Following the recent decision in Emirates Trading Agency LLC v Prime Mineral Exports Private Limited [2014] EWHC 2104 (Comm), the longstanding position under English law regarding the enforceability of multi-tiered dispute resolution clauses (commonly known as escalation clauses) has been brought into question. Mr Justice Teare held that a clause that provided for friendly discussions was a “condition precedent to the right to refer a claim to arbitration”. Subsequently, he distinguished it from an agreement to agree, and suggested that such a provision held enough certainty to be enforced.

Generally, escalation clauses allow parties to stipulate that they shall enter into staggered dispute resolution proceedings. Typically, a more informal type of alternative dispute resolution (ADR) such as negotiation or mediation is specified as a first stage. The parties to the contract are only, in theory, permitted to commence arbitration or litigation once this first stage has been completed.

Why use escalation clauses?

Parties frequently use escalation clauses due to a desire to avoid formal proceedings in the interest of maintaining a working business relationship. The intent is that escalation clauses will encourage both parties to work amicably towards resolving their differences, and thereby avoid the cost and antagonism that may result from court or arbitral proceedings.

Preliminary discussions or mediation can also provide the parties with time to assess the strength of their case and their available options, and calculate the most cost-effective route of proceeding. If at fault, it may also give a party time to rectify the issue, and possibly prevent early termination of a contract. 

Oct-Dec 2014 issue

Morgan, Lewis & Bockius LLP