Abstract

In international commercial field nowadays, it is inevitable to deal with disputes arising out of commercial contracts. In addition to a traditional way of setting dispute by litigation, arbitration is becoming popular. Besides, multi-tiered dispute resolution term is more and more likely to be included in international commercial contracts, due to the unique characteristics of different alternative dispute resolutions. The multi-tiered dispute resolution term can be considered as a collective expression of ADRs and therefore has some inherent advantages. However, problems also arise due to this aggregation.

This paper will give a brief analysis on the nature and performance of multi-tiered dispute resolution term by case study method and comparative method. For example, a brief summary and comparison of the nature of multi-tiered dispute resolution term in major jurisdictions will be shown. Comparison will also be made with some ADRs and arbitration in order to learn from the latter’s experiences to form more operative and clear ADR rules.

In the first section, I summarize the definition and development of ADR mechanism and multi-tiered dispute resolution. In section 2, I put forward some elements the parties should consider when drafting the term as well as different theories on the nature of the term in different jurisdictions and how it influences the jurisdiction of the arbitral tribunals. In the last section, based on the analysis made above, some suggestion will be given to help the parties to enter into a more enforceable multi-tiered dispute resolution term.

1 Introduction

Since the multi-tiered dispute resolution term is developed on the basis of ADR mechanism, before we determine the definition of this clause, we should first learn that what are ADRs and how they work.

A.Definition and content of alternative dispute resolution

Alternative dispute resolution (ADR), also known as non-litigation dispute resolution, was originated in the US and emerged in 1970s. Featuring with a time and cost-efficient characteristic comparing to traditional court proceeding, ADRs becomes popular in 1990s in Europe and gradually be considered as a preferential choice of resolving commercial disputes in international business community. There are several ADRs which are favored by the parties.

Negotiation

Negotiation is referred as a process where the parties settle their dispute without the intervention of a third party. Employers or officers may represent their companies and meet together to reach a resolution of the dispute. This amicable dispute resolution is considered as the least disruptive and least expensive method of settling disputes among commercial entities. However, it has drawbacks in the nature of itself since the commence of the negotiation is completely based on the parties’ common consent and the negotiated agreement does not have binding force, the commence of the negotiation process will be very difficult when one party change its mind and the execution of the settlement agreement is of great uncertainty.

Mediation

Comparing to negotiation, mediation introduces a neutral third party to assist the parties in dispute to come up with resolutions. Its confidentiality and flexibility are the main traits attracting the commercial entities. However, similar to the result of negotiation, the decision that the mediator made is not binding either. In other words, the party who’s absent from the mediation resolution may end up with only assuming the liability of breach under the contract law whatever the counterparty claims.

The parties to a contract can choose rules applicable to their mediation process, such as the rules formulated by International Chamber of Commerce(ICC), London Court of International Arbitration(LCIA) and United Nations Commission on International Trade Law(UNCITRAL). These rules are intended to assist the parties to enter into a mediation agreement more operatively in order to settle the dispute more effectively.

Expert’s Decision

Like arbitration, an Expert’ s Decision also contains a third party chosen by the disputing the parties and the expert decision is binding. This kind of ADR is often seen in complex construction and engineering contracts due to the professional feature of the disputes arising out of these contracts.

Arbitration

Arbitration is a private system of adjudication which offers the parties broad discretion to agree on some procedural and substantive matters when submitting the disputes for arbitration. The certainty of enforceability of arbitration is more convincible than other ADRs because the arbitration system consisting of international conventions, national arbitration laws and arbitration rules from institutional arbitration centers provide grounds for the recognition and enforcement of both the arbitration agreements and the arbitration awards.

