Tiered Dispute Resolution Clauses
08 April 2022
08 April 2022
This guide highlights the key issues to consider when drafting tiered dispute resolution clauses.
Alternative forms of dispute resolution, or ADR as it is more commonly known, provide contracting parties with alternatives to arbitration and litigation offering faster, less expensive and more flexible methods of dispute resolution. ADR is commonly provided for by inclusion in a tiered dispute resolution clause (also referred to as a "stepped" or "escalation" clause). This involves a series of steps in the overall dispute resolution process, each designed to handle the dispute if it has not been resolved by the previous step.
Commercial parties are becoming more creative in the drafting of tiered dispute resolution clauses and their use of ADR. If drafted carefully they can provide parties with a commercial and cost-effective dispute resolution mechanism. Conversely, poor drafting can add an extra layer of bureaucracy and, at worst, leave parties without proper recourse to the courts or arbitral tribunal.
This guide provides a brief overview of ADR and then looks at the issues that should be considered when including provision for ADR in a dispute resolution clause.
ADR is an umbrella term which covers a range of methods of dispute resolution. The main types are:
The objective of ADR is to allow parties to conclude disputes in a more satisfactory and mutually advantageous manner by focusing on their interests and commercial objectives. Whereas the first three above - structured negotiation, mediation and ENE - are commonly used in conjunction with arbitration and litigation, the latter two - expert determination and adjudication – are often used as a dispute resolution procedure in their own right. Expert determination and adjudication are, typically, binding forms of ADR procedure which oblige the parties to abide by any resulting award(s). These forms of determinative ADR are more akin to arbitration in terms of outcome. The first two, structured negotiation and mediation, are the forms of ADR typically incorporated in a tiered clause.
See the table at the end of this guide for a more detailed description of the different types of ADR.
The primary value of a tiered dispute resolution clause lies in the fact that it puts ADR "on the agenda". Although ADR is widely recognised as offering a mechanism for dealing with disagreements at an early stage before the parties become entrenched in their respective positions, unless already provided for in the contract, the possibility of ADR may not immediately occur to the parties. Or, as is more common, commercial parties may consider that the suggestion of ADR at an early stage will be perceived by the other as a sign of weakness. The incorporation of an ADR mechanism clause in a contract circumvents this problem by providing ample justification for the question of ADR being raised and discussed without any suggestion of weakness or lack of confidence by either side. If it is not felt suitable the parties can always agree to waive the requirement.
The inclusion of ADR is particularly useful in disputes where the parties have a long-term relationship and want that relationship to continue.
Where the dispute resolution clause provides for litigation before the English courts the procedural rules oblige the parties to consider ADR at various stages of the case and, in particular, before litigation proceedings are commenced.1 In those circumstances parties may consider that they do not need to provide for ADR in their contract. However, if provided for contractually and drafted appropriately (see below), an agreement to ADR may be enforced by the party seeking to rely on it and so should be provided for if the parties wish the obligation to go to ADR to have contractual force.
There are no corresponding duties and obligations in arbitration and so, if the ultimate referral of any dispute is to arbitration, including provision for ADR is highly recommended.
Historically, an agreement to negotiate or mediate was unenforceable as a matter of English law as it was effectively an agreement to agree. However, the decision of Colman J in Cable & Wireless -v- IBM UK2 has altered the position. Provided it is clear what steps the parties are required to take, the English courts will consider the obligation to be sufficiently certain and enforceable. Although the courts are not prepared to set out a list of minimum requirements that need to be satisfied for the ADR process to be binding, using mandatory language ("must" vs. "may"), referring to a clearly defined procedure (e.g. the CEDR Rules on mediation), and specifying a timeframe in which steps are to be taken, will assist in making your agreement enforceable.3
A tiered dispute resolution clause involves a series of steps in the overall dispute resolution process, each designed to handle the dispute if it has not been resolved by the previous step. These vary from the single step clause which provides for mediation and then litigation/arbitration, to a multi-step clause which provides for a series of direct negotiations followed by mediation if the negotiations fail and then litigation/arbitration.
