by Saiesh Kamath

1. Introduction

There are various ways of resolving disputes depending on the nature of the dispute, the stage it is in, and the inclination of the parties towards the resolution of the dispute. Some stages of disputes are more amenable to amicable dispute resolution methods like negotiation, mediation, and conciliation, while more advanced disputes may require arbitration. As Frank Sander and Stephen Goldberg have said, “fitting the forum to the fuss” is necessary.[1] This is the spirit behind Multi-Tiered Dispute Resolution (‘MTDR’) or ADR-first clauses.

These clauses respect and recognise that all disputes cannot be treated in the same way. Hence, there is more discretion allowed to parties to resolve the dispute in ways that are most appropriate to their business relationships and histories.

MTDR clauses are designed to address escalations in business relationship disputes by giving parties opportunity to pursue less formal dispute resolution methods including mediation or negotiation, either before or in parallel to court litigation or arbitration. Each resolution process is designed to resolve the dispute at a particular stage. Therefore, these can be considered ‘dispute resolution clauses’ as much as they can be considered ‘dispute escalation avoidance clauses.’

There are many commercial reasons for the popularity of MTDR clauses. Primary among them is the ability to maintain long-term relationships as well as the benefit of access to quick, economic, and effective dispute resolution methods.[2] They also allow parties the freedom to design the resolution mechanism in a way that best addresses the complexities of the parties’ working relationship. For instance, in complex construction disputes parties may prefer to opt for adjudication by a diverse panel of experts who understand the sector and its commercial considerations.

MTDR clauses open parties up to the benefits of the ADR process, such as narrowing the issues disputed. This has the effect of freeing up the time of the arbitral tribunals or Courts, and serves commercial interests by ensuring that time spent resolving the dispute is as brief as possible.

The study of international perception and acceptance of these clauses is interesting to gauge shifts in attitudes to ADR-first processes. In Part II, the enforcement of MTDR clauses and its implications for court processes are explored. In Part III, effects of non-enforceability on businesses are discussed and best practices for drafting MTDR clauses are examined. In Part IV, concluding remarks are offered.

2. International View of Enforceability

MTDR clauses are useful for maintaining business relationships and are widely used in sectors that require continuous cooperation,[3] such as the construction industry. However, such clauses must be enforceable for them to hold value. On this point, there are two dominant perspectives.

One camp considers some processes provided in the MTDR clauses to be unenforceable because those processes are not binding.[4] Where the operation of these processes is dependent on voluntary participation, absence of any party could be fatal to the process. Hence, these processes should not be judicially enforceable.[5] However, even if they were judicially enforced, mandating a hesitant party to negotiate or mediate would not be helpful when such processes require good faith efforts and a commitment to solve or narrow the dispute based on cooperation.[6]

The other camp states that if the parties to the dispute have clearly agreed for the MTDR clause to be applicable and binding, then the Court must enforce it.[7] Their argument is that if the parties’ intention and action steps are sufficiently clear, then no party should be allowed to request an arbitration without having exhausted the dispute resolution steps that precede arbitration.[8]

Hence, Courts and tribunals have often held differing opinions based on which of the above stated views they subscribe to. For a long time, English law treated an agreement to negotiate or mediate as unenforceable as this was considered to be an ‘agreement to agree.’[9]

This position changed after the decision in Cable & Wireless v. IBM UK.[10] In this case, the Court held that such agreements are enforceable if they are sufficiently clear on the steps to be undertaken. While no definitive guidelines are in place as a minimum threshold for such agreements and clauses, using mandatory words (like ‘must’ and ‘shall’) over directory words (like ‘may’ or ‘might’) while referring to clearly defined procedures (as provided in the ADC Guidelines for Commercial Mediation, 2019 and the ICC Mediation Rules, 2014) and timelines are helpful in holding such agreements or clauses enforceable.[11]

Institutional rules tend to favour enforceability. For instance, Article 13 of the UNCITRAL Model Law on International Commercial Conciliation, 2002, states that arbitration or litigation is not to be initiated when conciliation is an intermediate process to be exhausted.[12]

Article 6(4) of the ICC Rules of Arbitration, 2021, (‘ICC Arbitration Rules’) gives a discretion to the International Court of Arbitration of the International Chamber of Commerce (‘ICC Court’) to decide whether—and to which extent—the arbitration could proceed.[13] This allows the ICC Court to mandate parties to comply with a pre-action protocol as envisaged by MTDR Clauses.