B.Definition and development of multi-tiered dispute resolution term

Multi-tiered dispute resolution mechanism is a combination of several ADRs. It is more common to see this kind of term in some complex contracts like international construction and engineering contracts. Since this kind of contract usually has a long term in nature and disputes may occur at any stage of performing the contract, a multi-tiered dispute resolution term can provide one or more appropriate procedure for the parties to settle any particular dispute in a most effective way. In general, multi-tiered dispute resolution term refers to a term that contains several dispute resolutions like negotiation, mediation, expert’ s decision, arbitration, and so forth. The parties may agree on applying these techniques in order at different stage of disputes resolution. Generally speaking, the parties would start with negotiation between their high-ranking officers or mediation with the intervention of a neutral third-party. The last step would usually be arbitration, if the parties were unable to resolve preliminarily. Therefore, this term is also be called ‘escalation clauses’, ‘process clauses for negotiation-mediation-arbitration’ or ‘pre-arbitration procedural requirements’, as the formality and intensity are increasing.

The advantage of concluding escalation clauses are obvious because the confidentiality, flexibility, and efficiency they may secure comparing with litigation. In addition, since the most appropriate technique is agreed by the parties for resolving a specific dispute, it is a targeted way to settle the dispute while significantly saving time and costs. However, problems still may arise in drafting, performance, and enforcement stage of these escalation clauses. For example, are there any rules provided for the parties to refer, what is the legal consequence when a party breaches any of such clauses and what is the relation between arbitration and other ADRs in the clauses. These questions will be discussed below.

2 Nature of multi-tiered dispute resolution term

A.Drafting of multi-tiered dispute resolution term

We have already known that ambiguous arbitration clauses will lead to many problems at the commencement or enforcement stages of the arbitration, unclear wording in escalation clauses will also cause difficulties in making decision, for example, whether the parties have intention to be bound by these ADR clauses, or whether there is procedure to be followed when the parties shrift from one ADR to another.

International Center of Dispute Resolution (ICDR) of the American Arbitration Association (AAA) presents a demonstrative term in drafting the escalation clauses. LCIA also released recommended clauses for the combination of mediation-arbitration resolutions. We can find that under these recommended clauses, the parties “shall” first resort to negotiation or mediation. If they cannot reach a settlement, they may then refer the dispute to a binding and final arbitration. By using the word “shall” rather than “may”, the parties show their common intention to be bound by this multi-tiered dispute resolution term, which oblige the parties to make first attempts to resolve the dispute by ADRs. Using clear and accurate wording may help avoid conflicts arising out of this clause itself, which would also guarantee the efficiency of solving the substantive problem.

If the parties are using the word ‘may’, it can be considered that the parties have the right to settle the dispute by ADRs, which is more of an option but an obligation. According to the ICC Case No.10256, by using the word ‘may’, it is permissive but not mandatory for the parties to refer their dispute to the mentioned resolutions. Therefore, the parties have broad discretion to decide whether to conduct in strict compliance with the escalation proceedings, or whether they are already so ‘alienated’ that it is preferable for the dispute to be taken directly before an arbitration tribunal.

Therefore, since the parties enter into escalation clauses in their contract, regardless of whether the wording is clear or not, it indicates that they are willing to solve problems in amicable and efficient way. To achieve this goal, drafting in precise wording including the time limit and using “the parties shall”, as well as providing mandatory conditions precedent for commencing the arbitration, would help the parties to express their actual intention accurately. However, in practice, even with accurate draft showing the parties’ intention to involve in ADRs before arbitration or litigation, in different jurisdictions we still have different views on the enforceability of such term.

B.Nature of multi-tiered dispute resolution term and its influence on jurisdiction of arbitral tribunals or domestic courts

In practice of different jurisdictions, people have inconsistent views on the nature of multi-tiered dispute resolution term. Questions related to the nature of such term will always rise: may an arbitration tribunal govern when one party directly submits the dispute to arbitration without engaging in the ADRs mentioned in their mandatory clauses? Is there any remedy for the observant party? The answer will be different in different jurisdictions.

The breach of the ADR clauses only concerns substantive part of the matter

As a representative jurisdiction holding this view, the Supreme Court of Zurich in Switzerland concludes that, the clause of negotiation or consultation is of purely substantive nature and the breach of one party will lead to damage claim arise by the counter-party according to the substantive law, but not procedurally interfere the commencement of arbitration. Thus, even if one party does not abide by such clause or both parties completely ignore it, the court of the country still have jurisdiction over this dispute despite the existence of such clause.

