The Underlying Uncertainty of the Alternatives: Effectiveness of Multi-Tier Arbitration Clause



Bodhisattwa Majumder[*]

Dispute resolution clauses often stipulate a multi-tiered dispute resolution clause providing alternative dispute resolution (“ADR”) mechanisms rather than an arbitration clause. These clauses provide alternative dispute resolution methods, apart from arbitration, which is less time-consuming and cost-efficient than arbitration. The multi-tiered dispute-resolution clauses (“MTDC”) provide sequential dispute resolution procedures which conclude with arbitration.[i] Arbitration is placed as a last resort due to its binding nature and formal set up, compared to other avenues such as Negotiation, Mediation, Expert opinion or the like.[ii] In order to provide teeth to the pre-conditions to arbitration, the pre-arbitration procedures are made mandatory before going for arbitration.[iii] The same is done in furtherance of achieving a swift, dispute resolution process that consumes the least amount of financial and physical strain on the parties. However, the improper drafting of the multi-tiered clauses leads to further disputes that make the entire process futile. [iv] The parties move to litigation at the first drop of the hat contesting the mandatory nature of the clauses and whether there has been sufficient compliance to reach the stage of arbitration.

In every jurisdiction, the nature of these clauses has been disputed and challenged due to the consensual nature of the phrases, hence making them unenforceable.[v] The author in this piece strives to understand the impediments in the execution of these clauses, the reasons for conflict and also analyse the approach of the jurisdictions to resolve the same. The author has written this article in the context of Maritime Arbitration and the clauses drafted in the “Charterparties” (the contract between a shipowner and a cargo owner to hire the ship for a voyage).

Multi-tiered arbitration clauses - Enforcement

In order to develop an understanding of the efficiency of a MTDC, it is necessary to set a frame of reference regarding the construction. This is quintessential as the ruling on the enforceability of such a clause depends on the wording to derive the intention of the parties. The author for this article seeks to refer to the model dispute resolution clauses provided by the International Court of Arbitration (“ICC”).[vi]

i. Optional ADR- Under these model clauses, the parties at any point in time of the ongoing dispute arising out of the contract may seek ADR as a mechanism. The entire discretion to opt for the pre-Arbitration mechanisms are placed with any single party unilaterally.

ii. Obligation to consider ADR- Under these, the parties have to compulsorily “consider” ADR as a resolution mechanism before proceeding to any other method. The consent of the parties appears immaterial and the framework of the contract rules the procedure.

iii. Obligation to submit the dispute to ADR, with an expiration mechanism- Under these model clauses, the parties have an obligation to submit the dispute for ADR within a fixed date of reference. This date of referring to ADR is placed as a deadline with reference to the original date of the dispute to avoid any delay of filing.

iv. Obligation to submit the dispute to ADR, followed by arbitration- According to these types of clauses, the parties have to compulsorily use ADR as a resolution mechanism before proceeding to any other method.

In the above categories of clauses, Clause (ii) stands as the most disputed as the term “consider” has varied meanings defined by various arbitration institutions, which has been discussed in the next section. The forums have interpreted the measure of “considering” differently, and the minimum efforts required for being classified as “considering” have been diverse. For instance, in many situations, a discussion on the telephone has been considered sufficient and in some instances, a physical meeting was set to be the standard. As a result, the jurisdiction of the institution conducting arbitration procedure is challenged on the basis of the conduct of the parties.[vii] The forums move to adjudicate on the factum of the efforts by the parties to resolve the dispute through alternative means. Baltic and International Maritime Council (“BIMCO”) has also provided the model Clause, which falls within Clause (i) of the ICC Model Clauses and lays out optional mediation at any point of time before or after the commencement of arbitration. This has been followed by the London Court of International Arbitration.[viii] In order for the multi-tiered clauses to sustain, the sake of brevity has been a criterion before the courts of law, along with an unambiguous intention of the parties. In the absence of the same, the courts have interpreted the intention from the conduct of the parties before arriving for arbitration and that has often led to decisions incoherent to the intention of having a swift dispute resolution process. In most jurisdictions, there has been an inclination to rule against the enforcement of MTDC,[ix] however, recent years have seen contrary opinion.

The approach of jurisdictions towards MTDC

I. United Kingdom (London Court of International Arbitration)

Previously it was followed that whenever there was a lack of bare agreement mandating compliance of pre-arbitration procedure, the agreement cannot be enforceable.[x] Such agreements have been held as unworkable and impractical in practice.[xi] But in many cases where the procedure was mentioned, the courts have taken a lenient perspective when good faith has been exercised by the parties and an intention existed between the parties to mediate/negotiate.[xii] The stance in the common law courts was unclear regarding MTDC until recently.[xiii] The Court provided four-point guidelines to be adhered to while adjudicating on the enforceability of MTDC. Firstly, the pre-arbitral steps must be an enforceable obligation; Secondly, the obligations should be ‘expressed’ as a pre-requisite to arbitration; Thirdly, the process followed to meet the obligation should be sufficiently clear and certain by reference to objective criteria. Lastly, given that the above pointers are followed, the court shall have the discretion to stay proceedings in case it feels that an enforceable obligation has not been adhered to.

