16 October 2017

Multi-tier dispute resolution clauses

The ASA Conference, which took place on 15 September 2017 in Bern (see here for the conference materials), dealt with the practical aspects of so-called multi-tier dispute resolution clauses (MDR-clauses). The topics addressed included when they should be used and how they should be drafted.

What are multi-tier dispute resolution clauses?
MDR-clauses provide for a (often tailor-made) dispute resolution mechanism, which includes different layers and methods (see e.g. the med-arb model clause of the Swiss Chambers' Arbitration Institution). Each layer and method will be triggered only if and when the previous layer and method does not lead to a settlement. In the final layer, the dispute is usually submitted to state courts or arbitral tribunals for adjudication. Sometimes these clauses are also referred to as "step-clauses". This term adequately describes the fact that they contain various steps of dispute resolution and that progression to each step only occurs if the prior step is unsuccessful. Other authors use the term "escalation-clauses", referring to the fact that the clauses often provide for an escalation of a dispute within the organisations of the parties involved.

When to use multi-tier dispute resolution clauses?
At the ASA Conference, it became evident that the request to include some kind of step- or escalation-clause is often business driven and does not come from the in-house counsel or even external counsel. The business people want to avoid the need for complicated legal pro-ceedings to resolve possible future disputes. This is a justified aim, in particular in situations in which the parties intend to continue their collaboration beyond any dispute.

The lawyers are often cautious in including such multi-tiered dispute resolution clauses. While they appreciate the potential benefits of these clauses, they also see the pitfalls. They are, e.g., well aware that a badly drafted clause may give the other party a strong tool to effectively obstruct the commencement of litigation or arbitration. This may lead to serious issues in a specific case. In particular, a given claim may become time-barred. Hence, many speakers at the ASA Conference advocated that such clauses must provide for a swift and easy escape route and a safety net (i.e. a possibility to commence state court or arbitral proceedings after a predefined time limit for settlement discussions has lapsed). This requires that the pre-arbitral steps are defined in a sufficiently clear and operable manner. Clauses, which provide for "friendly negotiations", will usually not fulfil this purpose.

Should multi-tier dispute resolution clauses be compulsory or not?
The comparison of various jurisdictions' approaches to MDR-clauses made clear that only compulsory clauses will be enforced. This leads to the question as to whether it makes any sense to include non-compulsory escalation clauses in contracts at all. The general answer from the lawyers seems to be in the negative. Indeed, many contributors stressed that if two parties want to negotiate voluntarily in the case of a dispute, they can always do so.

What happens if an enforceable step- or escalation-clause is not complied with? This question raises some difficult legal issues. The Swiss Federal Supreme Court took quite a pragmatic approach in a recent landmark decision (DSFC 142 III 296). It found that a party can commence arbitral proceedings even if it has not complied with the pre-arbitral tier. The arbitral tribunal will have to stay the proceedings and set a time limit for the parties to proceed with the pre-arbitral tier (see here for details).

What conclusions should we draw? First, when confronted with a proposal to include a step- or escalation-clause in a contract, one should consider whether such a clause will be necessary to allow negotiations between two parties. If the relationship is of such a nature that, in the case of a dispute, the parties will be in a position to initiate discussions on a resolution informally, a clause is not required. Second, if a clause is included, it should be of compulsory nature, so that it may be enforced if necessary. This requires clear and unequivocal language. Third, each clause needs to include a clear and easy path to adjudication.

Our Dispute Resolution Team will be happy to answer any further questions you may have.

Authors: Christian Oetiker, Claudia Walz

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