Enforceability of Multi-Tier Arbitration Clauses

This article was written by Tanmayi Sharma, a student of Jindal Global Law School.

Arbitration has gained immense popularity as a form of alternate dispute resolution. However, other forms like negotiation and mediation are not far behind. An interesting trend emerging in the combination of these forms of dispute resolution, where one forms a pre-condition to the other. This trend has emerged in the formation of multi-tier arbitration clauses which contain an escalation. For example, in the case of the popular ‘Med-Arb’ clauses, the parties agree to first enter into Mediation before Arbitration. On the failure of the mediation proceedings, the parties enter into Arbitration. These clauses are considered advantageous as they require the parties to fully explore the possibility of an amicable settlement before entering into long, expensive and potentially disruptive arbitral proceedings. The problem thus arises when parties fail to complete this condition precedent, and move directly into arbitral proceedings. This article hopes to explore the enforceability of such pre-conditions in arbitration clauses in different Jurisdictions, and the implications of the same on public policy.

Content of Such Clauses

 Before moving into the enforceability of such clauses, it is important to define the content of such clauses. They usually include an agreement to mediate or negotiate amicably or in good faith, prior to the arbitration. These may be characterized in many different ways such as ‘friendly discussions’, as long as they indicate an agreement to negotiate or mediate the dispute prior to arbitration. They essentially envisage an escalation of dispute resolution.  This essay will specifically refer to those agreements that treat the pre-arbitration procedure as a condition precedent to arbitration, and not simply a contractual term. The language of the agreement must attempt to bar the jurisdiction of the arbitration. This article will go on to examine what conditions would lead to a clause being considered to constitute a condition precedent.

India

            The case law regarding the enforcement of pre-conditions to Arbitration is limited in India. In Tulip Hotels v. Trade Wings, a single judge bench of the Bombay High Court held that it was necessary to fulfilling the pre-condition of Conciliation before a matter could be referred to Arbitration.[1] Conciliation in India, is a recognised form of Alternate Dispute Resolution. The Arbitration and Conciliation Act 1996, provides structure and clarity to the process of Conciliation.[2] The aforementioned decision was based on two reasons. Firstly, that there is a defined process for conciliation, governed by the Arbitration and Conciliation Act 1996[3]. Secondly, that the agreement between the parties agreement stipulated that the matter which can be set to arbitration is restricted to that which was sent to conciliation.[4] Thus, it was mandatory  for the pre-condition to be fulfilled before the arbitration tier could be enforced.

Tulip Hotels was effectively overruled by a division bench in Rajiv Vyas v. Johnwin Manavalan,^[5] where it was held that a pre-condition of conciliation, included in the arbitration agreement, need not be fulfilled before the matter can be sent to Arbitration.^[6] The Court allowed the application under Section 11, notwithstanding the failure to complete such a condition.^[7] The Court observed that the respondent had made no argument to settle the dispute through conciliation, therefore they could not challenge the arbitration on the grounds of non-fulfilment of a pre-condition.^[8] Thus, the actions of the parties following the dispute also become relevant to the enforcement of multi-tier dispute resolution clauses, in addition to the construction of the clause. Courts are cognizant of the possibility of using multi-tier clauses to delay or detract proceedings.

United Kingdom

In the United Kingdom, multi-tiered dispute resolution clauses were traditionally considered unenforceable on the ground of uncertainty.[9] This is because there is no measurable standard to determine whether parties have complied with their obligations of negotiation.[10] This view stems from the decision in Walford v. Miles,[11] where Lord Ackner held that a bare agreement to negotiate lacked the necessary uncertainty, and was thus unenforceable.[12]

In Cable and Wireless v. IBM UK[13], the Court examined an agreement which stated that the parties would attempt to settle the dispute by arbitration, only after failing to settle the dispute by negotiating in good faith. Coleman J differentiated between an agreement to negotiate an agreement to follow a particular dispute resolution procedure. An agreement to negotiation was unenforceable as it is uncertain. On the Contrary, an agreement which contained an identifiable procedure would be enforceable.

                Almost a decade later in Sulamerica (2012)[14], the Court examined an agreement that required parties to resolve the dispute ‘resolved amicably by mediation’ before it could be referred to arbitration. The pre-condition of mediation was considered to be unenforceable, as it did not define the parties’ rights with sufficient certainty. The Court held that in order to be enforceable, the agreement had to set out a specific mediation procedure or at the very least, refer it to the services of a particular mediator.

            The issue was further clarified in Wah v. Grant Thornton,[15] which laid down a three prong test to assess the enforceability of a condition precedent to arbitration. The Court, in this case considered an agreement which stated that disputes would be referred to a panel containing three members before arbitration. Arbitration would only take place after a period of one month had elapsed and the panel had determined that it could not resolve the dispute. The Court insisted that the obligation prescribed was too ‘nebulous’ and uncertain to be enforced, and laid down a test to describe when an obligation would be enforceable. First, the provision has to prescribe an unequivocal commitment to commence the alternate procedure, which must be sufficiently certain from the terms of the Agreement. Second, the provision must indicate what steps each party is required in order to initiate the alternate process. Third, the provision must clearly allow the court to determine the respective minimum obligations of the parties to participate in the process, as well as when and how the process is exhausted or terminated.  These provisions must be drafted in such a way that they do not require any further agreement. Thus, Courts have largely stressed on the need for certainty before a multi-tier arbitration clause can be enforced, however there are exceptions to this rule as well.