The breach of the ADR clauses only concerns procedural part of the matter

In some jurisdictions, the authorities believe that such escalation clauses are a condition precedent to initiate an arbitration. According to New York Court of Appeal, given the contract contained explicit language evincing the parties’ intention, the decision of the mediator (an architect in this case) is a condition precedent to arbitration. Failing to satisfy such condition grants the permanent stay of arbitration. Also, a decision of the German Federal Supreme Court in 1998 stated that under such clause in which the parties had agreed to make attempts to resolve disputes by resolution negotiations before the initiation of court proceedings, claims brought before the courts by any party would be inadmissible if the settlement negotiations had not been commenced and completed. The court confirmed that, if the parties agreed on a mandatory pre-litigation clause, the parties were obliged to co-operate in carrying out the settlement negotiations.

The writer believes that, from the perspective of the parties in dispute, it is more reasonable that they are willing to be bound by the pre-arbitration clauses. First, once they enter into such escalation clauses which include several ADRs, we can firmly assume that the parties have the intention to solve the problems in amicable ways with time and cost efficiency. Otherwise, there is no need to include such clauses in the body of contract. Second, taking pre-arbitration clauses as contractual obligations of the parties would be detrimental to the function of the subsequent of the procedure for settlement of the commercial dispute. For example, if the pre-arbitration clauses are merely of an obligation nature and the observant party may only claim for damage under the contract law, the other party or even the court would be very likely to deny or even ignore such clauses, which would be a breach of the autonomy of the parties. In addition, claiming damage under the contract law as a remedy for the observant party is not sufficient, since its real intention is to apply ADRs to resolve the dispute. Scholars like Gary Born however points out that, treating those pre-arbitration clauses as conditions precedent bars the parties’ access to the arbitral proceedings and imposes inappropriate costs and delay in the entire dispute resolution process. Under such provision, the parties will risk in being prevented from pursuing presumptively reasonable claims and obtaining presumptively justified relief in the parties’ agreed forum for dispute resolution.

C.The parties’ performance of multi-tiered dispute resolution term

In practice, the plaintiff usually raise the claim that the defendant did not perform, or did not fully perform the obligation under such term to prevent the initiation of next tier of dispute resolution proceedings, or to challenge the jurisdiction of an arbitral tribunal. Therefore, to set a criterion to assess the parties’ performance is crucial.

Good faith criteria

Generally speaking, all the ADRs including arbitration require the parties to participate in that dispute resolution proceedings in good faith, which is also a principle under the contract laws. It is obvious that good faith is an extensive concept that is hard to apply directly to practice, and certain specific interpretations or indications are required. In ICC Case No. 6276, the parties have a three-tiered dispute resolution agreement(negotiation-expert decision-arbitration) that contains clear and strict modalities strictly binging both parties. In this case, the tribunal mentioned that, it is true that there is no objective and absolute criteria to determine the means of amicable settlement have been exhausted. However it was later found by the tribunal that there are sufficient indications showing that the claimant made genuine efforts in the first instance court, namely, the prerequisite of seeking amicable settlement is satisfied and the claimant are entitled to move to the next stage of the procedure. We therefore can conclude that, the criteria of good faith should be assessed on a case by case basis according to the facts of the case. We can find another example in ICC Case 9977, in which the arbitrator confirmed that, it is more importance that the parties show their good faith and real intention to reach a settlement by amicable ways by their acts, rather than strictly meet the criteria of every requirement in their agreement. In this case, the defendant argued that its counterparty designated its legal representative to present at the dispute resolution meeting, but not its senior management representative, which is not compliant with their dispute resolution clauses. The defendant’s objection was dismissed, for the reason of its counterparty is considered as actually performed its obligation in good faith in the first tier of the procedure, despite the different representative it designated. Another reason is that the defendant missed the opportunity of objection to the qualification of the corporate representative during the negotiation process which is not compliant with what has been agreed in the clauses, it is not persuasive to raise this objection after completion of the negotiation process.

