Frequently asked questions: is my tiered dispute resolution clause binding?

Lianne Sneddon, PDL, London and Amanda Lees, senior associate, Singapore

Speedread

In answering this FAQ, we provide guidance on what parties need to do (or avoid doing) in order to ensure that any pre-arbitral ADR procedure is enforceable. In particular, we highlight the need to:

• check the position under the governing law of the contract and in the particular jurisdiction where the dispute is to be resolved - different jurisdictions take different approaches to enforceability;
• ensure that the clause has clear and mandatory language ("must" as opposed to "may");
• refer to a clearly defined procedure;
• make sure any institution referred to actually exists;
• make it clear when a party can commence arbitration or litigation;
  specify a clear time-frame within which the proceedings steps have to be taken; and
• where the process is not to be binding, clearly state that it is not to be binding and that the parties are able to commence litigation or arbitration at any time.
• We also review recent English, Singaporean and Australian case law which highlights the different approach taken in these jurisdictions.

FAQ

We are often asked to review dispute resolution clauses and, in particular, dispute resolution clauses that provide for dispute resolution in stages, i.e. from negotiation to arbitration. A key issue that affects the drafting, and the disputes strategy once a dispute arises, is whether or not the pre-arbitration process is mandatory. The issue is an important one in arbitration given that arbitrators may not have jurisdiction to determine the matter if engaging in the pre-arbitration process is a condition precedent to commencing arbitration. The legal position on this varies from jurisdiction to jurisdiction: not all jurisdictions consider pre-arbitration ADR to be enforceable and where they do, the requirements differ. Recent English, Singaporean and Australian cases highlight the difference in approach and provide useful guidance on what you need to do (or not do) for a pre-arbitration process to be binding.

English law position

As a matter of English law, an agreement to enter into a pre-arbitration procedure is capable of giving rise to an enforceable obligation provided certain requirements are met. Precisely what those requirements are was recently reviewed in Wah (Aka Alan Tang) and Another -v- Grant Thornton International Limited & Others.(1) In that case, the clause provided for disputes to be referred first to the Chief Executive by way of amicable conciliation, and if no resolution is achieved then referred on to a Panel (comprising members of the board). The language of the clause was mandatory (use of "shall" as opposed to "may"). In addition, it provided that "no party may commence any arbitration procedures in accordance with this Agreement" until either the Panel had determined that it could not resolve the dispute or a month had lapsed since the request for conciliation had been referred to it.

The question before the court was whether the pre-arbitration procedure was a condition precedent to any arbitration. The tribunal itself had already determined that there was no contractually enforceable condition precedent to prevent it having jurisdiction. The Judge agreed and the application was dismissed.

In reaching his decision, the Judge reviewed the leading authorities on what is required for a pre-arbitral procedure to be binding and enforceable. As pointed out by the Judge, each case has to be determined on its own facts and not by reference to a checklist of "minimum ingredients" that can be used to determine whether your agreement is enforceable or not. The test is whether the obligations it gives rise to are sufficiently clear and certain to be given legal effect. In other words, does your clause provide, without the need for further agreement:

• a sufficiently certain and unequivocal commitment to commence a process;
• discernible steps that each party is required to take to put the process in place; and
• a sufficiently clearly defined process to enable a court to determine objectively both the minimum required of the parties to the dispute in terms of their participation and when or how the process will be exhausted or properly terminable without breach.

As regards any negative stipulation (the parties may not commence arbitration…), the event has to be sufficiently defined and its happening objectively ascertainable to enable the court to determine whether it has occurred.

The problem with the particular clause in question was that the Judge could not ascertain what exactly the parties were required to do to comply. In particular, the clause failed to provide what form the process of conciliation undertaken by the Chief Executive would take, who was involved and what was required by way of participation. The same comment was made of the reference to the Panel. As such, the clause was too equivocal in terms of the process required, and too nebulous in terms of the content of the parties' respective obligations to be given enforceable effect. As to the negative stipulation, he considered that its purpose was only to reinforce the provisions generally and provide a cut off date. It was not intended to prevent any arbitration from being commenced in circumstances where completion of the pre-arbitration process proved impossible (as was the case here).

Australian and Singaporean law position

Recent Australian and Singaporean decisions also provide guidance, and indicate that the courts there will more readily enforce clauses requiring pre-arbitration negotiation processes.

The Australian approach stems from the NSW Court of Appeal 2009 judgment in United Group Rail Services Ltd -v- Rail Corporation New South Wales.(2) The multi-tiered dispute resolution clause in this case required:

• a senior representative of each of the parties to "meet and undertake genuine and good faith negotiations with a view to resolving the dispute or difference";
• that the matter, if unresolved, be "referred to the Australian Dispute Centre for mediation"; and
• a reference of the dispute to arbitration if it was not resolved by the senior representatives or mediation.

Both parties agreed that the mediation provision was uncertain and unenforceable as the Australian Dispute Centre did not exist. However, after careful consideration of the English, Australian and New Zealand authorities, many of which were to the contrary, Allsop P (then President of the NSW Court of Appeal, now Chief Justice of the Federal Court) held that the requirement that senior representatives "meet and undertake genuine and good faith negotiations" was certain, had identifiable content and could be enforced.

