ESCALATION CLAUSES – SOME TIPS FOR COMMERCIAL PARTIES
Escalation clauses (also known as ‘tiered’ or ‘multi-tiered’ dispute resolution clauses) provide for disputes between contracting parties to be resolved in stages. They provide for alternative dispute resolution (ADR) options, such as negotiation, mediation and expert determination, to take place before the relevant dispute is referred to arbitration or the courts. In this article we outline the potential benefits and downsides of incorporating such clauses into commercial contracts. After discussing recent court decisions as to the impact of non-compliance with an escalation clause, we conclude with some practical drafting tips.
Why include an escalation clause?
Escalation clauses are a common feature of commercial contracts, particularly in the context of infrastructure projects or other long-term contracts, where the resolution of disputes via negotiation or mediation is viewed as being more efficient and less disruptive to parties’ ongoing relationship than arbitration or litigation.
The primary value of an escalation clause lies in the fact that it puts ADR options ‘on the agenda’. Although ADR is widely recognised as offering a mechanism for dealing with disagreements at an early stage before parties become entrenched in their respective positions, unless already provided for in the contract, the possibility of ADR may not occur to the parties. Or, as is more common, commercial parties may consider that the suggestion of ADR at an early stage will be perceived by the other as a sign of weakness.
Oct-Dec 2022 issue
Ashurst