What is Multi- Tiered Dispute Resolution Clauses?

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INTRODUCTION
Multi-tiered dispute resolution clauses merege ADR
and arbitration procedures and provide for a
sequence of dispute resolution procecesses generally
composed of negotiation, mediation, expert
determination and finally abitration. By inserting a
Multi0Tier resolution clause in their contract parties
agree to resolve their potential controversies by
using these escalating steps with an intention that
arbitration proceedings will only be commenced in
case of failure of previous ADR techniques.
Basics
 A clause may provide first for non-binding mediation
under mediation procedures. If the mediation is
unsuccessful, the clause authorizes the dispute to be
resolved by binding arbitration pursuant to specific
arbitration rules.
 A three tier clause may provide first for negotiation,
which, if unsuccessful, is followed by non-binding
mediation, then by binding arbitration.
Goal of the Clause
 Prompt, cost-effective dispute resolution
 Appropriate escalation of ADR techniques
 Negotiation and mediation required before “litigation
mind-set” takes hold
 Conservation, if possible, of the underlying relationship
Example Clause:
ICDR Model Clause
In the event of any controversy or claim arising out of or relating to this
contract, or a breach thereof, the parties hereto agree first to try and settle
the dispute by mediation, administered by the International Centre for
Dispute Resolution under its Mediation Rules. If settlement is not reached
within 60 days after service of a written demand for mediation, any
unresolved controversy or claim arising out of or relating to this contract
shall be settled by arbitration in accordance with the International
Arbitration Rules of the International Centre for Dispute Resolution.
The parties should consider adding:
“The number of arbitrators shall be (one or three)”;
“The place of arbitration shall be (city and/or country)”;
“The language(s) of the arbitration shall be ___.”
Example Clause:
ICDR Model Clause (Three Tier)
In the event of any controversy or claim arising out of or relating to
this contract, or the breach thereof, the parties hereto shall consult
and negotiate with each other and, recognizing their mutual interests,
attempt to reach a solution satisfactory to both parties. If they do not
reach settlement within a period of 60 days, then either party may, by
notice to the other party and the International Centre for Dispute
Resolution, demand mediation under the Mediation Rules of the
International Centre for Dispute Resolution. If settlement is not
reached within 60 days after service of a written demand for
mediation, any unresolved controversy or claim arising out of or
relating to this contract shall be settled by arbitration administered by
the International Centre for Dispute Resolution in accordance with
its International Arbitration Rules.
Example Clause:
ICC Model Clause
In the event of any dispute arising out of or in connection with
the present contract, the parties agree to submit the matter to
settlement proceedings under the ICC ADR Rules. If the
dispute has not been settled pursuant to the said Rules within
45 days following the filing of a Request for ADR or within
such other period as the parties may agree in writing, such
dispute shall be finally settled under the Rules of Arbitration of
the International Chamber of Commerce by one or more
arbitrators appointed in accordance with the said Rules of
Arbitration.
Example Clause:
LCIA Model Clause
In the event of a dispute arising out of or relating to this contract, including any question
regarding its existence, validity or termination, the parties shall first seek settlement of that
dispute by mediation in accordance with the LCIA Mediation Rules, which Rules are deemed
to be incorporated by reference into this clause.
If the dispute is not settled by mediation within [............] days of the appointment of the
mediator, or such further period as the parties shall agree in writing, the dispute shall be
referred to and finally resolved by arbitration under the LCIA Rules, which Rules are deemed
to be incorporated by reference into this clause.
The language to be used in the mediation and in the arbitration shall be [............].
The governing law of the contract shall be the substantive law of [............].
In any arbitration commenced pursuant to this clause,
(i) the number of arbitrators shall be [one/three]; and
(ii) the seat, or legal place, of arbitration shall be [City and/or Country].
WHAT IS MULTI- TIERED DISPUTE
RESOLUTION CLAUSES?