            Some courts have upheld agreements containing alternate procedures, even without an identifiable procedure or defined process. This is primarily done in cases where the multi-tier dispute resolution clause is a part of an overarching business framework, in order to allow parties to resolve the dispute without resorting to costly arbitral proceedings. For example, in the case of Emirates Trading Agency[16], the Court upheld a clause in the agreement stating that the parties were required to resolve their disputes by “friendly discussion” before arbitration. The matter could only be referred to arbitration if the dispute could not be resolved within fourth weeks.

            The Emirates Trading case affirmed the decision in United Group Rail Services v. Rail Corporation,[17] which upheld a multi-tier arbitration clause which was a part of an engineering contract. The clause dictated that the parties were required to “meet and undertake genuine and good faith negotiation” with the objective of resolving any dispute that arose. This case distinguished from Walford v. Miles on the ground that the obligation in Walford arose from a standalone agreement. On the contrary the agreement at hand formed a part of an established legal framework, removing the uncertainty regarding the parties rights and obligations.

            It is interesting to note that Wah v. Grant, Cable and Wireless and Emirates Trading Agency were decisions of the Courts of first instance in the UK. Therefore, it can be argued that Emirates forms the most relevant, if not authoritative decision regarding multi-tier arbitration clauses. However, it is important to remember that all these cases refer to the obligation to negotiate before an arbitration. The same can be distinguished from an obligation to mediate as in Sulamerica, where mediation proceedings and obligations could still be considered uncertain without a proper procedure for the appointment of a mediator and a time frame.

Other Jurisdictions

            Courts in jurisdictions outside India and UK, may be more likely to give effect to multi-tier arbitration clauses. In Australia, Courts have decided that an agreement to negotiate in good faith is considered to be an undertaking to behave in a particular manner and is therefore more than a mere ‘agreement to agree’.[18]  The High Court of Singapore also held that a bare agreement to mediate would be valid and enforceable. The Court made this decision on the basis that traditional Asian values promoted the use of friendly negotiations for settlement of disputes.[19] However, this is not always the case. In Switzerland, the Courts held that a multi-tier dispute resolution clause which did not provide any procedural framework for negotiations  and did not prescribe a time limit for the initiation of conciliation proceedings was not enforceable.[20] Thus, the requirement of a defined process and certainty seems to permeate across jurisdictions.

Conclusion

            Jurisdictions across the world agree that an agreement to agree is not binding. However, when agreements to negotiate or mediate become pre-cursors to arbitration, they may be enforceable. Courts may be inclined to give effect to these non-binding ADR processes, if there is no uncertainty. Courts which have legislation or can rely on a defined process to dispel this uncertainty, are more likely to enforce pre-conditions to arbitration or multi-tier arbitration clauses. Thus, when drafting multi-tier arbitration clauses it is imperative that the lawyers clearly indicate the time frame before the matter can be referred to arbitration, the rights and obligations of each party and the level of involvement of third parties. While these terms may add rigidity to the contract, they bring to the contract certainty, making them enforceable in most, if not all, jurisdictions. It is also important to keep in mind that Courts may decide not to enforce the clauses if they believe that the parties have not made best efforts to imitate the alternate form of dispute resolution. They may also choose to proceed directly to arbitration if they believe that the attempt to enforce the pre-condition is only made with the intention to delay proceedings.

[1] Tulip Hotels Pvt. Ltd. v. Trade Wings Ltd., (2010) 2 Arb LR 286, ¶26 – 28.

[2] Arbitration and Conciliation Act, 1996.

[3] Tulip Hotels Pvt. Ltd. v. Trade Wings Ltd., (2010) 2 Arb LR 286, ¶26

[4] Tulip Hotels Pvt. Ltd. v. Trade Wings Ltd., (2010) 2 Arb LR 286, ¶28.

[5] (2010) 6 Mah LJ 483.

[6] Rajiv Vyas v. Johnwin Manavalan, (2010) 6 Mah LJ 483, ¶ 7.

[7] Rajiv Vyas v. Johnwin Manavalan, (2010) 6 Mah LJ 483, ¶ 11, 16.

[8] Rajiv Vyas v. Johnwin Manavalan, (2010) 6 Mah LJ 483, ¶ 7.

[9] Alan Redfern, et al., Law and Practice of International Commercial Arbitration, 4th edn. [London: Sweet & Maxwell, 2004].

[10] Cable and Wireless v. IBM UK, [2002] EWHC 2059 (Comm).

[11] [1992] 2 AC 128.

[12] Walford v. Miles, [1992] 2 AC 128.

[13] Cable and Wireless v. IBM UK, [2002] EWHC 2059 (Comm).

[14] Sulamérica Cia Nacional De Seguros S.A. v. Enesa Engenharia S.A [2012] EWCA Civ 638.

[15] Wah v. Grant Thornton, [2012] EWHC 3198 (Ch).

[16] Emirates Trading Agency LLC v. Prime Mineral Exports Pvt. Ltd. [2014] EWHC 2104 (Comm).

[17] United Group Rail Services v. Rail Corporation,  [2009] NSWCA 177.

[18] Hooper Bailie Associated v. Natcon Group Pty [1992] 28 NSWLR 206.

[19] Alan Redfern, et al., Law and Practice of International Commercial Arbitration, 4th edn. [London: Sweet & Maxwell, 2004] p. 102.

[20] X GmbH v. Y Sàrl [2011] Decision No. 4A_46/2011, 16 May 2011.