Multi-tier clauses - dispute resolution on many levels

To what extent are multi-tiered dispute resolution clauses enforceable? David Greene, senior partner and commercial litigator at Edwin Coe, says a recent decision is another stage in the development of modern judicial thought in various jurisdictions that clauses providing multi-tier dispute resolution can be enforceable.

Original news

Emirates Trading Agency LLC v Prime Mineral Exports Private Ltd [2014] EWHC 2104 (Comm), [2014] All ER (D) 40 (Jul)

The claimant agreed to purchase iron ore from the defendant, pursuant to a contract, which contained, as a condition precedent, pre-arbitration conciliation steps, the first being time-limited friendly discussion between the parties. A dispute arose under the contract, which the defendant referred to arbitration. The claimant applied, pursuant to the Arbitration Act 1996, s 67 for an order that the tribunal had lacked jurisdiction. The Commercial Court, dismissing the application, held that the arbitral tribunal had jurisdiction to hear and determine the claim because the condition precedent to arbitration had been satisfied.

What is the significance of this decision?

Multi-tiered dispute resolution clauses are increasingly common, particularly in large and on-going contracts in which a resolution process that does not destroy a continuing relationship is all important. Historically, anything short of submitting to arbitration has been unenforceable. The problem is that, for instance, an obligation to seek to resolve issues in good faith lacks the certainty or hard edges that the court seeks in order to enforce or police such a provision. It is not unlike an agreement to agree, which is similarly unenforceable.

However, over the past few years the courts have taken a different line. This change in attitude has taken place against the background of the changes to the Civil Procedure Rules 1998, SI 1998/3132 which now provide for a pre-action procedure which may be enforced by the court. Further, there is an allied consideration which has developed over the past 20 years. The modern court is concerned to interpret agreements to give them business efficacy and to ensure that parties perform contracts as intended by them. Therefore, if the parties have agreed a resolution process, the court is keen to ensure parties perform their obligations as far as possible.

The decision is another stage in the development of modern judicial thought in various jurisdictions that clauses that provide multi-tier dispute resolution can be enforceable.

How did the court address the issue of enforceability of multi-tiered dispute resolution clauses?

The court was faced with the usual problems of identifying sufficiently hard edges in the relevant clause to determine whether or not there had been a failure by one of the parties to perform. It also concluded that it was able to test an obligation to seek resolution in good faith discussions within a time limit which it found to be sufficiently hard edged to be enforceable.

What practical advice can lawyers take from this decision?

Draft a multi-tiered resolution so that the obligations are clear. The judge placed some importance on the fact that there was a time limit on the period for negotiation so probably best to include timings to any procedure adopted.

Should lawyers consider reviewing existing contracts in light of this?

It would be an idea to review existing contracts, but in order to change the clause one party needs the agreement of the other. Certainly in templates/boilerplates it would be an idea to review standard multi-tiered resolution clauses.

What are the risks/rewards of multi-tiered dispute resolution clauses?

The benefit is that the parties are required to enter into negotiations in good faith. The difficulty is that one or more parties may be merely ticking the box without any real intention to act in good faith. It remains a very difficult task for the court to measure that good faith or lack of it. The risk is that the process merely delays the inevitable court or arbitration process.

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First published on LexisPSL Restructuring and Insolvency

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