 Multi-Tiered Dispute Resolution Clauses is a clause in the
contract between the parties which requires the parties to be
engaging themselves in distinct stages which give results of a
final and binding resolution prior to arbitration or litigation.
 The stages of the process are as follows:
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NEGOTIATIONS BETWEEN PROJECT PERSONNEL
NEGOTIATIONS BETWEEN SENIOR EXECUTIVES
MEDIATION
DISPUTE RESOLUTION BOARD
ARBITRATION or LITIGATION.
Typical Uses of Multi-Tier Arb.
Clauses - Long Term or
“Relationship” Agreements
 Joint Ventures
 Distributorship or Licensing Agreements
 Supply Agreements
 Long Term Service Agreements
 Governing Documents for Closely Held Entities
 Construction or Infrastructure Projects
Increasing Role of Party Autonomy
 One of the most important aspects of multi- tiered arbitration
clauses is ‘party autonomy’. The principle of ‘party autonomy’ is
greatly recognized in a driving force in the international
arbitration. Party autonomy in arbitrational proceedings acts as
one of the key distinguishing features of the arbitration
agreements. It gives the parties the freedom to choose the forum
and the procedure to be followed according to their own
convenience. This principle guides international commercial
arbitrators in determining the correct choice of the law
applicable to an international commercial contract.
 The only limitation, which is there with regards to multi-
tiered arbitration clause is that, it should not be against
public policy or be illegal.
NEGOTIATIONS
 Negotiations are the cheapest and fastest dispute
resolution mechanism which allows parties to preserve
their business relationships and continue in future.
Negotiations are usually the first step of MTDRC’s and
contractually mandated because a contractual binding
has a psychological effect that ensures parties actually
to negotiate before beginning arbitration or litigation.
The MTDRC drafters contractually mandate different
levels of negotiations with different authorities in
order ensure a result out of the dispute.
MEDIATION
 in terms of the outcome of the settlement which is
absolutely based on the parties’ interests and needs.
Mediation is a process where the negotiation is
conducted by a neutral third party, the mediator.
Mediator is a trained professional, who helps parties to
find the best solution to their disputes, by identifying
the strength and weaknesses of their positions,
mediation will result in a settlement. Mediation is a
confidential ADR process it’s a creative in nature
DISPUTE RESOLUTION BOARDS
 In contracts involving specific and very technical
details, parties may put for dispute resolution boards
consisting of contract specific experts. The purpose of
such option is the fact that “technical issues to be
handled by experts before considered by Arbitral
Tribunal.”
PROBLEMS WITH MTDRC
 When one tier should come to an end and
next begins, it becomes necessary to know
when to stop wasting time and money and
proceed to the next stage.
 mediation may require disclosure of
sensitive business information.
 an agreement reached by mediation is not
directly enforceable.
QUESTIONS
 Whether an agreement to negotiate and mediate
our enforceable?
 Whether MTDRC’s providing arbitration as the
last stage are they part of mechanism of
arbitration?
ENFORCEABILITY OF ADR STAGE OF
MTDRC in Different Jurisdictions
 ENGLAND
 AUSTRALIA
 GERMANY
 FRANCE
 SWITZERLAND
 INDIA
ENGLAND (Common Law)
 In England it appears from the decided decision that
two different theories are present one in favour of ADR
and the other against it. In Courtney’ Case it was
decided that agreement to negotiate is vague and
uncertain and in Channel Tunnel it was held that
parties in general be held to the agreements made by
them regarding their chosen dispute resolution
procedure.
AUSTRALIA (Common Law)
Aiton v. Transfield
 The defendants wanted a stay of proceedings on the grounds that the contracts
on which the plaintiff based its claims contained express provisions for the use
of ADR before proceedings could be instituted.
 The plaintiff asserted that the defendant made misleading representations
during the tender process and during the performance, thereby causing the
plaintiff to be unable to complete the works according to the contracts, and as a
consequence to have performed additional work and according to a different
completion period. The plaintiff therefore claimed damages allegedly incurred
by reliance on these representations.