Some institutional rules actively encourage amicable methods for resolution of disputes. For instance, the ICC Arbitration Rules have provisions for administrative fee concessions when the dispute is first attempted to be resolved by ICC Mediation Rules, 2014.[14] The ICC Arbitration Rules also encourage the arbitral tribunal, by way of case management techniques, to encourage parties to settle all or part of their dispute through amicable ways.[15]

When parties approach tribunals and Courts without exhausting the initial process(es), does it affect the jurisdiction of tribunals and Courts or the admissibility of the claim? While jurisdiction refers to the tribunal’s power to decide a case, admissibility refers to the appropriateness of admitting the case at that particular stage.[16] Courts in Germany and Switzerland, for instance, have inconsistently held that MTDR clauses invoke admissibility issues.[17] When pre-conditions like negotiation and mediation, among others, are not fulfilled non-complying parties are not allowed to initiate arbitration. However, the treatment is not uniform, and some Courts have considered MTDR clauses to be a matter of jurisdiction.[18]

3. Best Practices For Enforceability

MTDR clauses need to be drafted with care and precision in order to ensure that Courts and tribunals enforce them.[19] If the pre-arbitration steps lack clarity, there is much scope for opposing parties to raise jurisdictional objections and prolong disputes.[20] This serves to harm the interests of commercial-minded parties, particularly in contexts where time is of the essence of a project, transaction, or deal.

Clarity in phraseology and language is necessary in international commercial contracts because judges and arbitrators from multiple jurisdictions may be called upon to interpret the MTDR clause.[21] Some interpretational approaches focus on the written word or ‘literal interpretation’ of the clause. If there is ambiguity at this stage, then there is scope for Courts and tribunals to interpret the clause in light of the purpose of the parties. This would work against the certainty required by international businesses.

Some best practices for designing an enforceable MTDR clause are as follows:

  1. Consult with a lawyer on the most appropriate ways to codify commercial interests in legal terms.
  2. The clause should clearly mention whether compliance with any pre-arbitration process is mandatory or optional before initiation of arbitration. This can be done by adding mandatory terms instead of directory terms.
  3. If the processes are intended by parties to be compulsory, then the processes should be accompanied with clearly defined procedures and conditions.[22] The terms involved must not be vague.[23]
  4. The transition between each step must be specified and detailed, without having to place reliance on any further agreement among the parties.[24]
  5. Stipulating time limits adds certainty and clarity to the clause and adds to ease of enforceability.[25] A timeframe stating the beginning and end stages is helpful.
  6. The dispute resolution forum or organisation mentioned must exist and should be clearly and correctly named in the clause.[26]

 4. Concluding Remarks

MTDR clauses are popularly used in international commercial contracts to resolve disputes. While such clauses are valid, their treatment on the point of enforceability is mixed. Often, Courts and tribunals ruled against enforceability when such clauses were unclear and uncertain.

Hence, best practices when drafting MTDR clauses are useful to ensure that commercial interests of businesses are met. Most importantly, the advice of lawyers and counsel should be sought for drafting MTDR clauses to account for developments in law.

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[1] Michael Komuczky and Sima Ghaffari, Drafting multi-tiered dispute resolution clauses, Kluwer Mediation Blog (30 November, 2021) available at http://mediationblog.kluwerarbitration.com/2021/11/30/drafting-multi-tiered-dispute-resolution-clauses/.

[2] Didem Kayali, Enforceability of Multi-Tiered Dispute Resolution Clauses, 27(6) Journal of International Arbitration 551 (2010).

[3] Nada Abouelseoud, A Practical Approach to Multi-tiered Dispute Resolution Clauses, Al Tamimi & Co. available at https://www.tamimi.com/law-update-articles/a-practical-approach-to-multi-tiered-dispute-resolution-clauses/.

[4] Didem Kayali, Enforceability of Multi-Tiered Dispute Resolution Clauses, 27(6) Journal of International Arbitration 551 (2010).

[5] Didem Kayali, Enforceability of Multi-Tiered Dispute Resolution Clauses, 27(6) Journal of International Arbitration 557 (2010).

[6] Halsey v Milton Keynes General NHS Trust [2004] 1 WLR 3002,

[7] Didem Kayali, Enforceability of Multi-Tiered Dispute Resolution Clauses, 27(6) Journal of International Arbitration 551 (2010).

[8] Didem Kayali, Enforceability of Multi-Tiered Dispute Resolution Clauses, 27(6) Journal of International Arbitration 557 (2010).

[9] Quick Guides, Tiered Dispute Resolution Clauses, Ashurst (28 June, 2021) available at https://www.ashurst.com/en/news-and-insights/legal-updates/quickguide—tiered-dispute-resolution-clauses/.

[10] [2002] All ER (Comm) 1041.

