Tiered Dispute Resolution Clauses
Given the significant levels of early international support for the Singapore [Mediation] Convention and the growing popularity (and success) of international commercial mediation (see https://www.kwm.com/en/jp/knowledge/insights/in-anticipation-of-this-month-s-singapore-mediation-conference-20190806), tiered dispute resolution clauses (“TDRCs”) are very much in focus for many corporate counsel. In several industries, for example the energy industry where parties are often engaged in complex long-term contractual relationships that require continuing, day-to-day cooperation, TDRCs are already widely used as a way of solving potential disputes as and when they arise and saving ongoing working relationships. Nevertheless, there are some pitfalls that you need to be aware of and so we will look at:
(i) an English high court judgment from last month that both underlines the courts’ strong support for alternative dispute resolution (“ADR”) and TDRCs, and highlights the requirements you need to satisfy in order to make sure that your TDRCs are enforceable; and
(ii) 4 TOP TIPS to bear in mind when drafting an enforceable TDRC.
TDRCs – what are they?
TDRCs are contractual provisions setting out a series of ADR steps that parties must take whenever a potential problem or dispute arises – prior to commencing any formal legal proceedings. These pre-action ADR steps can include discussions and negotiation between different levels of staff, as well as adjudication, early neutral evaluation or mediation – all aimed at finding solutions to problems in a non-adversarial setting. In short, TDRCs are a way of forcing parties to communicate and settle issues amicably so that their working relationship might continue to function. Lawyers are often involved, whether in the form of inhouse counsel or otherwise, but the objective is always to prevent the metaphorical walls going up and communications being reduced to costly written legal submissions served in court or arbitration proceedings.
TDRCs - advantages
Quite simply, TDRCs allow potential disputes to be addressed quickly and informally so that problems are solved before they get out of hand, working relationships are protected and time and money is not wasted. Business can continue relatively unhindered. TDRCs facilitate the use of problem-solving methods of ADR which can minimise disruption to business and projects – they help take the heat out of a situation by allowing for cooling-off periods of discussion and negotiation. These are important commercial advantages and there is very little downside: the ADR options introduced through TDRCs cost very little to try but offer a significant potential upside in terms of savings.
TDRCs - pitfalls
A question sometimes asked is whether TDRCs merely equate to more levels of potential dispute or are an important step towards solving disputes before they escalate. The answer generally depends on how well your TDCR is drafted.
In practice, there are some potential pitfalls which unless a TDRC has been drafted carefully, can undermine the benefits of agreeing alternatives to formal legal proceedings. Most often, the types of pitfalls that arise stem from a failure by parties to explain precisely what they would like to do when a potential problem arises. It is this lack of clarity that most often results in satellite litigation with parties arguing over whether for example, they are obliged to hold discussions or negotiations and if so for how long, or whether they must mediate or can go straight to court or arbitration.
Historically, TDRCs have been challenged on the basis that they were considered to be no more than agreements to agree – and therefore too uncertain for the courts to monitor and enforce. However, in recent years, in particular for reasons of public policy, the balance has shifted towards the courts accepting that provided they are clearly drafted, TDRCs can constitute (jurisdictional) conditions precedent to the commencement of court or arbitration proceedings. This shift in approach was underlined in a case in 2014 (Emirates Trading v Prime Mineral Exports), when the high court acknowledged the public interest in these matters and noted that “…commercial…[people]…expect the court to enforce obligations which they have freely undertaken and…[where]…the object of the agreement is to avoid what might otherwise be an expensive and time-consuming arbitration.” In fact, the judge in Emirates went so far as to suggest that “a time limited obligation to seek to resolve a dispute in good faith should be enforceable” – despite concerns being expressed in some quarters that it would be difficult in practice for a court to determine whether a party had in fact complied with its obligations to negotiate in good faith.
TDRCs - how to avoid the pitfalls: Ohpen Operations v Invesco [August 2019]
The more recent case of Ohpen Operations v Invesco Fund Managers re-emphasises the public policy element but also confirms the courts’ support for clearly drafted TDRCs and highlights how problems can be avoided by summarising the key requirements of a valid, enforceable TDRC.
The Ohpen claim concerned a contract to develop a digital online investment platform. Delays led to a dispute and the contract was terminated. The parties attended one ‘without prejudice’ meeting before Ohpen then commenced court proceedings. Invesco challenged the jurisdiction of the court arguing that the proceedings had been commenced in breach of a TDRC contained in the parties’ contract. The TDRC required any dispute to first be discussed by the parties themselves; then referred to their contract managers; then escalated to the parties’ executive committees; and, failing a settlement, then referred to mediation under CEDR Rules. Invesco’s case was that the TDRC was mandatory and quite apart from the different stages of discussions that should have been explored, the parties should at least have mediated before Ohpen filed a claim in court.
In response, Ohpen claimed that the TDRC only applied to disputes arising in the initial stage of the project and/or before the contract was terminated. However, unlike in many cases, there was no debate as to whether the parties’ one without prejudice meeting (and any related exchanges) was sufficient to satisfy the TDRC obligation for named individuals on each side to seek resolution between themselves, and failing that, for the parties’ executive committees to try likewise.
