Multi-tiered dispute resolution clauses – what are they and what do you need to know?
What is ADR?
Alternative dispute resolution or ‘ADR’ for short is simply anything ‘alternative’ to court or arbitral proceedings. Mediation is probably one of the most common forms of ADR, but there are other forms: expert determination, adjudication, early neutral evaluation, conciliation and even a good old fashioned off-the-record negotiation, to name a handful.
What are the benefits of ADR?
The ongoing nature of some commercial agreements means that, if a dispute arises, formal dispute resolution proceedings might sensibly be seen as a last resort. By providing for the parties to undertake some less formal stages of dispute resolution before beginning litigation or arbitration, a multi-tiered dispute resolution procedure clause providing for ADR can help protect the relationship between the parties, and can save them significant amounts of time and money when compared with litigation or arbitration.
Institutions need to be aware of the pros and cons of ADR. These can, to a large extent, depend on the specific ADR mechanism in question. However, institutions should recognise that the use of ADR to settle a dispute can have numerous benefits, for example:
• Saving time – Reaching a resolution through the litigation process can often take many months or even years, whereas ADR can usually take place in much shorter timescales. The saving of the amount of senior manager time engaged (for example, Estates Directors in the context of complex construction disputes) can be very significant.
• Saving costs – Resolving a dispute through ADR is likely to be cheaper than doing so through the courts / arbitration, partly as a result of the shorter timescales involved.
• Flexibility, choice and control – ADR is often more flexible, enabling parties to reach solutions that are not based on a ‘win/lose’ outcome, and instead being focused on the solution (i.e. as opposed to the ‘rights and wrongs’). The parties are free to ‘bespoke’ the process to suit their needs and to reach settlement based on their interests, rather than having solutions imposed on them.
• Confidentiality – The parties can agree that the ADR process is confidential, which can give them the freedom to air sensitive commercial issues on a full and frank basis. In my experience, this can be useful for institutions looking to ensure that disputes are resolved within a protected forum, which preserves confidentiality thereby minimising or avoiding the risk of any reputational damage.
• Maintaining business relationships – Unlike litigation, which is adversarial in nature, ADR can enable the parties to a dispute to settle by consent, potentially increasing the likelihood of preserving ongoing business relationships.
• Likelihood of settlement – My experience is that ADR can give rise to very good prospects of achieving settlement. I am not alone, given that the 8th Mediation Audit produced by the Centre for Effective Dispute Resolution (CEDR) in July 2018 refers to an aggregate settlement rate of 89% for mediation (an impressive statistic by anyone’s standards!).
• Benefits without settlement – Even if the ADR process doesn’t result in settlement, it can still give rise to other benefits, such as narrowing the issues in dispute, testing the strengths and weaknesses of each party’s case and keeping channels of communication open.
What sorts of steps do multi-tiered dispute resolution clauses include?
Over the many years I have dealt with construction disputes, it is fair to say that the instances in which ADR has been considered and used have often occurred outside the scope of the parties’ agreed dispute resolution mechanism. That said, based on my more recent experience it is becoming clear that the growing confidence in ADR to achieve a resolution without the need for recourse to formal proceedings has led to an increase in the popularity and use of multi-tiered dispute resolution clauses.
A multi-tiered dispute resolution clause is one which might say that in the event of a dispute arising, the parties must follow a sequence of processes. For example, the clause might provide that, first off, the parties must arrange for director representatives of each party to meet to seek to resolve the dispute. If that doesn’t resolve the dispute, the next step might be to have chief executives (or some other senior representatives) to meet. If that doesn’t resolve the dispute, the next step might be for the parties to engage in a mediation before court or arbitral proceedings are commenced.
The recent case law
Given the increase in the popularity of multi-tiered dispute resolution clauses, it is perhaps unsurprising that the Technology and Construction Court (TCC) has recently had to decide a dispute which had arisen in relation to the construction and enforcement of just such a clause.
In the case of Ohpen Operations UK Ltd v Invesco Fund Managers Ltd ( EWHC 2246 (TCC)) the TCC provided useful guidance on the key factors.
