a dispute amicably prior to arbitration or to attempt to do so in good faith. These expressions ought to be avoided when drafting multi-tiered dispute resolution clauses as they are inherently uncertain, and some courts and arbitral tribunals will find themselves unable to enforce them.
To illustrate this point, a New York court deemed in the case of Mocca Lounge that "even when called upon to construe a clause in a contract expressly providing that a party is to apply his best efforts, a clear set of guidelines against which to measure a party's best efforts is essential to the enforcement of such a clause".7
A notable exception to this principle is the Australian case United Group Rail Services Ltd., where a requirement to hold "genuine and good faith negotiations" was held enforceable.8 This suggests that in certain circumstances, even an agreement to negotiate in good faith can still be enforceable.
Mandatory Language
A further key element of a binding multi-tiered dispute resolution clause is the use of mandatory language such as "shall" to connect the tiers. Otherwise, courts and tribunals risk finding that the tiers of a multi-tiered dispute resolution clause are optional, thereby allowing parties to bypass them.
For example, in ICC Case No. 4230, a clause stipulating in French that "all disputes related to the present contract may be settled amicably" was held to be non-binding as the use of the word "may" indicated that it was an option but not an obligation. The tribunal determined that the mandatory nature of a pre-arbitral tier had to be "expressly indicated."9
Nevertheless, even multi-tiered dispute resolution clauses with mandatory language may sometimes not be enforced. Such was the decision of a Swiss Federal Supreme Court judgment, which considered an agreement under the Fédération Internationale des Ingénieurs-Conseils' (typically referred to asFIDIC) 1999 Conditions of Contract.10 In particular, the Conditions of Contract required that, prior to arbitration, a dispute would be referred to a dispute adjudication board. However, two years after the claimant had issued a notice of intention to do so, such a board had yet to be constituted. The Supreme Court considered that the long duration which had elapsed without the parties being able to comply with the pre-arbitral tier meant that it should not be enforced. It was also considered highly unlikely by that point that the pre-arbitral tier would affect the likelihood of a subsequent arbitration, thus defeating its very purpose.
This demonstrates how, in some jurisdictions, it may be possible to circumvent parts of multi-tiered dispute resolution clauses if the prerequisite tiers are proving impossible to complete or if it is obvious that the prerequisite tiers will be ineffective.
It should also be borne in mind that multi-tiered dispute resolution clauses are sometimes a procedural consideration, and not a jurisdictional one. In other words, non-compliance with multi-tiered dispute resolution clauses might not affect the jurisdiction of a tribunal to consider the dispute, although this depends on the governing law of the underlying arbitration agreement.
Conclusion
The enforceability of multi-tiered dispute resolution clauses is a nuanced question, depending largely on the wording of the particular agreement and its governing law. To be enforceable, a multi-tiered dispute resolution clause needs to be drafted in sufficiently certain language to allow the court to enforce it with reference to objective criteria. Nebulous provisions, such as those attempting to create a duty to negotiate in good faith, will frequently go unenforced due to the inherent lack of certainty in their terms. It is equally important for multi-tiered dispute resolution clauses to use mandatory language such as "shall", although in specific circumstances such mandatory pre-arbitral tiers might still be avoided.
Footnotes
1. G. Born and M. Scekic, "A Dismal Swamp" in C. David, Practising Virtue Inside International Arbitration (Oxford University Press 2015).
2. Ohpen Operations UK Limited v Invesco Fund Managers Limited [2019] EWHC 2246 (TCC), [2019] BLR 576, ¶32.
3. Sulamérica CIA. Nacional de Seguros S.A. v Zurich Brasil Seguros S.A. [2012] EWHC 42 (Comm), [2012] 1 Lloyd's Rep 275, ¶¶27-28.
4. Channel Tunnel Group Ltd. and another v Balfour Beatty Construction Ltd. [1993] AC 334, pp. 345-346.
5. D. Kayali, Enforceability of Multi-Tiered Dispute Resolution Clauses, 27(6) Journal of International Arbitration (2010), pp. 573-575.
6. G. Born,International Commercial Arbitration (3rd edn., 2023), §5.08[A].
7. Mocca Lounge, Inc. v. John Misak et al. (1983) 94 A.D.2d 761, p. 763-764.
8. United Group Rail Services Ltd. v Rail Corporation New South Wales [2009] NSWCA 177, ¶ 28.
9. ICC Case No. 4230, Partial Award, p.1.
10. 4A_124/2014 of July 7 2014, pp. 17-19.
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