Tiered Dispute Resolution Clauses

This guide highlights the key issues to consider when drafting tiered dispute resolution clauses. 

Alternative forms of dispute resolution, or ADR as it is more commonly known, provide contracting parties with alternatives to arbitration and litigation offering faster, less expensive and more flexible methods of dispute resolution. ADR is commonly provided for by inclusion in a tiered dispute resolution clause (also referred to as a "stepped" or "escalation" clause). This involves a series of steps in the overall dispute resolution process, each designed to handle the dispute if it has not been resolved by the previous step. 

Commercial parties are becoming more creative in the drafting of tiered dispute resolution clauses and their use of ADR. If drafted carefully they can provide parties with a commercial and cost-effective dispute resolution mechanism. Conversely, poor drafting can add an extra layer of bureaucracy and, at worst, leave parties without proper recourse to the courts or arbitral tribunal.

This guide provides a brief overview of ADR and then looks at the issues that should be considered when including provision for ADR in a dispute resolution clause. 

What is ADR?

ADR is an umbrella term which covers a range of methods of dispute resolution. The main types are:

• structured negotiation;
• mediation;
• early neutral evaluation (ENE); 
• expert determination; and
• adjudication. 

The objective of ADR is to allow parties to conclude disputes in a more satisfactory and mutually advantageous manner by focusing on their interests and commercial objectives. Whereas the first three above - structured negotiation, mediation and ENE - are commonly used in conjunction with arbitration and litigation, the latter two - expert determination and adjudication – are often used as a dispute resolution procedure in their own right. Expert determination and adjudication are, typically, binding forms of ADR procedure which oblige the parties to abide by any resulting award(s). These forms of determinative ADR are more akin to arbitration in terms of outcome. The first two, structured negotiation and mediation, are the forms of ADR typically incorporated in a tiered clause.

See the table at the end of this guide for a more detailed description of the different types of ADR. 

The main features of ADR

These include:

• Consensual: Disputes are referred to ADR at the agreement of the parties – whether in advance by insertion of an ADR clause in the contract or at the time the dispute arises. 
• Confidential: ADR processes are conducted in a confidential environment. Procedures such as negotiation and mediation are conducted on a "without prejudice" basis unless, and until, settlement is reached. As such, if no settlement is achieved, generally speaking neither party may use or refer to any matters arising during the ADR in subsequent proceedings. In expert determination and adjudication parties can provide that the procedure be confidential.
• Flexible: One of the great advantages of ADR is that it allows parties to seek solutions which accommodate their commercial objectives and allows them to tailor the procedure to suit their needs. 
• Time and cost-effective: If the clause is drafted carefully and ADR used properly it should provide parties with a quick and relatively cost-effective dispute resolution mechanism. 

Reasons to include a tiered clause in a contract 

The primary value of a tiered dispute resolution clause lies in the fact that it puts ADR "on the agenda". Although ADR is widely recognised as offering a mechanism for dealing with disagreements at an early stage before the parties become entrenched in their respective positions, unless already provided for in the contract, the possibility of ADR may not immediately occur to the parties. Or, as is more common, commercial parties may consider that the suggestion of ADR at an early stage will be perceived by the other as a sign of weakness. The incorporation of an ADR mechanism clause in a contract circumvents this problem by providing ample justification for the question of ADR being raised and discussed without any suggestion of weakness or lack of confidence by either side. If it is not felt suitable the parties can always agree to waive the requirement.

The inclusion of ADR is particularly useful in disputes where the parties have a long-term relationship and want that relationship to continue.

Where the dispute resolution clause provides for litigation before the English courts the procedural rules oblige the parties to consider ADR at various stages of the case and, in particular, before litigation proceedings are commenced.¹ In those circumstances parties may consider that they do not need to provide for ADR in their contract. However, if provided for contractually and drafted appropriately (see below), an agreement to ADR may be enforced by the party seeking to rely on it and so should be provided for if the parties wish the obligation to go to ADR to have contractual force. 

There are no corresponding duties and obligations in arbitration and so, if the ultimate referral of any dispute is to arbitration, including provision for ADR is highly recommended. 

Enforceability of an agreement to ADR

Historically, an agreement to negotiate or mediate was unenforceable as a matter of English law as it was effectively an agreement to agree. However, the decision of Colman J in Cable & Wireless -v- IBM UK² has altered the position. Provided it is clear what steps the parties are required to take, the English courts will consider the obligation to be sufficiently certain and enforceable. Although the courts are not prepared to set out a list of minimum requirements that need to be satisfied for the ADR process to be binding, using mandatory language ("must" vs. "may"), referring to a clearly defined procedure (e.g. the CEDR Rules on mediation), and specifying a timeframe in which steps are to be taken, will assist in making your agreement enforceable.³  

Drafting considerations 

Structure and timetabling

A tiered dispute resolution clause involves a series of steps in the overall dispute resolution process, each designed to handle the dispute if it has not been resolved by the previous step. These vary from the single step clause which provides for mediation and then litigation/arbitration, to a multi-step clause which provides for a series of direct negotiations followed by mediation if the negotiations fail and then litigation/arbitration. 

If drafted properly, the structure can be very effective but if not, can be used tactically to delay matters. To avoid this the drafting should ensure that it is clear when one stage ends and another begins. The common approach is to provide for a structured time scale for when the various steps are to take place and to make it clear when the time period for each stage ends.

How detailed should the ADR provisions be? 

A tiered clause may be simple and short or may set out a lengthy and detailed process. Short form ADR clauses allow the parties to work out and agree the details if and when the dispute arises. The disadvantage is that the detailed machinery is not settled, and it may be difficult to agree this later; also the less detailed the form, the less the prospect may be of having it enforced by a court. On the other hand, a long form can contain all the details which will minimise later scope for procedural disagreement and may enhance the possibility of a court treating it as enforceable. The disadvantages, however, are that the details may not necessarily be appropriate to the actual dispute when it arises and trying to agree detailed dispute resolution provisions in advance, which may never arise in practice, may not be considered commercially desirable by the parties when entering into a contract.

