By Sagar Gupta and Juan Pablo Charris
It is commonplace for complex commercial agreements to have a multitiered (or escalation) dispute resolution clause providing for tiered dispute resolution mechanisms. These mechanisms may include negotiation, mediation, conciliation, and arbitration, or any combination of these processes culminating in arbitration and/or litigation. Despite their recent proliferation, leading common law jurisdictions have variously treated pre-arbitration steps as mandatory conditions precedent going to the root of the arbitral tribunal’s jurisdiction or as voluntary steps that may be varied by acquiescence and subsequent conduct.
In this piece, the authors make two inquiries:
- the allocation of competence between a tribunal and a court to decide on the compliance of pre-arbitration procedures; and
- whether the compliance with pre-arbitration steps is a question of jurisdiction or admissibility.
The article examines these questions in light of the recent developments as to the position of multi-tiered dispute resolution clauses with reference to judicial decisions in England, Hong Kong, Australia, and Singapore.
England
In line with the principle of party autonomy, English courts have generally been reluctant to find compliance with multitier dispute resolution clauses as jurisdictional pre-conditions to arbitration, absent clear language in the parties’ agreement to that effect.
However, in Emirates Trading Agency LLC v. v Prime Mineral Exports Pte Ltd ([2015] 1 WLR 1145), the English High Court, while considering a challenge to an arbitral award under section 67 of the English Arbitration Act 1996, treated a failure to comply with the pre-arbitral steps as a matter affecting the tribunal’s jurisdiction. The Emirates Trading decision was criticized in some quarters as being inconsistent with English law and contrary to English public policy. Notably, the distinction between jurisdiction and admissibility was not specifically considered in Emirates Trading but the compliance of pre-arbitral steps was simply assumed to be an issue of jurisdiction.
The decision in Emirates Trading was subsequently considered and distinguished in the recent case of Republic of Sierra Leone v. SL Mining Ltd ([2021] EWHC 286 (Comm)). The English High Court in Sierra Leone drew a distinction between jurisdiction and admissibility and found no basis for a jurisdictional challenge under section 67. The Court decided that compliance with a multitiered dispute resolution clause is:
- a procedural matter falling within the competence of the tribunal; and
- is an issue of admissibility (rather than jurisdiction) and goes to whether the claim is premature.
Notably, the court identified the harmonizing trend in this regard and referenced international legal scholarship on the matter, which it found were all going “one way”. The approach taken in Sierra Leone was subsequently endorsed in NWA and others v NVF and others [2021] EWHC 2666. Interestingly, the court clarified in NWA that, albeit compliance with pre-arbitral procedural requirements is a prima facie issues of admissibility, parties may opt to engage the tribunal’s jurisdiction by providing clear and precise wording to this effect in the relevant multitiered dispute resolution clause.
On a separate note, in Kajima Construction Europe (UK) Ltd v Children’s Ark Partnership Ltd ([2023] EWCA Civ 292), the English Court of Appeal recently concluded that contractual provisions providing for mandatory alternative dispute resolution (“ADR”) procedures can create a condition precedent to the commencement of litigation. However, such contractual provisions are enforceable only when the drafting is sufficiently clear, precise and certain, with the mechanism referring to objective criteria, and tailored to the specific contract. Ultimately, the court (through a majority decision) dismissed the appeal seeking the enforcement of pre-litigation steps on grounds that the relevant ADR procedure was unenforceable.
Hong Kong
In C v D ([2022] HKCA 729), the Hong Kong Court of Appeal held that, subject to an agreement of the parties to the contrary, disputes regarding pre-conditions to arbitration go to the admissibility of the claim rather than to the jurisdiction of the tribunal and, in turn, are for the tribunal to decide. Accordingly, the Hong Kong Court of Appeal concluded that non-compliance with multitiered dispute resolution clauses cannot lead to a successful jurisdiction challenge to an award before the court save for exceptional circumstances where the contract makes clear that failure to follow the pre-conditions to arbitration will have jurisdictional consequences. More recently, the Hong Kong Court of Appeal granted leave to appeal in C v D before the full court, which was listed for hearing on 27 April 2022, as the court considered that the case raised a question of general importance.
The Hong Kong court has signaled a clear policy preference in favor of arbitration for the compliance with arbitral pre-conditions to be decided by the tribunal and one that is an issue of admissibility.
Australia
Similar to English law, an “agreement to agree” is not considered sufficiently certain to be enforceable under Australian law. However, contrary to English decisions, some Australian courts have distinguished between an agreement to agree and a good faith negotiation clause, holding the latter to not be incomplete or lacking essential terms.
In the landmark case of United Group Rail Services Limited v Rail Corporation New South Wales (74 NSWLR 618), the New South Wales Court of Appeal enforced a requirement for a senior representative of each party to “meet and undertake genuine and good faith negotiations” as a pre-condition to arbitration. However, in doing so, the court did not make any observations on whether non-compliance with the negotiation clause would leave the arbitral tribunal without jurisdiction.
