Broad-Gauging: The Multi-Tier Dispute Resolution Clauses

There has always been a need of the hour to settle the dispute fairly but in a fast and more efficient manner than litigation as allowed by the courtroom practice. Initially, when the practice of Alternative Dispute resolution was in its budding stage, it was nothing more than a hobbyhorse for a few offbeat scholars. Today, this practice is not shackled with the reputation of the cult movement[1] because the increase in the pendency of cases coupled with the inefficacy of the conventional justice delivery system and the high stakes of damaging reputation had led common people to make recourse to the practice of Alternative Dispute Resolution. This alternative emphasizes the power to negotiate rather than adjudicate.[2]

Arbitration has long emerged from the shadows of the ADR process to hold a different position in its place as the fastest-growing modicum of dispute resolution. For sophisticated contracts, it is not only a clear-cut choice between litigation in the courts and the resolution of disputes by international arbitration, rather now the status quo is making express provisions for one or the other forms of ADR before escalating the dispute to arbitration. This is often a more complex, multi-staged process than a plain vanilla arbitration or litigation process[3].

The involvement of multi-tier dispute resolution mechanisms has been on the rise in the international forum because of the growing complexity of the contract formation process and various types of disputes occurring in such trade relations. This is accentuated by the establishment of the blocs such as NAFTA and Mercosur.[4]

MULTI-TIER ARBITRATION CLAUSES

Explaining the pre and the post-arbitration clauses

Also known as escalation clauses or filter clauses, multi-tier arbitration clauses have now become the norm of the day finding their presence in the construction of complex contracts like contracts made for joint ventures, mergers, intellectual property[5], construction/infrastructure[6] , and long-term contracts. These clauses refer to the procedure that the parties are conditioned to adopt in case of any dispute. Instead of going for a plain vanilla arbitration or litigation, parties in the initial stages try to reach an amicable settlement. In case of its failure, the parties then resort to the adoption of a more formal and binding procedure of arbitration. Henceforth, such clauses provide for an alternate dispute resolution mechanism at each level before going for final arbitration. The scripture of such clauses at least ensures that some disputes can be resolved at the pre-arbitration stage and parties have a relook at the process of arbitration[7]. However, sometimes these clauses lead to various problems if the prescribed procedure i.e. the multi-tier dispute resolution clauses are not followed.  Some of the tiers involved in the procedure are as follows:

  • Negotiation – This non-binding method involves direct discussion and is employed to conclude without the involvement of a third party. Generally, this is the first tier of a typical dispute resolution clause[8].
  • Mediation- In this method, a third party is appointed as a facilitator who aids in reaching a mutual settlement. It involves a voluntary agreement on the side of both parties. It gives the parties their autonomy over the process ensuring that the third-party control is not counterproductive[9].
  • Expert Determination- This is just like the process of arbitration where a third party adjudicates the disputed matter but an arbitrator in arbitration is immune from personal liability while the same is not true for this[10].
  • Arbitration- This is the formal and binding procedure wherein an arbitrator is appointed to adjudicate the disputed matter. However, the arbitrator is not bound to follow the established law and procedure applicable in courts instead the law laid out in the arbitration agreement has to be followed[11].

Another aspect of these multi-tier dispute resolution clauses lies in the post-arbitration clauses wherein the arbitral award is further challenged or appealed to shed out the grievance of either of the parties. This is put into action after the arbitration proceedings arising from the contract have already been settled.

Hence, the broadest meaning explains the fact that these clauses lay down the various steps to be followed before and after the commencement and completion of the arbitral proceeding.

THE HIGHS AND THE LOWS

Highlighting the merits and the demerits of MTDRCs

THE HIGHS

As aforementioned, it is not a one-stage process and involves a variety of dispute-resolution mechanisms. These comprise different steps each incorporating a form of ADR culminating into arbitration or litigation. Such clauses help in establishing a blend of ADR and Arbitration which in turn helps the parties in adopting the best method for dispute resolution. Also, it gives the contracting parties to resolve the conflict by a non-adversarial mechanism[12].  Along the same line, it allows to solve the dispute at a stage before the commencement of the arbitration saving time and huge costs involved. For example- if the dispute gets resolved just by negotiation, then the parties won’t have to resort to arbitration. The cost now incurred is low and the outcome is the same.