Prospect of failure to reach a settlement in the previous tier of dispute resolution procedure

In some circumstances, it is already not possible for the parties to reach a settlement in a friendly way. It is necessary or even urgent to submit the dispute to the arbitration tribunal or the court. Is it still obliged for the parties to stay in the pre-arbitration or pre-litigation proceedings? Should they express their consent to waive such obligation or can any of the party proceed with the arbitration or litigation unilaterally?

In the Hurst v Leeming Case, the judge upheld the defendant’s argument, he accepted that a party may refuse to proceed with mediation since there is no real prospect of success and this party would not be punished. Even though this is an exceptional circumstance, in the writer’s opinion, it is rational to skip the premised tiers of dispute resolutions if there is absolutely no possibility to solve the problems by the parties themselves, and to reduce the waste of time and costs on it. However, as mentioned above, the parties’ good faith and positive attitude should at least be indicated through their acts, rather than decline without even trying, which could be considered as a breach of obligation.

3 Suggestions on entering into a multi-tiered dispute resolution term

As mentioned above, in most jurisdictions, the multi-tiered dispute resolution term is valid or enforceable only when certain conditions are met. Therefore, based on the analysis on and the comparison with arbitration clauses, the writer provides the followings suggestion for entering into more operative escalation clauses.

A.Time to conclude multi-tiered dispute resolution term

Compared with the arbitration clause, the escalation clauses can also be included in the body of contract, or be entered into separately after the arising of a dispute. In addition, the separability of such term is required to be interpreted in the same way as that of the arbitration clauses. Therefore, the parties can enter into such term based on their autonomy even after the arising of a dispute.

B.Wording of such term

Using ‘shall’ rather than ‘may’ to obligate the parties

As discussed in Section 2, the parties who used ‘shall refer’ rather than ‘may refer’ have more possibility of successfully initiate the ADR proceeding as they want under most jurisdictions. Avoiding ambiguous wording on one hand establishes obligation between the parties which refers their will of settling problems through amicable ways, on the other hand, it prevents the circumstances that this clause itself becoming a dispute which may reduce the efficiency.

Setting more specific procedural rules to define the criteria of the parties’ performance

For example, the parties may agree that, a mutual consent in a written document exchanged indicates the initiation of an ADR proceeding and if they cannot reach a resolution agreed time line, it is appropriate to skip the current ADR proceeding and move to the next tier of ADR proceeding. Also, how many meetings should be held and who should attend these meetings could be taking into account, rather than simply describing these conditions in ‘good faith’ manner.

Specifying the scope of matters applying amicable dispute resolution michanism

Similar to the arbitrability in arbitration, the parties should be aware that the matters contemplated in their agreement are negotiable or may be mediated. Otherwise, the enforceability cannot be guaranteed when such agreement is contrary to the mandatory rules in the jurisdiction concerned. In addition, it is better for the parties to ensure that the scope of the disputes subject to the aforesaid ADRs is the same as that subject to arbitration. It may prevent the situation that some problems cannot be discussed by the parties friendly but be submitted directly before the arbitration panel or the court, which is contrary to the parties’ intention for entering into such amicable dispute settlement clauses.

4 Conclusion

It is becoming common that the parties of international commercial contracts seeking settlement through ADRs and enter into multi-tiered dispute resolution term in their contracts. As discussed above, this dispute resolution mechanism has the advantage for solving problems at different stages. It has the characteristics of amicability and efficiency, which is favored by the commercial parties. However, due to the autonomy-based nature of negotiation, mediation, or other ADRs, inaccurate draft by the parties, and various views on the nature of such term, there are difficulties in the enforceability of such escalation clauses. What’s more, the negative influence on later arbitration or litigation should not be overlooked either. In order to realize the value of such term and ultimately achieve the objects of the parties who apply it, we should suggest the parties to pay more attention in drafting such term, for example, accurate wording and precise definition of the conditions for the parties’ performance of ADR clauses should be provided in their multi-tiered dispute resolution term.

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