II. Australia (Australian Commercial Dispute Centre)

The Australian Courts have leaned in favour of enforcing arbitration clauses and opined that an agreement to meet/negotiate/discuss is a mandatory procedural aspect that the parties cannot disregard while proceeding to arbitration. It was held in the ruling of United Group Rail Services[xiv]that merely because there have been ambiguities and uncertainty, it does not connote that the MTDC clauses were unenforceable outright. The Australian courts have also adopted approach similar to the UK Regime to determine enforceability. The Courts have placed reliance on the structure of the agreement, the conduct of the agreement to meet pre arbitration obligations and then arrived into conclusion rather than focusing solely on the construct of the clause. This in turn connotes that the parties cannot seek shelter of poor drafting to avoid their pre-arbitration obligations. The decisions in most common law jurisdictions therefore have moved towards the mandatory regime, which places the pre-arbitral steps as a pre-requisite for arbitration. The approach taken is such that only when the steps are defined, complied and the compliance is genuine, the mode of arbitration can be pursued.

III. Singapore

The High Courts in Singapore, following the common law approach, share jurisprudential thoughts similar to Australia and hold that an agreement to negotiate serves a useful purpose and merely because there will be difficulty in proving breach, the courts should not hold such clauses to be lawfully unenforceable.[xv] It considers enforcement of pre-arbitration clauses a necessary precedent to have the arbitration.

IV. India

Post the amendments in (Indian) Arbitration and Conciliation Act 1996, the courts in their rulings had left it for the arbitration tribunal to answer and decide whether the compliance of the pre-arbitral steps have been taken into consideration by the parties.[xvi] Before the 2015 amendment, Indian courts have emphasised on the conduct of the parties while dealing with the nature of the pre-arbitration steps. If it was pointed out by the parties that the step of negotiation before the arbitration was a mere formality, the court[xvii] did not allow any party to take benefit from the clause and declare the arbitration as void. The most used and prominent observations were made by the Allahabad High Court in Sun Securities[xviii] where it held that the only scenario when the pre-arbitration mechanism is enforceable is when it forms a part of the procedure for appointment of the arbitrator. Another pre-requisite for this was that the mechanism should be adjudicatory.

Premature Arbitration – Approach of Indian Courts towards MTDC

The Indian regime has joined the bandwagon of other common law countries and adopted the mandatory approach while determining the enforceability of a MTAC.[xix] An invocation of the arbitration clause is said to be pre-mature if the procedure prescribed in the arbitration clause has not been complied with. The Indian Courts have primarily considered invocation of the arbitration clause as pre-mature in mostly three categories; Firstly, if the language of the clause mandates the pre-arbitration procedure; Secondly, if the conduct of the parties fell short of the conduct required in facilitating the pre-arbitration procedure and lastly, if the formalities required has not been complied.[xx]

A. Language of the agreement

In order to ascertain whether the clause of the agreement mandates pre-arbitration steps or whether the step is merely an option for the parties to exercise or they have to give efforts towards it compulsorily the Apex Court has noted:[xxi] that in order to understand the intention of the parties the prime importance shall be given to nature of the clauses and the language of the clause. In case the parties have intended to make the pre-arbitral steps mandatory and thereby indicated the same by using a clear, unambiguous clause the jurisdiction of the Arbitral Tribunal is ousted by non-compliance. Thus, in order to have an enforceable pre-arbitration procedure, the parties must have the terms drafted in a clear, unambiguous, and precise manner.

B. Conduct of the parties

The Apex Court in Visa International[xxii] also emphasized on the efforts made towards the facilitation of the pre-arbitration process, and deliberated whether the parties made serious efforts towards mutual discussion. In one instance, the Apex Court[xxiii] had taken the help of the correspondence exchanged between the parties (letters, emails, etc) to determine the intention of the parties. The conduct of parties was taken as primordial proof of the desire of the parties to partake into settlement in the following case. In clauses where it is mentioned explicitly that arbitration will take place for disputes which cannot be settled amicably, it forms a precondition for the parties to attempt for alternate ways to resolve the dispute before approaching the court.

C. Insufficient formalities

Non-compliance with procedural formalities also forms an impediment towards the enforcement of MTDC which can also result in premature arbitration. These include the statutory and contractual formalities such as Stamp duty, Registration, Signature, witness etc. The Apex Court in one instance[xxiv] had stopped the appointment of arbitrator as the deed had not borne stamp duty. As an Agreement to arbitrate is a contract, it is bound by the laws of contract (Indian Contract Act, 1972) and thereby the invalidity of the main contract might also affect the arbitration clause. Therefore, it is the duty of the tribunal to examine the instrument before admitting it as evidence for arbitration.[xxv]