This also avoids frustrating business relations. As the ADR mechanisms are involved, these clauses are more sensitive to the parties’ relationship and future communications[13]. Moreover, these offer the option to solve financially less important matters by less formal or informal methods[14]. Not only this, but the parties also get a chance to re-evaluate their legal stance helping them to review the cause of their dispute.  The parties also escalate at each level of ADR getting satisfactory results at some level and even if not, they proceed in the hope that the settlement would be finalized by the arbitral award. Also, the time involved in carrying forward the negotiating process in turn helps as a cool-off period taking the heat out of the dispute and dawning on the minds of the parties to reconsider their stance.

Party autonomy is the crux of the story of the Alternative Dispute Resolution mechanism. The autonomy given over deciding the laws and the procedures to be followed helps in reducing the possibility of risks in some ways as now the lead is in the hands of the parties themselves. Control over the outcome leads to managing the possible risks. Also, such mechanisms are used to preserve existing business relations. This also leads to devising creative business solutions to the existing problems which in case of arbitral or courtroom proceedings might not be possible.

THE LOWS

The roses come with their thorns. The same is true for MTDRCs. A complicatedly framed multi-tier dispute resolution clause prima facie might seem a good idea but when the parties are deeply entrenched in their disputes, the practicality of such clauses comes into question[15]. This is because the clause might not suit the present situation or the thought with which they were formed might not suit the present circumstances. The process will contain lacunas, gaps giving rise to uncertainties and there would be no objective indicator. Another demerit would be the situations in which the relations have been irreparably broken down, negotiation and mediation won’t work at the lower level. The parties would rather try to go for arbitration and won’t make any effort to negotiate the conflict leading to a waste of time and resources. This grim realization comes at a time when the clauses have already been laid down in the contract. The weak party may take advantage of this situation delaying the procedure.

At other times, the enforceability of one clause might affect the enforceability of other clauses. When the steps or tiers are not clear, the ambiguity scrambles the entire clause. The next major problem has come up recently after the amendment to Arbitration and Conciliation Act,1996[16] inter alia fixing the tenure within which the dispute has to be resolved. This is problematic as the time consumed in the conciliation proceedings is not exempted under the Limitation Act, of 1963[17].  On the lines of time-barred, the Arbitration clause can be nullified. These are some of the problems that need to be rectified while some of these have been answered by the different courts of the country.

THE JUDICIAL TRAJECTORY

Two Schools of thought prevailing!

There is a division of thought concerning the nature of the multi-tier dispute resolution whether it is a mandate or just a direction to follow the mediation/negotiation/conciliation before actually commencing the arbitration proceedings. The following two judgments provide a bird’s eye view of that discussion.

In Tulip Hotels Pvt Ltd., Mumbai, and another Appellants; Versus Trade Wings Ltd., Mumbai, and others[18], the High Court of Bombay upheld that conciliation is the first step of dispute resolution on which the second step of arbitration relies. However, it doesn’t mean that if the conciliation proceedings are deliberately rendered impossible or if it is deliberately avoided by the other party, then he would be rendered a useless spectator. Also, the parties have resorted to conciliation as the first step because they place good faith in both of them and the second stage is provided for the disputes unresolved. Hence the arbitration has to be preceded by the conciliation procedure. The purpose of clause 19 of the agreement highlighted that the parties can’t frustrate the dispute resolution mechanism deliberately. Herein the respondents when given a chance to reconcile their disputes within 30 days as per the agreement refused to do so stating conciliation is not possible resulting in the adoption of the arbitration procedure by the applicant.

