Multi-tiered Dispute Resolution Clause (MTDRC) in a Contract - Benefits and Risks

A Multi-tiered Dispute Resolution Clause can be described as a double-edged sword. Although the incorporation of a complex MTDRC in a contract may seem to be a brilliant idea on paper and does bring some benefits to the parties, the possible risks of the incorporation of a MTDRC especially the uncertainty as to its enforceability should not be overlooked.

What is a Multi-tiered Dispute Resolution Clause?

A Multi-tiered Dispute Resolution Clause (“MTDRC”) is a contractual clause that stipulates different stages, involving separate procedures, to resolve disputes. In general, the different stages in a MTDRC may compose of negotiations, mediation, expert determination, and finally arbitration or litigation. A MTDRC is also known as a “multi-step”, “escalation”, “ADR-first” or “pre-arbitral procedure” clause. A MTDRC is widely used in an international construction contract which is usually long-term and complex. A MTDRC will then have the effect of combining alternative dispute resolution with arbitration or litigation.

An example of a MTDRC is appended below:

‘If any dispute arises in connection with this agreement, the Company shall, within XX days of a written request from one party to the other, meet in a good faith effort to resolve the dispute.

If the dispute is not wholly resolved at that meeting, the parties agree to enter into mediation in good faith to settle such a dispute and will do so in accordance with the XXX Mediation Procedure. Unless otherwise agreed between the parties within XXX days of notice of the dispute, the mediator will be nominated by XXX Mediation Centre.

No party shall commence any court proceedings in relation to any dispute arising out of this agreement until it has attempted to settle the dispute by mediation and either the mediation has terminated or the other party has failed to participate in the mediation, provided that the right to issue proceedings is not prejudiced by a delay.”

What is the intention of parties of incorporating a MTDRC in a contract?

By including a MTDRC in a contract, the parties agree to resolve their potential disputes by using the escalating steps as provided in the MTDRC with the intention that arbitral or court proceedings will only be initiated if all the previous ADR techniques have failed to solve the dispute.

What are the benefits of inserting a MTDRC in a contract?

1. A MTDRC provides dispute resolution procedures that suit the parties’ needs in resolving different disputes that arise in a contract In a long-term and complex construction contract, various types of disputes may arise. A MTDRC gives the parties flexibility to structure the stages of dispute resolution so that it suits the specific needs of their relationship. The parties can design the MTDRC based on their autonomy when predicting the type or nature of disputes which are likely to arise.
   

2. A MTDRC provides an opportunity for the parties to resolve the dispute by ADR without resorting to arbitration or litigation Some disagreements which are less important or only involve small financial amounts could be early settled by ADR without reference to arbitration or litigation. This could also preserve the relationship between both parties.
   

3. A MTDRC allows the parties to reflect on the facts which cause the dispute Although the dispute may not be resolved by ADR and the parties have to commence arbitration or court proceedings, the parties may still benefit from participating in the ADR process as stipulated in the MTDRC. During the ADR processes, the parties could review the facts, gain a better understanding of the nature of the dispute and how the other party approaches the dispute which will help them to evaluate their legal positions better and to decide whether they should opt for a settlement or proceed with litigation or arbitration.
   

What are the possible risks of inserting a MTDRC in a contract?

1. Uncertainty as to the enforceability Most of the time, the dispute resolution clauses are being treated as one of the boilerplate clauses which being reproduced from precedents and inserted in the contracts at the eleventh hour without gaining much attention consideration. This has in turn caused the MTDRC to be poorly drafted. Since the MTDRC is drafted based on the party’s autonomy, the wordings of the MTDRC are very crucial in deciding how the MTDRC will be functioning. The MTDRC may be unenforceable if they are not meticulously drafted due to the lack of certainty of the clause and different approaches adopted by the court in deciding the enforceability of a MTDRC.
   

2. Stay of court or arbitration proceedings When a MTDRC is clearly drafted, mandatory and enforceable, another issue may arise when one party skips the ADR steps and resorts to arbitration or litigation directly. There may be situations where it is impossible for both parties to settle the dispute amicably as the relationship between both parties has become acrimonious. If one of the parties files a court proceeding directly without first resorting to the ADR as stipulated in the MTDRC, the court proceedings most likely will be stayed. The parties could have obtained a final and binding decision from the court if they were not bound by the MTDRC.
   

3. Obstruct or delay the dispute resolution process A MTDRC will only fit its purpose if both parties are still on good terms as the ADR process much depend on the consensus and cooperation of both parties. If the relationship of both parties has been damaged irreparably, engaging in all the ADR steps as stipulated by the MTRDC will only delay the commencement of the court or arbitration proceedings and the dispute resolution process. An enforceable MTDRC may be weaponised as a tactic to obstruct or delay the proceedings. is well illustrated in the case of Emirates Trading Agency LLC v Prime Mineral Exports Private Limited [2015] 1 WLR 1145.

In any event, parties shall be aware of the benefits and risks before incorporating a MTDRC in their contracts. It is advisable for the parties to adopt a standard clause to avoid the risks of unenforceability of a MTDRC due to its poor drafting.

This article is only intended to provide general information to our Firm's clients and it should not be regarded as professional legal advice. Should you require any professional legal advice, you are advised to consult us.