As a matter of contractual interpretation, the Court rejected Ohpen’s attempt to limit the application of the TDRC to the initial phase of the project. The Court also acknowledged that a TDRC which requires parties to follow a specified dispute resolution process (such as that provided by CEDR) can in principle create a condition precedent to court and can be enforced by way of a stay of proceedings. As with the Emirates case, the Court reaffirmed “the clear and strong policy in favour of enforcing alternative dispute resolution provisions and in encouraging parties to attempt to resolve disputes prior to litigation.” It then set out four key requirements for an enforceable TDRC:
(1) the TDRC must create an enforceable obligation requiring the parties to engage in ADR;
(2) the obligation must be clearly expressed as a condition precedent to court proceedings or arbitration (in Ohpen, the TDRC stated that “if a Dispute is not resolved in accordance with the Dispute Procedure [i.e. discussions and then mediation], then such Dispute can be submitted by either Party to the exclusive jurisdiction of the English courts”);
(3) the dispute resolution procedure does not have to be formal but must be sufficiently clear and certain by reference to objective criteria, including machinery to appoint a mediator or determine any other necessary step in the procedure without the requirement for any further agreement by the parties [NB. the reference to CEDR’s Rules of Mediation in Ophen satisfied this requirement]; and
(4) the court has a discretion to stay proceedings commenced in breach of an enforceable TDRC, and in doing so will have regard to the public policy interest in favour of upholding ADR clauses.
The Court held that the TDRC in Ohpen met these criteria and therefore ordered a stay of the court proceedings in favour of mediation. Notably, the Court also rejected the argument that the TDRC did not survive termination of the parties’ contract – finding that an enforceable TDRC is “indistinguishable from an arbitration clause” in this regard.
TDRCs – 4 top practical drafting tips
To be enforceable, a TDRC must be clear and certain as to the parties’ intention to be bound by an obligation to undertake a well-defined ADR process before commencing any formal legal proceedings. As such, a well drafted TDRC should:
1. set out clear, ascertainable time limits and procedures for each step in the ADR process – whether that involves for example, discussions, negotiation, or mediation; it should be clear to the parties (without the need for any further agreement on procedures), at what point each step has become exhausted thereby triggering the next step in the process, and how each step is to be taken. This means setting out what is expected in terms of any negotiations – for example, who would be required to attend, when where and for how long/how many times, etc;
2. make clear that each step in the ADR process is mandatory and if a step is not taken by either side, it will prevent that party from taking any further steps or commencing legal proceedings;
3. in the case of a requirement to mediate, refer to mediation rules or a mediation institute so that no further agreement on the part of the parties is required in order to progress the mediation and appoint a mediator. In Ohpen, the parties agreed to CEDR Rules – equally enforceable would be a reference to the Singapore International Mediation Centre (“SIMC”) Rules (or the recently created Japan International Mediation Center (“JIMC”) - Kyoto). In the light of the Singapore Convention, we can expect an increasing number of industries to start using TDRCs with references to institutional mediation as a matter of policy; and
4. expressly preserve the right to seek urgent interim relief from the court. In some situations, a party may need to obtain a freezing injunction or some other interim relief pending the outcome of attempts to resolve their dispute. A carefully drafted TDRC should contain an express carve-out allowing the parties to seek relief where necessary and even before any ADR or formal legal process has started.
One cautionary note to bear in mind is that while it is possible to enforce TDRCs which require the parties to hold discussions or negotiate in good faith, care should be exercised in that while it will certainly help if objectively determinable criteria are clearly set out, it is nevertheless still difficult to prove that a party has (or has not) acted in good faith. Consideration of whether there has been compliance will be fact dependant and subjective in nature.
In short, as with all dispute resolution clauses but perhaps especially so in the case of TDRCs, it is important they are considered, negotiated and drafted carefully in order to be most effective. And although such clauses may not traditionally be a key priority in commercial negotiations, if done properly, there can be significant potential benefits for all concerned.
46 States signed the Singapore Convention on 7 August, including the US, China, India, S. Korea, Saudi, Sri Lanka, Malaysia, Philippines and Singapore. Japan is also due to sign soon. In comparison, only 10 States signed the New York [arbitration] Convention when originally introduced – there are now 160 State signatories
Teare J in Emirates Trading Agency LLC v Prime Mineral Exports Pte Ltd  EWHC 2104 at para 64
See para 52 of judgment
 EWHC 2246 (TCC)
Centre of Dispute Resolution – a leading ADR service provider in London specialising in the resolution of conflict deadlock
Note that in Walford v Miles  2 AC 128 per Lord Ackner, an obligation to negotiate in good faith was said to be inconsistent with a party’s self-interest in negotiations and the right to withdraw from negotiations in order to encourage the other side to make an improved offer. As such, a bare agreement simply to negotiate or hold discussions in good faith is unlikely to be enforced