In another case of Ravindra Kumar vs M/s. BPTP Ltd. & Anr. [19]– the Delhi High Court upheld that the procedure should be the follow-up of mediation proceedings by the arbitration but this condition shouldn’t be a bar for reference to arbitration preserving the rights of the party as specified by Section 77[20] and dismissing a petition under sec 11[21] or section 8.[22] Therefore, it is implied that the proceedings before arbitration is directive in nature and not mandatory. Also, he mentioned that attention should be paid to the arbitration clause and the mediation/conciliation proceedings should be concluded in a reasonable period. The question here raised was since the respondent didn’t comply with the conditions of the arbitration agreement, the petition has to be dismissed under section 8 of the Arbitration Act[23] by placing reliance on Haldiram Manufacturing Company Pvt. Ltd. v. DLF Commercial Complexes Limited[24]. The judge held two reasons for its directory nature- the first one is of sec 77 as specified above. The second reason is that Section 14 of the Limitation Act prescribes a time limit for the arbitration clause to be invoked and if the duration of mediation proceedings exceeds the time period, then the arbitration clause would be nullified. He also placed reliance on  Saraswati Construction Co. v. Cooperative Group Housing Society Ltd[25]. The issue was whether the prior requirement given in the arbitration clause is mandatory or directive for the invocation of the arbitration clause. The learned judge,

“Held that the prior requirement as stated for invoking arbitration even if not complied with, the same cannot prevent reference to arbitration, because, the procedure/pre-condition has to be only taken as a directory and not a mandatory requirement’’

Just like this, the stand of the Delhi High court in a legion of cases has been the same. The story of pre-arbitration clauses is still ambiguous, however for the post-arbitration clauses, the stand has become crystal clear after the Centograde judgment[26]. The position was clear even before this judgment but this gave closure to the debate.

In Heeralal Agarwalla & Co. vs Joakim Nahapiet & Co. Ltd[27], the Calcutta high court stated that the award given by the arbitrators can be referred to the arbitrators and then finally appealed to a committee. The contention of the ward being final and binding was rejected and the argument that it can be appealed further was accepted. The award of the committee will be accepted and will be applied to both parties.

The finality was given by the centrotrade judgment.[28] The facts were that there was a contract concerning the sale of copper concentrate and a dispute arose regarding the dry weight. As per the agreement, the dispute was to be first resolved through the Indian Council of Arbitration, and in case of grievance, the matter was to be ICC rules of arbitration and conciliation in London, UK. The issue was whether the two-tier arbitration is allowed in India and another issue was listed for further hearing. The Supreme Court, in its judgment, emphasized the party autonomy and remarked that the Arbitration and Conciliation Act,1996[29] does not hamper the party autonomy in deciding the arbitration procedure explicitly or impliedly. It was also held that the arbitral award can further be appealed for its reconsideration by another arbitrator.

CRITICAL ANALYSIS

Examining the topic at hand

After going through the various judgments mentioned above, it is clear that the ambiguity concerning the pre-arbitration clauses still prevails. There are High courts that have maintained their stance of pre-arbitration mechanisms as mandatory and while others have denied the same. While this can be problematic, the solution lies in the problem itself. The mandatory or directory nature of the arbitration clauses can be deciphered from the arbitration agreement itself.  Firstly, the drafting of such clauses should be done with a clear hand and in the simplest way. So that, at the time of dispute resolution, the ambiguity doesn’t become a barrier.

Secondly, the time period for pre-arbitration proceedings should be pre-decided or fixed so that there is no unnecessary delay and the option for arbitration is not restricted on grounds of time-barred under the respective sections. Also, this would eliminate the possibility of a situation where one party has a clear chance of getting the award in his favor but is unable to do so because of the extension of proceedings.

Thirdly, the language of the arbitration agreement should showcase whether the question of steps in the dispute resolution process is mandatory or directory in nature. If the condition made is precedent, then it has to be followed keeping the Limitation Act in consideration. The conditions of resolving the dispute without the appointment of an arbitral tribunal,  whether each step of dispute resolution mechanisms has been followed, the prescribed time limit for each step, and whether following each step of the dispute resolution mechanism is binding or not should be clear in the agreement leaving no space for varied interpretation.

Fourthly, the steps should be elaborated or detailed properly for the parties to follow and a legal right should be made to insist that each stage of the process is followed if mandated by the agreement. The conduct and communication between the parties can give clarity on whether the stages of the dispute resolution mechanism have been followed or not.