[11] Quick Guides, Tiered Dispute Resolution Clauses, Ashurst (28 June, 2021) available at https://www.ashurst.com/en/news-and-insights/legal-updates/quickguide—tiered-dispute-resolution-clauses/ referring to Wah (aka Alan Tang) and Another v. Grant Thornton International Limited and Others, [2012] EWHC 398 (Ch).

[12] UNCITRAL Model Law on International Commercial Conciliation, Article 13.

[13] ICC Rules of Arbitration, 2021, Article 6(4).

[14] ICC Rules of Arbitration, 2021, Appendix III, Article 2(12); Indranil Deshmukh and Samhita Mehra, Good Faith Negotiations and Mediation: A Missed Opportunity So Far, Cyril Amarchand Mangaldas India Corporate Law Blog (28 November, 2019) available at https://corporate.cyrilamarchandblogs.com/2019/11/good-faith-negotiations-mediation-missed-opportunity-so-far/.

[15] ICC Rules of Arbitration, 2021, Appendix IV, Clause h(i).

[16] Aceris Law LLC, Escalation Clauses in International Arbitration: The English Approach (21 December, 2021), available at https://www.acerislaw.com/escalation-clauses-in-international-arbitration-the-english-approach/.

[17] Rupert Bellinghausen and Julia Grothaus, Escalation Clauses: No Longer a Tripping Hazard for Arbitrations with Seat in Germany?, Kluwer Arbitration Blog (1 December, 2016), available at http://arbitrationblog.kluwerarbitration.com/2016/12/01/escalation-clauses-no-longer-a-tripping-hazard-for-arbitrations-with-seat-in-germany/; Aceris Law LLC, Escalation Clauses in International Arbitration: The English Approach (21 December, 2021), available at https://www.acerislaw.com/escalation-clauses-in-international-arbitration-the-english-approach/ referring to Republic of Sierra Leone v. SL Mining Limited, [2021] EWHC 286 (Comm); International Chamber of Commerce, ‘Interim Award in Case 16083’ [2015] (1) ICC Dispute Resolution Bulletin 57.

[18] Rupert Bellinghausen and Julia Grothaus, Escalation Clauses: No Longer a Tripping Hazard for Arbitrations with Seat in Germany?, Kluwer Arbitration Blog (1 December, 2016), available at http://arbitrationblog.kluwerarbitration.com/2016/12/01/escalation-clauses-no-longer-a-tripping-hazard-for-arbitrations-with-seat-in-germany/.

[19] Michael Komuczky and Sima Ghaffari, Drafting multi-tiered dispute resolution clauses, Kluwer Mediation Blog (30 November, 2021), available at http://mediationblog.kluwerarbitration.com/2021/11/30/drafting-multi-tiered-dispute-resolution-clauses/.

[20] Michael Komuczky and Sima Ghaffari, Drafting multi-tiered dispute resolution clauses, Kluwer Mediation Blog (30 November, 2021), available at http://mediationblog.kluwerarbitration.com/2021/11/30/drafting-multi-tiered-dispute-resolution-clauses/.

[21] Michael Komuczky and Sima Ghaffari, Drafting multi-tiered dispute resolution clauses, Kluwer Mediation Blog (30 November, 2021), available at http://mediationblog.kluwerarbitration.com/2021/11/30/drafting-multi-tiered-dispute-resolution-clauses/.

[22] Michael Komuczky and Sima Ghaffari, Drafting multi-tiered dispute resolution clauses, Kluwer Mediation Blog (30 November, 2021), available at http://mediationblog.kluwerarbitration.com/2021/11/30/drafting-multi-tiered-dispute-resolution-clauses/.

[23] Didem Kayali, Enforceability of Multi-Tiered Dispute Resolution Clauses, 27(6) Journal of International Arbitration 567 (2010); Nada Abouelseoud, A Practical Approach to Multi-tiered Dispute Resolution Clauses, Al Tamimi & Co. available at https://www.tamimi.com/law-update-articles/a-practical-approach-to-multi-tiered-dispute-resolution-clauses/.

[24] Didem Kayali, Enforceability of Multi-Tiered Dispute Resolution Clauses, 27(6) Journal of International Arbitration 577 (2010).

[25] Nada Abouelseoud, A Practical Approach to Multi-tiered Dispute Resolution Clauses, Al Tamimi & Co. available at https://www.tamimi.com/law-update-articles/a-practical-approach-to-multi-tiered-dispute-resolution-clauses/.

[26] United Group Rail Services Limited v. Rail Corporation New South Wales, [2002] C.L.C. 1319.