The guidance is useful both to litigators dealing with disputes but also to those drafting multi-tiered dispute resolution clauses. Certainly, this case will be of interest to in-house counsel who will undoubtedly be at the ‘coal face’ in advising on contracts / agreements, many of which are likely to contain multi-tiered dispute resolution clauses.
So, what was the case about in a nutshell?
Invesco argued that its contract with Ophen contained a valid, binding and applicable ADR clause which included a mandatory tiered dispute resolution clause, part of which required a mediation prior to the commencement of proceedings. On this basis, Invesco said the court should exercise its discretion to stay the proceedings i.e. temporarily halt the court claim Ohpen had commenced, pending referral of the dispute to mediation.
Ohpen disagreed and opposed the stay. Its position was that, as a matter of construction of the contract, the relevant dispute resolution provisions were not applicable outside a certain period or following termination of the contract (the contract having been terminated by one of the parties).
What was the court’s decision?
Having considered a raft of earlier cases, the court provided guidance as to the key principles where a party seeks to enforce an ADR provision:
“(i) The agreement must create an enforceable obligation requiring the parties to engage in alternative dispute resolution.
(ii) The obligation must be expressed clearly as a condition precedent to court proceedings or arbitration.
(iii) The dispute resolution process to be followed 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.
(iv) The court has a discretion to stay proceedings commenced in breach of an enforceable dispute resolution agreement. In exercising its discretion, the court will have regard to the public policy interest in upholding the parties’ commercial agreement and furthering the overriding objective in assisting the parties to resolve their disputes.”
Applying those principles to the facts in the Invesco and Ophen case, the TCC decided that the proceedings should be stayed. In summary, it concluded that:
1. The contract contained a dispute resolution clause that applied to the parties’ dispute
2. The clause created an enforceable obligation which required the parties to engage in a mediation
3. The clause operated as a condition precedent to the commencement of proceedings. Although the term ‘condition precedent’ was not actually used in the clause, the meaning of the clause was clear i.e. the right to commence proceedings would arise only on the failure of the dispute resolution procedure to resolve the process and that included the need to mediate.
4. The mechanism was sufficiently clear and certain.
5. In all the circumstances, the court considered that a stay of proceedings was appropriate to enable a mediation to take place.
As to when the court should exercise its discretion to stay proceedings, the TCC emphasised that:
“There is a clear and strong policy in favour of enforcing alternative dispute resolution provisions and in encouraging parties to attempt to resolve disputes prior to litigation. Where a contract contains valid machinery for resolving potential disputes between the parties, it will usually be necessary for the parties to follow that machinery, and the court will not permit an action to be brought in breach of such agreement.”
What are the top tips?
When drafting a multi-tiered dispute resolution procedure clause it is sensible to consider:
• Who the dispute should be referred to. Discussions between the parties’ representatives are most likely to be successful when the individuals in question are familiar with, and have responsibility for, the products, services or projects. However, they must also have sufficient authority within the institution to be able to take the decisions necessary to resolve the dispute, or, indeed, the decision to refer it to mediation and subsequent court or arbitration proceedings.
• Setting a timetable for the phases of the procedure, as this helps prevents deliberate delays.
• The terms of any dispute resolution mechanism need to be clear and unambiguous. On a practical level it is worth considering:
• whether the dispute resolution clause should apply to all disputes or only certain types; and
• whether provisions relating to timing are realistic (for example, it is probably not sensible to include short timescales in respect of high value complex construction disputes).
• To reduce the risk of the negotiation and mediation provisions being held unenforceable, it is important to express the obligations as being a condition precedent to litigation or arbitration.
• Make sure the negotiation and mediation process is sufficiently clearly identified, by reference to objective criteria which the parties are required to engage in, prior to litigation or arbitration. The process to be followed must not only be clearly identified, but also must not leave the procedure open to being further agreed (being mindful that ‘agreements to agree’ are unlikely to be enforceable).
When a dispute has arisen, it will be necessary to take a careful look at the dispute resolution clause in play. If there is any doubt as to whether the clause in question gives rise to a watertight obligation to follow set processes before court / arbitral proceedings are commenced, either from the perspective of the institution wanting to engage in ADR (and avoid court / arbitral proceedings) or to avoid ADR and proceed straight to formal proceedings, it is worth seeking legal advice from a litigation specialist.