DRAFTING MULTI-TIERED CONTRACTUAL DISPUTE RESOLUTION CLAUSES: A BALANCING ACT

Increasingly popular among contractual counterparties, multi-tiered dispute resolution clauses require that parties attempt one or more stages of alternative dispute resolution (ADR) in the event that a dispute arises between them. Only then, if and when ADR fails, may parties finally commence binding arbitration or litigation knowing that they tried to mitigate the burden, cost and time expense of such proceedings.

There are many forms of multi-tiered ADR clause, largely because they can be tailored to counterparties’ specific requirements and business practices. While, objectively, this promotes flexibility, there are numerous drawbacks to mandating restrictive procedural steps particularly at the outset of a commercial arrangement. To a degree, there is some ‘obvious commercial sense’ in such multi-tiered clauses where used to promote early settlement (as observed in Emirates Trading Agency LLC v Prime Mineral Exports Private LTD (2014).

However, that logic relies on the clause in question being sufficiently clear, precise and certain. The risk is that if clauses are not carefully drafted, or are simply unrealistic, parties will encounter significant procedural hurdles and practical obstacles as they progress through each agreed ADR step. Nevertheless, despite the questionable efficacy of such clauses, they remain evermore popular among sophisticated commercial counterparties, and are often increasingly complex.

Enforceability of multi-tiered dispute resolution clauses under English law

Historically, English courts refused to recognise a bare agreement to negotiate for lack of certainty. Much like ‘an agreement to agree’, a promise of this nature was impractical in circumstances where it was not sufficiently clear how negotiations would be finally determined. While this principle remains, over recent years the courts have shed light on what will make a layered ADR agreement sufficiently clear so as to be legally enforceable.

Apr-Jun 2021 issue

Weil, Gotshal & Manges (London) LLP