 It was held that it could not order specific performance of a dispute resolution
clause even if it was possible to satisfy the legal requirements for the court to be
able to determine that the clause is enforceable. This is due to the difficulty for
the court to supervise the process.
SWITZERLAND (CIVIL LAW)
 In Switzerland there is a doubt casted over the practical importance of mediation by an
independent mediator for commercial disputes because the Swiss courts always conduct
settlement negotiations themselves and the fact that broad common-law type pre-trial discovery
procedures does exist in Switzerland and as such cannot inflate the cost of litigation.
 In a case involving a construction of an apartment the parties had agreed that disputes arising
would be decided by the courts. However, the parties undertook that, before referring the matter
to the court, they would submit it to a panel of conciliators. If the parties failed to settle the
matter within 30 days after the conciliators had issued a recommendation, each party could refer
the dispute to litigation.
 After completion of the apartment, the claimants discovered several construction defects. The
parties commenced conciliation proceedings with two main defects and settled. However, when
the respondents interrupted these works, the claimants filed a claim with the Zurich District
Court requesting the remedy of all the defects, not just the two on which the parties had settled
by conciliation.
 The respondents maintained that the court had no jurisdiction, or if it had, it must reject the
claim. The respondents argued that conciliation had dealt with only two of the defects invoked
by the claimants and that, with regard to other defects, the necessary condition precedent for
commencement of litigation was not met.
 The Cassation Court decided that a conciliation clause was an issue regarding material
contractual commitments, i.e. of substantive nature, a condition precedent to jurisdiction of the
court. According to this decision, a conciliation clause is to be treated as an agreement of purely
substantive nature. Consequently, ordinary courts would, despite the existence of a conciliation
clause, accept jurisdiction, even if one of the parties ignored the clause.
FRANCE (CIVIL LAW)
 In Polyclinique des Fleurs case, the French 2nd Civil
Chamber held contrary to the Zurich Cassanation Court.
According to French practice the claimant is required to
comply with the conciliation clause, otherwise the court
will refuse to start with judicial proceedings.
 In 2001 the French 1st Civil Chamber has held that namely a
finding that a contractual provision for conciliation in
mandatory terms, is not enforceable- a result which
violates the fundamental principle pacta sunt servanda.
GERMANY
 The Bundesgerichtshof held that a clause, under which the parties had
agreed to attempt to resolve disputes arising out of a contract by settlement
negotiations before commencing court proceedings, was valid under German
Law and that, in general, any claim brought against one of the parties by the
other before the courts would be inadmissible if the settlement negotiations
had not been commenced and completed.
 The court confirmed that, if the parties agreed on a mandatory settlement
clause, both parties were obliged to co-operate in carrying out the settlement
negotiations. An action brought before the courts prior to completion of an
agreed settlement procedure was inadmissible.
 Like the Common Law position the questions even in the Civil Law System
our answering in two different directions as to is mediation mandatory prior
to commencement of arbitration or litigation and whether it is enforceable
under law. One of the objections raised is that mediation should be
voluntary and that a forced mediation cannot lead to a satisfactory result
which seems to be refuted because of the fact that modern mediation
science has proven that the intervention by a third neutral party improves or
multiplies the probability that the parties may be able to reach an
agreement.
OTHER LEGAL PROBLEMS
Prescription:



Does initiation of ADR proceedings stay the
run of prescription or is it still necessary to
approach a court for an injunction? In Cable &
Wireless the court found that “the mere issue
of proceedings is not inconsistent with the
simultaneous conduct of an ADR or with a
mutual intention to have the issue finally
decided by the courts only if the ADR
process fails.” It follows that proceedings
could also be instituted to interrupt
prescription.
In France it was mentioned obiter in Poiré v.
Tripier that by submitting a dispute to
conciliation or arbitration the effect of the
applicable statute of limitations is suspended.
Thus, in most cases a person whom is unsure
about the question whether the run of
prescription will be suspended while MTDR is
being used will be able to approach the court
for an order to that effect.