"Catch all" provision

Caution should be exercised against making a tiered clause overly complicated. Some tiered clauses often provide for different forms of ADR depending on the type of dispute. For example, in a corporate transaction the clause may provide for expert determination when accounting issues are in dispute and litigation for legal disputes. This approach runs the risk of disputes falling between the gap and can lead to arguments over what constitutes a legal dispute. This is best avoided by ensuring that there is a "catch all" provision. In the example given this would be dealt with by providing that all disputes that do not fall within the expert determination clause are to be referred to the English courts.

Enforceable or not?

As mentioned above, if the parties' intentions and the procedure to be followed are clearly spelled out in the clause, the clause can be enforced. Consequently, the parties need to decide whether they want the agreed ADR process to be mandatory and draft accordingly. Although it is open to both an English court or English seated arbitral tribunal to stay any proceedings commenced pending compliance with the ADR process, there is a risk (particularly in arbitration) that a claim could be dismissed for being commenced prematurely. 

This can have significant consequences when limitation is an issue or injunctive/declaratory relief required. Therefore, it is prudent to incorporate a provision permitting the parties to commence litigation/arbitration proceedings notwithstanding the commencement of mediation/ADR.

If the parties do not want the obligation to be binding, make it clear in the contract that the process is not a pre-condition and does not prevent either party from commencing arbitration or litigation. Clarity is always preferable to satellite litigation.

Identification of a specific ADR procedure

When drafting the ADR clause it is up to the parties to decide whether they wish to specify a particular ADR procedure or whether they prefer to agree on one as and when a dispute arises. The reality is that once a dispute has arisen agreement may be difficult to reach so providing for this in the contract is to be preferred.

Is the identity of the neutral/mediator to be spelled out in advance? 

This is not recommended given the problems it causes if that person becomes unavailable. It is common for tiered clauses to provide that parties will agree on the choice of mediator and, failing that, for appointment to be made by an appropriate body. Ensure that the body chosen is capable of appointing a mediator or expert as, if not, and the parties cannot agree one, recourse may have to be made to the courts at additional cost.

Arbitration and litigation

Tiered clauses should provide a mechanism for a final, binding and enforceable resolution of the dispute, typically arbitration or litigation. Ensure that the usual principles are applied when drafting the litigation/arbitration clause and that they are consistent in their language with the rest of the clause.

Specimen clause

The golden rule with any dispute resolution clause is clarity in drafting. This is particularly true of tiered dispute resolution clauses which can be detailed and complex. The key principles to follow when drafting them are as follows:

• have a clear process;
• make it clear when the process is triggered;
• incorporate a time frame (beginning and end); 
• ensure that the decision makers are easily identifiable;
• make it clear whether the mediation is to take place before or during an adversarial procedure or whether options are to be left open; and
• state that it is not to be binding if that is the case.

The specimen clause below is adapted from one of the model clauses previously provided by the Centre for Effective Dispute Resolution (CEDR), an ADR organisation in the UK, and provides for final resolution in arbitration.⁴

Tiered clauses are not boilerplate – they should always be drafted by reference to the particular circumstances of the transaction. The specimen is useful for the purpose of illustrating how a tiered clause looks and operates and as a starting point for the drafting of a tailored tiered clause. 

If any dispute arises out of or in connection with this agreement or its formation, directors or other senior representatives of the parties with authority to settlethe dispute will, within [   ] days of a written request from one party to the other, meet in a good faith effort to resolve the dispute. 

If the dispute is not wholly resolved at that meeting, the parties will attempt to settle it by mediation in accordance with the CEDR Model MediationProcedure. Unless otherwise agreed between the parties within [   ] days of notice of the dispute, the mediator will be nominated by CEDR. To initiate the mediation a party must give notice in writing ("ADR notice") to the other party(ies) to the dispute requesting mediation. A copy of the request should be sent to CEDR. Unless otherwise agreed, the mediation will start not later than [      ] days after the date of the ADR notice.

EITHER [The commencement of mediation will not prevent the parties commencing or continuing arbitration.] OR [No party may commence any arbitration in relation to any dispute arising out of this agreement until it has attempted to settle the dispute by mediation and either the mediation has terminated or the other party has failed to participate in the mediation, provided that the right to issue proceedings is not prejudiced by a delay.]

If the dispute is not settled by mediation within [      ] days of commencement of the mediation or within such further period as the parties may agree in writing, the dispute shall be referred to and finally resolved by arbitration. CEDR shall be the appointing body and administer the arbitration. CEDR shall apply the UNCITRAL rules in force at the time arbitration is initiated. In any arbitration commenced pursuant to this clause the number of arbitrators shall be [1 – 3] and the seat or legal place of arbitration shall be [London, England].

1. Although parties cannot be compelled to mediate by the courts, where a party is regarded as having unreasonably refused to mediate, it may be penalised in costs at trial (Halsey v Milton Keynes General NHS Trust [2004] EWCA Civ (576)).
2. [2002] 2 All ER (Comm) 1041.
3. Wah (aka Alan Tang) and Anr v Grant Thornton International Limited and Ors [2012] EWHC 3198 (Ch). Any enforcement by the courts is counterbalanced by the fact that most ADR procedures allow a party to terminate the process at any time. A court will also not enforce such a clause if reference to an ADR procedure would be a completely hopeless exercise or if inappropriate in the circumstances.
4. CEDR does update its model clauses from time to time. If looking for the latest version, please contact CEDR direct.