Multi-tiered clauses: pros and cons of an alternative dispute resolution system

Multi-tiered, or multi-step, clauses are dispute resolution clauses containing a phased system to resolve differences, which starts with a number of alternative dispute resolution steps (negotiation between senior managers, mediation, dispute boards, etc.), and ends with arbitration if the first alternative steps prove unsuccessful.

It has been said that these clauses work as a filter only letting the most entrenched disputes go through to arbitration.

On their nature, much has been discussed as to whether they are genuine arbitration agreements or something different.

The truth in practice is that over recent years the use of this type of clause has been considerable in the most diverse types of contracts and industries (construction particularly). And the main arbitration courts propose specimen multi-tiered clauses.

The advantages generally associated with this type of clauses concern escaping the negative consequences of an arbitration proceeding. With these clauses, it is sought to arrive at a solution through processes that are not harmful to the commercial relationship (avoid the stigma of a proceeding) and considerably save the parties time and money.

Moreover, if the outcome of alternative dispute resolution procedures fails to work, the parties (and the respondent especially) have more time to prepare their defense.

Despite their advantages, these clauses are sources of more than a few problems where one of the parties fails to observe the multi-tiered procedure, or where the wording of the clause is unclear or ambiguous as regards the various steps and the mandatory nature or otherwise of the pre-arbitration steps. When talking about multi-tiered clauses, legal commentators have in fact focused on the problems associated with clauses of this type and on giving guidance for avoiding them. To be more specific, the main topic when talking about these clauses is their effects and consequences on the arbitration proceeding, in addition to their recognition and enforcement of the ensuing award, if one of the parties fails to follow the procedure envisaged in the multi-tiered clause.

Another potentially conflictive matter is where one of the parties seeks injunctive relief from a judicial court under a legal system that requires the party to commence an arbitration proceeding within a given time (days, generally) which means the party cannot observe the multi-tiered procedure.

Put concisely, whereas any arbitration agreement that has not been carefully worded may pose problems when it comes to the commencement of the arbitration proceeding and/or to the recognition and enforcement of the award (problems that are magnified by drawing up late-night clauses), these risks are much greater when we enter the domain of multi-tiered clauses. Not in vain has it already been said that multi-tiered clauses run a particular risk of ending up being pathological clauses.

So, rather just pasting a specimen multi-tiered clause into an agreement, proper thought should be given to whether a multi-tiered procedure is in the parties’ interests, and if so, extreme care taken over how the clause is worded to avoid, or mitigate, any potential problems. This may involve elements such as clearly determining whether or not the pre-arbitration steps (negotiation, technical expert, dispute boards, etc.) are mandatory,  the time periods, or, if applicable, the events determining failure of the pre-arbitration steps and allowing them to be skipped.