Nevertheless, there remains a live debate on whether tiered dispute resolution processes should be enforced if they are futile (See, Contrast Constructions Pty Ltd v Allen [2020] QCAT 194; Cf. Santos Ltd v Fluor Australia Pty Ltd [2016] QSC 129). The Supreme Court of South Australia, while considering the validity of a tiered dispute resolution clause on grounds of uncertainty, held in Tesseract International Pty Ltd v Pascale Construction Pty Ltd ([2021] SASCA 8) that the parties’ choice of conciliation constituted a jurisdictional pre-condition to arbitration. The contract provided for consecutive conciliation and arbitration processes, both of which were stated to be determinative and binding. The court reminded parties to ensure that the different processes in a tiered dispute resolution clause should be interlinked and the drafting should be clear.
However, Australian courts are increasingly of the view that tiered dispute resolution mechanisms are not issues of jurisdiction. For instance, in WCX M4-M5 Link AT Pty Ltd v Acciona Infrastructure Projects Australia Pty Ltd (No 2) ([2022] NSWSC 505), the Supreme Court of New South Wales held that:
- the question of whether an arbitration agreement is “inoperative” for the purpose of s 8 of the Commercial Arbitration Act 2010 (NSW) (based on the UNCITRAL Model Law) should generally be left to the arbitrator unless it was preferable for the court to determine such matters; and
- non-compliance with pre-arbitral steps does not render the arbitration agreement “inoperative” (and consequently does not strike at the tribunal’s jurisdiction).
Continuing the trend of giving broad and inclusive interpretation to arbitration agreements, in late 2022, the Queensland Court of Appeal upheld the arbitration agreement in a tiered dispute resolution clause (See, Lee v Lin & Anor [2022] QCA 140). The court was considering an appeal from a first instance decision on whether the litigation proceedings should be stayed in favor of arbitration. The court held that the arbitration agreement was valid as it obliged the parties to “refer the dispute to the Australian Commercial Disputes Centre (ACDC) for final settlement by a single arbitrator”. The mere fact that there was a post-arbitration step contemplated in the agreement (i.e., litigation), did not invalidate the arbitration agreement.
Singapore
Singapore’s tryst with multi-tiered dispute resolution clauses has come full circle. While initially the Singapore courts were reluctant to discount the jurisdictional consequences of non-compliance with pre-arbitral steps (See, International Research Corp PLC v Lufthansa Systems Asia Pacific Pte Ltd and another [2013] SGCA 55), recent jurisprudence suggests that the Singapore courts will likely treat arbitral pre-conditions as matters of admissibility within the arbitral tribunal’s competence. In BTN and another v BTP and another ([2020] SGCA 105), the Singapore Court of Appeal was asked inter alia to consider whether a tribunal’s decision that an issue was res judicata was a matter of admissibility or jurisdiction. The Singapore Court of Appeal endorsed the “tribunal versus claim” test previously set out in BBA and others v BAZ ([2020] SGCA 53) and found that res judicata was an issue of admissibility and not jurisdiction, and in its reasons, stated that “tribunals’ decisions on objections regarding preconditions to arbitration, like time limits, the fulfilment of conditions precedent such as conciliation provisions before arbitration may be pursued, mootness, and ripeness are matters of admissibility, not jurisdiction” (emphasis added).
In the recent case of Max Engineering Works Pte Ltd v PQ Builders Pte Ltd ([2023] SGHC 71), the Singapore High Court made an order for specific performance compelling parties to mediate their dispute, even though the arbitration was already afoot. The court’s reasoning was that the use of the words “shall refer the dispute to mediation” in the dispute resolution clause (instead of an endeavours or good faith obligation) required the court to respect the parties’ choice of dispute resolution process. In this case, the parties’ obligation to mediate extends so long as arbitration of the dispute had not been concluded, such that both the mediation and arbitration were to run in parallel.
Conclusion
A harmonizing trend appears in respect of multi-tiered dispute resolution clauses in major common law jurisdictions. This is an interesting pro-arbitration trend as courts often deal with competing policy objectives to enforce escalation clauses, including judicial non-intervention in arbitration and enforcing the bargain entered by parties to commercial contracts.
Firstly, in a bid to be arbitration-friendly, there seems to be broad consensus that the compliance of pre-arbitration procedures should be decided by the arbitral tribunal. However, in most cases, the national courts will retain jurisdiction to review the arbitrators’ decision in this regard. Secondly, while there have been notable aberrations in the development of the legal position, which is still evolving, recent case law suggests that compliance with pre-arbitration steps will be seen as questions of admissibility.
Ultimately however, notwithstanding the pro-arbitration trend, courts will be guided by the wording of the escalation clause and, therefore, parties should be mindful of the impact of precise and clear drafting of these clauses, tailored to the specific contractual relationship.
JUS MUNDI blog: Multitiered Dispute Resolution Clauses: Towards Harmonization?