If drafted properly, the structure can be very effective but if not, can be used tactically to delay matters. To avoid this the drafting should ensure that it is clear when one stage ends and another begins. The common approach is to provide for a structured time scale for when the various steps are to take place and to make it clear when the time period for each stage ends.
A tiered clause may be simple and short or may set out a lengthy and detailed process. Short form ADR clauses allow the parties to work out and agree the details if and when the dispute arises. The disadvantage is that the detailed machinery is not settled, and it may be difficult to agree this later; also the less detailed the form, the less the prospect may be of having it enforced by a court. On the other hand, a long form can contain all the details which will minimise later scope for procedural disagreement and may enhance the possibility of a court treating it as enforceable. The disadvantages, however, are that the details may not necessarily be appropriate to the actual dispute when it arises and trying to agree detailed dispute resolution provisions in advance, which may never arise in practice, may not be considered commercially desirable by the parties when entering into a contract.
Caution should be exercised against making a tiered clause overly complicated. Some tiered clauses often provide for different forms of ADR depending on the type of dispute. For example, in a corporate transaction the clause may provide for expert determination when accounting issues are in dispute and litigation for legal disputes. This approach runs the risk of disputes falling between the gap and can lead to arguments over what constitutes a legal dispute. This is best avoided by ensuring that there is a "catch all" provision. In the example given this would be dealt with by providing that all disputes that do not fall within the expert determination clause are to be referred to the English courts.
As mentioned above, if the parties' intentions and the procedure to be followed are clearly spelled out in the clause, the clause can be enforced. Consequently, the parties need to decide whether they want the agreed ADR process to be mandatory and draft accordingly. Although it is open to both an English court or English seated arbitral tribunal to stay any proceedings commenced pending compliance with the ADR process, there is a risk (particularly in arbitration) that a claim could be dismissed for being commenced prematurely.
This can have significant consequences when limitation is an issue or injunctive/declaratory relief required. Therefore, it is prudent to incorporate a provision permitting the parties to commence litigation/arbitration proceedings notwithstanding the commencement of mediation/ADR.
If the parties do not want the obligation to be binding, make it clear in the contract that the process is not a pre-condition and does not prevent either party from commencing arbitration or litigation. Clarity is always preferable to satellite litigation.
When drafting the ADR clause it is up to the parties to decide whether they wish to specify a particular ADR procedure or whether they prefer to agree on one as and when a dispute arises. The reality is that once a dispute has arisen agreement may be difficult to reach so providing for this in the contract is to be preferred.
This is not recommended given the problems it causes if that person becomes unavailable. It is common for tiered clauses to provide that parties will agree on the choice of mediator and, failing that, for appointment to be made by an appropriate body. Ensure that the body chosen is capable of appointing a mediator or expert as, if not, and the parties cannot agree one, recourse may have to be made to the courts at additional cost.
Tiered clauses should provide a mechanism for a final, binding and enforceable resolution of the dispute, typically arbitration or litigation. Ensure that the usual principles are applied when drafting the litigation/arbitration clause and that they are consistent in their language with the rest of the clause.
The golden rule with any dispute resolution clause is clarity in drafting. This is particularly true of tiered dispute resolution clauses which can be detailed and complex. The key principles to follow when drafting them are as follows:
The specimen clause below is adapted from one of the model clauses previously provided by the Centre for Effective Dispute Resolution (CEDR), an ADR organisation in the UK, and provides for final resolution in arbitration.4
Tiered clauses are not boilerplate – they should always be drafted by reference to the particular circumstances of the transaction. The specimen is useful for the purpose of illustrating how a tiered clause looks and operates and as a starting point for the drafting of a tailored tiered clause.
If any dispute arises out of or in connection with this agreement or its formation, directors or other senior representatives of the parties with authority to settlethe dispute will, within [ ] days of a written request from one party to the other, meet in a good faith effort to resolve the dispute.
If the dispute is not wholly resolved at that meeting, the parties will attempt to settle it by mediation in accordance with the CEDR Model MediationProcedure. Unless otherwise agreed between the parties within [ ] days of notice of the dispute, the mediator will be nominated by CEDR. To initiate the mediation a party must give notice in writing ("ADR notice") to the other party(ies) to the dispute requesting mediation. A copy of the request should be sent to CEDR. Unless otherwise agreed, the mediation will start not later than [ ] days after the date of the ADR notice.