Most recently the Queensland Supreme Court stayed proceedings until there had been compliance with a multi-tiered dispute resolution provision. (3) The provision provided for disputes to be referred to a meeting of the Project Coordination Group to "attempt to resolve the dispute", then if unsuccessful to the Business Review Group to "meet and use its best endeavours to resolve the Dispute" and if unsuccessful the Chief Executive Officers "must meet within 10 Business Days and use their best endeavours to resolve the Dispute". If the Dispute was not resolved, claims of less than $1 million were to be referred to Expert determination, and claims of $1 million or more referred to litigation.

It was submitted that the requirement that the Project Coordination Group "attempt to resolve" the dispute was uncertain as there was a lack of a readily ascertainable objective standard by which the Court could assess if the parties had complied with the requirement. In contrast to the English law position, the Judge rejected this submission and held that there was no uncertainty about the requirement to have a meeting and the Court was capable of assessing whether or not the parties had attempted to resolve the dispute, i.e. made an effort or endeavoured to do or accomplish such action.

In Singapore, these issues were recently examined in International Research Corp PLC -v- Lufthansa Systems Asia Pacific Pte Ltd.(4) The dispute resolution clause required that any dispute be referred to the following in order:

• a committee of the parties' Contact Persons "for their review and opinion";
• a committee consisting of Datamat's designee and Lufthansa Systems' Director of Customer Relations;
• a committee consisting of Datamat's designee and Lufthansa Systems' Managing Director "for resolution by them",
• and finally to SIAC arbitration.
• There was no specified requirements that any of these people meet within a certain timeframe or what steps they were required to take to resolve the dispute.

The arbitral tribunal held that the provision was too uncertain to be enforceable and therefore was not a precondition to the commencement of the arbitration. In contrast, the Judge held that the clause was certain and a pre-condition:

• the Court of Appeal's observations in HSBC Institutional Trust Services (Singapore) Ltd -v- Toshin Development Singapore Pte Ltd(5) on the enforceability of a provision to negotiate rent in good faith and the public interest in promoting the enforceability of good faith or friendly negotiation clauses were applicable to an obligation to refer a dispute to the specified committees;
• the steps were expressed in mandatory terms; and
• the arbitration clause expressly stated that disputes "which cannot be settled by mediation [the Court held this to be a reference to the negotiation process as set out above]" shall be settled by arbitration, making it clear that the process was a condition precedent.

Importantly the Judge held that as the negotiation process was a condition precedent, the arbitral tribunal would not have jurisdiction before the condition precedent was fulfilled. In those circumstances, the Court would not be able to order that the proceedings in front of the tribunal be stayed while the parties complied with the procedure; rather the parties would need to comply with the procedure and then re-commence the arbitration.

Fortunately the Judge held that the parties had in substance complied with the clause by conducting negotiations such that the condition precedent to arbitration was satisfied.

Comment

What do we take from these cases? First, the importance of checking the position under the governing law of the contract and in the particular jurisdiction where the dispute is to be resolved. Second, if you do want the pre-arbitral procedure to be enforceable, make sure your clause is clear and use mandatory language such as "must" as opposed to "may". If you are unable to refer to a clearly defined procedure such as the CEDR Rules on mediation, then make sure the process, and what is required of the parties, is clearly set out in your clause. In addition, make sure any institution or procedure referred to actually exists. Further certainty will be added by making it clear when a party can commence arbitration or litigation. As a matter of good practice, always specify a clear time frame within which any preceding steps to resolve the dispute are to take place. Given that the effect may be to deprive a tribunal of jurisdiction, we always recommend including a carve-out so that if engaging in the pre-arbitration process is likely to cause prejudice (because, for example, the limitation period is about to expire), arbitration proceedings can be commenced.

If you do not want the obligation to be binding, the best advice is to make it clear in the contract that the process is not a pre-condition and does not prevent either party from commencing arbitration. Even if a court or tribunal agrees with your position, you will have wasted time and money on reaching that stage. Clarity is always to be preferred over satellite litigation.

For more detailed guidance, see our Quickguide: Tiered Dispute Resolution Clauses for more detail.

Please click on the links below for the other articles in the February 2013 Arbflash:

• Asymmetric dispute resolution clauses: proceed with caution
• Anatomy of an arbitration Part I: Why arbitrate?
• Queen Mary 2012 survey on international arbitration practice: snapshot of key findings
• Arbitration in China: CIETAC developments
• Australian High Court considers constitutional challenge to Australia's international arbitration regime
• International round-up
• Investment treaty update

_Notes:

_{(1) [2012] EWHC 3198 (Ch).
(2) [2009] NSWCA 177.
(3) Downer EDI Mining Pty Ltd -v- Wambo Coal Pty Ltd [2012] QSC 290.
(4) [2012] SGHC 226.
(5) [2012] SGCA 48.}