What are multi-tiered clauses for dispute resolutions?

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Multi-tiered clauses are dispute resolution clauses which includes a escalating-step system to resolve differences, which starts with a number of alternative dispute resolution steps (negotiation between senior managers, mediation, dispute boards, etc.), and ends with arbitration if the first alternative steps result unsuccessfully. In my experience, these clauses work as a filter only letting the most entrenched disputes go through to arbitration. On their nature, much has been discussed as to whether they are genuine arbitration agreements or something different. It is increasingly common in complex commercial contracts to see “multi-tier” ADR clauses.
It is important that these clauses are carefully considered. Clauses that simply say, for example, the parties are to engage in “good faith negotiations” before proceeding to arbitration, leave a number of issues open.

What to consider while drafting the clauses?

How long can the parties take in the negotiating process? If negotiations are futile, how does a party escalate the matter to the next level of ADR? When has a party not acted in “good faith” in a negotiation process? Generally in drafting, it is preferable to:

1. Specify how the ADR process is initiated. For example, it may be initiated by one party serving the other party with a notice setting out brief details of the dispute.

2. Set time limits on the various stages of the ADR process.
For example, the clause could provide that in the negotiation stage of ADR, the parties must make representatives with authority to settle the dispute available for the purpose of meeting in an effort to resolve the dispute and that such meeting must take place within 30 days of service of a notice of dispute. If the negotiation turns out to be fruitful and not enough time has been allocated, the parties can always agree to extend the time period. By setting a time limit, the parties eliminate the risk that either party will cause undue delay by declining to participate in the negotiation.

3. Spell out how a dispute is moved from one stage of the ADR process to the next.
This should be triggered by an indisputable event, e.g. expiry of a time period. In the example above, if the dispute is not settled by the authorized representatives in the 30 days, make it clear that the dispute shall proceed to be determined in accordance with the remainder of the ADR clause. Avoid the use of terms which may cause a dispute in themselves. For example, a requirement that negotiations be conducted in good faith adds nothing, other than an invitation to a dispute about whether one party acted in good faith.

4. Avoid the use of terms which may cause a dispute in themselves. For example, a requirement that negotiations be conducted in good faith adds nothing, other than an invitation to a dispute about whether one party acted in good faith.

Among the key issues that parties to an arbitration clause should consider is the place of the hearing for domestic contracts, and the place of arbitration for international contracts (i.e., contracts where the parties reside in different jurisdictions). Where the contract is a wholly domestic one, the location for the hearing may not be an issue if both parties reside in, say, DIFC (the parties would invariably designate the DIFC as the place for the hearing). However, if the parties reside in different cities and the contract does not designate a hearing location, unless the parties can agree, this will be up to the arbitrator to decide (adding time and cost to the process while this issue is being determined). The issue is very simply avoided by, for example, a clause specifying: “The arbitration will be held in DIFC, United Arab Emirates.”

It is worthwhile to mention effective ADR clauses mandate ADR (whether it is negotiation, mediation, expert determination, arbitration or a combination of all of them (i.e. a multi-tier clause). Ineffective ADR clauses unintentionally provide an option of ADR or litigation, for example providing that any disputes which cannot be settled by negotiation “may” be submitted to arbitration (not “must” or “shall”). Another error I have experienced is for a contract to contain, in successive clauses, both a consent to the jurisdiction of certain courts and a consent to arbitration, leaving it uncertain whether the parties intended arbitration to be the exclusive dispute resolution process. These errors are avoided by careful drafting and word choice.