EITHER [The commencement of mediation will not prevent the parties commencing or continuing arbitration.] OR [No party may commence any arbitration in relation to any dispute arising out of this agreement until it has attempted to settle the dispute by mediation and either the mediation has terminated or the other party has failed to participate in the mediation, provided that the right to issue proceedings is not prejudiced by a delay.]
If the dispute is not settled by mediation within [ ] days of commencement of the mediation or within such further period as the parties may agree in writing, the dispute shall be referred to and finally resolved by arbitration. CEDR shall be the appointing body and administer the arbitration. CEDR shall apply the UNCITRAL rules in force at the time arbitration is initiated. In any arbitration commenced pursuant to this clause the number of arbitrators shall be [1 – 3] and the seat or legal place of arbitration shall be [London, England].
This is negotiation at different levels within a corporation and often features in tiered clauses. So, for example, where a dispute arises the issues in dispute will first be negotiated by managers. If that proves unsuccessful the next stage is to move to negotiation between the senior managers and then up the chain until it ends with negotiation between the CEOs.
This is the most common form of ADR and is a process which involves a neutral person (the mediator) actively assisting parties in working towards a negotiated agreement of a dispute. The mediator essentially facilitates settlement by bridging gaps between the relevant parties. Mediation does not result in a binding decision – it is not the role of the mediator to rule on the merits of the dispute - rather, the purpose of the mediation is to encourage the parties to reach a mutually beneficial settlement. However, if requested, the mediator may provide a mutual and confidential evaluation of each party's case which may assist in the negotiation process. For further information on the mediation process itself see our Quickguide on Commercial Mediation.
Early neutral evaluation
This is a process whereby the court provides a without prejudice, non-binding, early neutral evaluation at the request of the parties. This involves a particular judge in a matter or dispute providing a preliminary view on a question of law or a particular issue in dispute. It is usually more appropriate in disputes which revolve around questions of law rather than complicated issues of fact or quantum.
A process in which an independent third party, acting as an expert rather than a judge or arbitrator, is appointed by the parties to decide the dispute. The basis of an expert determination lies purely in contract, the parties having made a binding agreement to accept the expert's decision. If done properly it can be a very quick and cost-effective way of achieving resolution of a dispute. There are very limited rights of appeal which gives the parties finality and expert determinations tend to be used in disputes of a technical nature.
For more information see our Quickguide on Expert Determination.
Adjudication is similar to expert determination in that it is a process in which a third-party neutral, the adjudicator, makes a binding decision on a contractual dispute. The right to refer the dispute to the adjudicator can be provided by contract or statute and is usually used in construction matters. In England adjudication applies to all construction contracts entered into after 1 May 1998.
This is a hybrid between mediation and arbitration and can be used where mediated negotiations do not lead to a settlement. In those circumstances the parties can agree that the mediator becomes an arbitrator and issues a final and binding award on the outstanding matters. The process has been supported by various countries and institutions, including Singapore, Japan and China, but has not been greatly used in Europe. It has at least theoretical advantages but among its downsides is the risk that an aggrieved party could seize on the arbitrator's involvement as mediator to allege apparent bias or loss of neutrality. This could lead to the removal of the arbitrator or, conceivably, invalidation of an arbitral award. In addition the prospect of a mediator becoming an arbitrator can be perceived as inhibiting full and frank discussions in the mediation.
A process in which a representative of each party makes a formal presentation of their best case to a panel of senior executives from each party, usually with a mediator or expert as neutral chairperson. Following the presentations, the panel meets and the usual format is for the chairperson to act as a mediator between the senior executives. Unless requested by the parties the chairperson does not make a binding determination. The process is confidential and without prejudice.
Dispute Review Board
A panel (usually three neutral individuals) is appointed at the start of a project and adjudicates disputes as they arise. The decisions are binding but can be challenged via court or arbitration. They tend to be used in large-scale construction projects.