Enforceability of Settlement
Agreements:
 Article 14 states that the settlement
agreement becomes enforceable the
same as an arbitral award.
 Thus this being an internationally
widely accepted principle courts
must follow it for the success and
smooth functioning to conciliation
proceedings
 UNCITRAL Model on International
Commercial Conciliation, Art. 14
THE SOLUTIONS BY
GENERAL DRAFTING METHODS
 Drafting MTRDC’s the following has to be kept in mind
which of the ADR techniques to use; in what order to use
them; over what period of time they will be used; the
precise form of each particular technique to use and
lastly whether there is a need for “separate” dispute
resolution paths, or an integrated multi-tiered process.
 In order for an ADR clause to be effective, it ought to be
contractually sound and the following should be
included to ensure certainty and thus eventually
enforceability. The procedures to be used before employing
arbitration should be clearly stipulated in the contract.
 Contracting parties should double ensure there to be
ambiguity for MTDRC’s to be successful.
Enforceability Issues
Solutions:
 Seat your Multi-Tier ADR Clause in a jurisdiction which
will enforce the preliminary tiers
 If you are considering placing the seat in an unfamiliar
jurisdiction, Consult Local Counsel
 Include provisions giving the arbitrator the power to
require specific performance of preliminary tiers of the
ADR clause
OTHER ISSUES IN CONNECTION
WITH MULTI-TIER CLAUSES
 Interim relief, preliminary measures
 Involvement of arbitrators in first-tier phase
 Confidentiality of information from first-tier
 Suspension of limitation periods
 Penalty payments in case of non-compliance
 Remedies in case of breach of contract
 Counterclaims
 Violation of non-mandatory settlement
processes
Position in India
 In the case of M.A Sons v. Madras Oil and Seeds Exchange Limited and another the High
Court of Madras observed that:
 “an award made pursuant to a proper arbitration agreement is final, subject, of course, to
the consequences of any such term of the contract”
 The parties entered into and agreement and one of the clause specified that the contract
would be subject to the by-laws of the Madras oil and seeds exchange Ltd. later a contract
by- law came into existence which gave the parties a right to appeal. It was contended that
this was opposed to the Condition No. 7 of the First Schedule of the Arbitration Act, 1940
which provided that the award shall be binding on the parties.
 The Court however rejected this argument observing that there is nothing preventing
parties to pursue an appeal. The Court heavily relied on a decision of the Calcutta High
Court in the case of Hiralal Agarwalla and Co. v. Joakim Nahapier and Co. Ltd , in this case
the Calcutta High Court dealt with a situation where the dispute was first refered to
Arbitrators, then to an umpire, and there on to a committee of appeal. The Court held that
there was nothing to prevent the parties from agreeing to a submission containing in it a
further submission to arbitration and held that the appeal was valid. The Court also
referred to a passage from Russel on Arbitration which mentions that an arbitration
agreement may provide for an appeal. Hence, the High Court was of the opinion that, an
award made pursuant to a proper arbitration agreement is final, subject, of course, to the
consequences of any such term of the contract.
The Centrotrade Case
 In the present case, Centrotrade Minerals and Metals Limited entered into a contract for
the sale of Copper Concentrate to Hindustan Copper Limited to be used at by the latters
at its plant in Khetri, Rajasthan. One of the clauses in the contract provided that, in case
of any dispute between the two parties, the matter would be referred to arbitration in
India before the Indian Council of Arbitration (ICA) in accordance with the rules of
arbitration of ICA. In the event of any disagreement with the decsions given by the
arbitrators under the ICA, the matter would be further referred to a second arbitration in
London, in acoordance with the rules of International Chamber of Commerce (ICC). A
dispute arose Centrotrade Minerals approached ICA for arbitration, arbitrator made an
award in favour of Hindustan Copper Lt. (HCL). Centrotrade made an appeal to the
second arbitral tribunal in london under the ICC. Arbitrator made an award in favour of
Centrotrade. As a result HCL filed an application with the District Judge of Alipore,
Calcutta, seeking declaration of the award passed by the ICC as void and unenforceable.