CONCLUSION

This article ignites the discussion of how arbitration became an alternative to the conventional method of adjudication i.e. litigation in the court system. This is carried forward to the inclusion of multi-tier dispute resolution clauses in the construction of complex contracts which has resolved the issue of dispute resolution at an early stage prior to arbitration saving time, cost, and especially business relations. However, the efficacy of such clauses is called into question when the drafting of these agreements gives ambiguity instead of clarity. The purpose of opting for such a mechanism is defeated if these clauses instead of saving time, cost, and energy come heavy on these elements. Here drafting of the clauses becomes critical since the clarity in these clauses not only gives insights into the binding nature of clauses but also serves the very purpose of opting for such a clause.


[1] Harry T. Edwards, Alternative Dispute Resolution: Panacea or Anathema, 99 HARV. L. REV. 668 (1986).

[2] Id. at 670.

[3] Craig Tevendale, Hannah Ambrose & Vanessa Naish, Multi- Tier Dispute Resolution Clauses and Arbitration, 1 TURK. COM.L.REV.31 (2015).

[4] Mauricio Gomm Santos, The Role of Mediation in Arbitration: The use and challenges of Multi-tiered Clauses in International Agreements, 10(38), Revista Brasileira de Arbitragem, 7, 7-15(2013).

[5] C. Collar Fernadez & Jerry Spolter, International Intellectual Property Dispute resolution: Is Mediation a Sleeping Giant in American Arbitration Association, 271 Handbook On International Arbitration & ADR (2d. ed. 2010).

[6] Michael Pryles, Multi-tier Dispute Resolution Clauses, 18 Journal of International Arbitration 159 (2001).

[7] Srishti Pareek, Multi-tier Arbitration Clause’ Mediation and Arbitration Centre < https://viamediationcentre.org/readnews/Njg2/MULTI-TIER-ARBITRATION-CLAUSE#:~:text=Multi%2Dtier%20arbitration%20clauses%20provide,an%20escalation%20or%20filter%20clauses.> (Last visited on December 9, 2022).

[8]  Ashish Kumar, Multi-tier Dispute Resolution Clauses, Scc Online ( 21 February 2022), https://www.scconline.com/blog/post/2022/02/21/multi-tier-dispute-resolution-clause/#:~:text=Multi%2Dtiered%20dispute%20resolution%20clauses%20use%20several%20dispute%20resolution%20procedures,does%20not%20solve%20the%20issue  (Last visited on December 15,2022).

[9] AMERICAN BAR ASSOCIATION, A Practical Guide For Resolving Government Contract Controversies, 12 American Bar Association (1999).

[10] Supra (n 8).

[11] Arbitration and Conciliation Act, 1996, No. 26, Acts of Parliament,1996(India).

[12]Katarina Tomic, Multi-Tiered Dispute Resolution Clauses: Benefits and Drawbacks, 2017 Harmonius: J. LEGAL & Soc. Stud. Se. EUR. 360 (2017).

[13] Id at 363.

[14] Id at 364.

[15] Supra (n 3).

[16] Supra (n 11).

[17] Limitation Act,1963, No.36, Acts of Parliament,1963(India).

[18] Tulip Hotels Pvt Ltd and others vs Trade Wings Ltd., Mumbai and others, (2010) 2 Arb LR 286.

[19] Ravindra Kumar vs M/s. BPTP Ltd. & Anr, (2015) 147 DRJ 175.

[20] Supra (n 11), s 77.

[21] Supra (n 11), s 11.

[22] Supra (n 11), s 8.

[23] Id.

[24] Haldiram Manufacturing Company Pvt. Ltd. v. DLF Commercial Complexes Limited, (2012) 193 DLT 410.

[25] Saraswati Construction Co. v. Cooperative Group Housing Society Ltd., (1999) 57 DLT 343.

[26] Centrotrade Minerals and Metal Inc. vs Hindustan Copper Ltd., (2020) 19 SCC 197.

[27] Heeralal Agarwalla & Co. vs Joakim Nahapiet & Co. Ltd,(1926), 31 CWN 730.

[28] Supra, n 27.

[29] Supra, n 17.


Author: Dhawni Sharda


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s