Conclusion

The courts in a substantial number of jurisdictions have traditionally been reluctant or unwilling to enforce MTDC. However, in the last few years, courts in a have shown an inclination to enforce them. In order for a multi-tiered arbitration clause to be enforceable, along with the positive injunctions, the negative injunctions should also be precise and the parties are aware.[xxvi] The Courts have laid down guidelines for inclusion of an injunction which specifies with the connotation of definite words as “Shall” or “Must”. And in other instances where there has been a use of open-ended sentences such as “may”or“choose to” which leave scope of interpretation, then the timeline should be mentioned under which the parties can exercise their choice. Further, it has also been the practice that only after expiration of that period, the arbitration clause can be invoked. Simultaneous exercise of choice to mediate/arbitrate has led to disputes and that needs to be avoided. The various means of alternative dispute resolution exist to facilitate expedite procedures for the parties to relieve themselves from the clutches of litigation. In order to facilitate the same, it is quintessential to ensure that there is a certain degree of certainty and lack of vagueness which can be utilised by the parties to delay the due process. The Indian jurisdiction in this front has led the bandwagon of enforcement by laying specific criteria of enforcement and also laying possible instances where there is a leeway provided to the party. Comparatively, other jurisdictions are yet to follow the suite. The need is eminent for the other jurisdictions to have a uniform set of guidelines and model agreements for ensuring clarity among the parties and the courts alike.

[*]Bodhisattwa Majumder is a Final Year Student at Maharashtra National Law University. He is also the Editor-in-Chief of the Arbitration & Corporate Law Review, a venture to explore his interests in Corporate and Commercial Laws. He can be contacted at bodhisattwa@mnlumumbai.edu.in.

[i] Michael Pryles, Multi-Tiered Dispute Resolution Clauses, 18 J. Int'l Arb. 159 (2001). [ii] Klaus Peter Berger, “Law and Practice of Escalation Clauses”, 22 Arb. Int'l 1 (2006). [iii] James H. Carter, “Issues Arising from Integrated Dispute Resolution Clauses, in New Horizons in International Commercial Arbitration and Beyond”, ICCA Congress Series No. 12, 446 (A.J. van den Berg ed., 2005). [iv] Michael Pryles, “Multi-Tiered Dispute Resolution Clauses”, 18 J. Int'l Arb. 159 (2001). [v] Id, at pp. 423 [vi] Dyala Jimenez-Figueres, “Multi-Tiered Dispute Resolution Clauses in ICC Arbitration”, 14 ICC Bull. 71 (No. 1, 2003). at pp. 73. [vii] Multi-tiered Dispute resolution clause, Global Arbitration News, https://globalarbitrationnews.com/multi-tiered-dispute-resolution-clauses-a-reminder-of-the-court-of-appeals-split-decision/, Accessed 6th November, 2020. [viii] Recommended Clauses 2015-16, The North of England Protecting and Indemnity and Assoc. Ltd., Available at https://www.nepia.com/recommended-clauses-2015-16, Accessed 28th September, 2020. [ix] Pre-Arbitral Steps – Indian law perspective, International Law Office, https://www.internationallawoffice.com/Newsletters/Arbitration-ADR/India/Khaitan-Co/Pre-arbitral-steps-Indian-law-perspective, Accessed 6th November, 2020. [x] Walford v. Miles (1992) 1 All ER 453 (HL) [xi] Dhanani v. Crasnianski (2011) 2 All ER (Comm) 799 [xii]Cable & Wireless Plc v. IBM United Kingdom Ltd 2002 EWHC 2059 (Comm). [xiii] Ohpen Operations UK Ltd v Invesco Fund Managers Ltd [2019] EWHC 2246 (TCC). [xiv] United Group Rail Services v. Rail Corpn. New South Wales (2009) 127 Con LR 202., [xv] International Research Corpn. Plc v. Lufthansa Systems Asia Pacific Pte Ltd. 2012 SGHC 226. [xvi] M/s Simpark Infrastructure Pvt. Ltd. Vs Jaipur Municipal Corporation; MANU/RH/1010/2012; Ravindra Kumar Vermavs M/s BPTPltd.& Anr. MANU/DE/3028/2014; SBP & Co. vs Patel Engineering Co. (2005) 8 SCC 618 [xvii] Nirman Sindia v. Indal Electromelts 1999 SCC OnLine Ker 149. [xviii] Sun Security Services v. Babasaheb Bhimrao Ambedkar University Arbitration Case No. 4 of 2013 (All). [xix] Supra Note 15. [xx] Sushil Kumar Sharma v. Union of India CASE NO.: Writ Petition (civil) 141 of 2005; Siemens Limited v. Jindal India Thermal Power Arb. P.243/2017; SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd., (2011) 14 SCC 66. [xxi] Id, Sushil Kumar Sharma. [xxii] Visa International Ltd. v. Continental Resources (USA) Arbitration Petition NO.16 OF 2007 [xxiii] Supra Note 18, Siemens Ltd, at ¶30 [xxiv] Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd Civil Appeal No. 3631 of 2019. [xxv] Supra Note 18, SMS Tea Estates. [xxvi] Wah v. Grant Thornton International Ltd. (2013) 1 Lloyd’s Rep 11.

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