On the other hand Centrotrade filed an application with the Senior division Civil Judge
for the execution of the ICC award. both the cases were sent to the Calcutta High Court,
where a single Judge Bench gave the decision in favour of the Cantrotrade but the
Division Bench of the High Court reversed the decision. Hence an appeal by both the
parties to the Supreme Court. The matter was placed before a bench comprising Justice S
B Sinha and Justice Tarun Chatterjee. Both of whom differed in their opinions. Justice S B
Sinha outrightly rejected the presence of two tiers of arbitration under the scheme of the
Arbitration Act, 1996. Justice Tarun Chatterjee on the other hand was of the opinion that
the two tier arbitration is possible under the Arbitration Act.
Justice S.B. Sinha’s View
 “throughout, the provisions nowhere it is mentioned that an appeal can be made or an
application can be filed against the award to a separate arbitration board or forum. So,
the finality and legality has to be determined
 Further Justice Sinha added that a domestic award not set aside as provided under the act
within the time frame provided under S. 34 would become a decree by legal fiction as
provided under S. 36 of the Arbitration Act. [14] The decree can only be set aside as
provided under the Act. It would be opposed to public policy if the same is set aside by a
private adjudicator. by the Court if it is so challenged.”
 On the issue of whether the ICC award would be enforceable as a foreign award or not
justice Sinha opined as “it is inconceivable that one part of the arbitration agreement
shall be enforceable as a domestic award but the other part would be enforceable as a
foreign award”
 Justice Sinha further said that the move from Indian Council of Arbitration to the ICC
arbitral tribunal would not amount to an appeal, as an appeal is generally a continuation
of the same proceeding. In the present case two different tribunals would use two
different set of proceedings and rules. Hence it would not amount to the same
proceedings.
Justice Chatterjee’s View
 Justice Sinha was of the opinion that, a domestic award cannot be challenged
anywhere else except before a national court on the grounds specified under
Sec. 34 of the 1996 Act.
 However, on the same issue issue Justice Tarun Chaterjee was of the opinion
that,
 “…The intention of the parties was that the second arbitration was in the nature
of an appeal and that the second award would take precedence over the first
award. It is therefore amply clear that the intention of the parties to the
agreement was that if the parties are dissatisfied with the first award and if
approach was made to the ICC arbitrator… then the first arbitration award
would not be binding on the parties nor there would be any existence of the
same after the ICC award was made. Thus, it cannot be said that the proceeding
before the ICC arbitrator was an independent proceeding nor it could be said
that it was merely a second arbitration in London, U.K.”
CONCLUSION
 With an in-depth analysis of MTDRC one can conclude that drafting of
them has to be specific for their application to be success when
disputes arise. The courts shall also make efforts that these ADR
processes are respected as is arbitration therefore when the question of
their applicability is an issue the courts shall take a dynamic stand and
always try to make them as far as possible applicable upon the parties.
This will undoubtedly reduce unnecessary tensions between the parties
and increase business cooperation.
 As today the world is growing global village and commerce and trade is
growing at a rapid scale such dispute resolution mechanisms have to
become enforceable for a cheaper and less time consuming process.
Dispute Resolution in the commercial world is to be done at the fastest
to achieve the greater good and for a better future of the world of
tomorrow.
Delhi High Court
Havels India Ltd. vs Electrium
Sales Ltd. on 16 April, 2013
 C.S. (O.S.) No. 2221/2012 Page 14 of 23 regarding the
invocation of the arbitration. If that were the case, all
multi-tier dispute resolution clauses, also known as
escalation clauses can be frustrated by one party
claiming that its participation in the preceding
mediation proceedings cannot be used to trigger the
arbitration clause, merely because it used the term
„without prejudice‟ in the communications.
 Contact:
[email protected]
Thank you

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