INTRODUCTION

The evolution of the legal ecosystem in India has bolstered the parties' ability to choose how disputes should be settled if any arise at the time of drafting an agreement. Though the parties have traditional courts as an option, resolving conflicts via Alternative Dispute Resolution mechanisms ('ADR') has become the new norm. Today, some Parties tend to insert what is referred to as a 'multi-tiered dispute resolution clause' ('MTDR clause') in their agreement.

The crux of such a clause is to offer parties the chance to settle their disputes outside of court or arbitration. The clauses state, step-by-step, the procedure that the parties stow to resolve a dispute. They usually contain different phases, each one independent from the other, such as negotiation, mediation or conciliation. Failing these phases, Courts or Arbitration is generally the last resort.

The primary value of MTDR clauses is the involvement of ADR in the settlement process since ADR helps deal with disagreements at an early stage before the parties become entrenched in their respective positions. The inclusion of ADR is particularly useful in disputes where the parties have a long-term relationship and wish to see that relationship continues.

PURPOSE OF A PRE-ARBITRATION PROCEDURE:

Modern-day arbitration clauses mostly stipulate the pre-arbitral procedures that parties must take before resorting to arbitration. It is quite apparent that while there are benefits, there are also disadvantages to such pre-arbitral procedures.

BENEFITS

  • It is a contractually mandated opportunity to resolve disagreements relatively inexpensively in comparison to an actual arbitration proceeding.
  • They provide a contractual 'cooling-off period' during which the parties can reassess and evaluate whether to strike a compromise outside the contentious arbitral context.
  • They can be particularly useful in circumstances where parties have a long-term commercial relationship that they wish to preserve.1
  • It may enable the parties to narrow the issues to be arbitrated, by settling on those issues which they find common ground before arbitration, resulting in a more efficient and cost-effective arbitration.

DISADVANTAGES

  • Pre-arbitration negotiations where the parties are deeply entrenched in their positions can lead to an unnecessary waste of time and expense.
  • It can impair a party's ability to secure interim measures in time-sensitive disputes by postponing the commencement of the arbitration.
  • It can lead to an objection to the tribunal's jurisdiction, which may result in the termination of the arbitration, or the final award being set aside or refused recognition and enforcement.
  • Pre-arbitration procedure can lead to objections to counterclaims made in arbitration that were not specifically discussed and negotiated at pre-arbitration negotiations on the basis that such counterclaims were not first subject to settlement discussions.
  • Though the pre-arbitration procedure is exempt from triggering the limitation period, however, it is fortified from triggering the "breaking point" as iterated in the case of Geo Miller.2 That can set off the cause of action for the commencement of the limitation period.

In widespread practice, pre-arbitration procedures are habitually used in complex construction contracts, joint venture agreements, or energy-related contracts that aim to establish long-term relationships. Contracts such as NDAs, Leave and License agreements or IPR licensing agreements, Franchisee, distribution, Master Service Agreements (MSAs) and other day to day trade agreements, where substitution is faster, where there is an interplay of a continuous cause of action and requirement for immediate relief, than pre-arbitration procedures shall become a burden. Boilerplate drafting of arbitration clauses with pre-arbitration procedures built-in is best avoided.

CREATING A BESPOKE PRE-ARBITRATION PROCEDURE

Generally, MTDR clauses are not governed by a specific law regarding which methods should be adopted and the relevant procedures. In other words, what is stipulated in the clause is what will be enforced on Parties and if drafted correctly, the MTDR clause can be very effective but if not, it can be used tactically and controversially to delay matters.

To improve the chances of success of enforcement, the clause should be sufficiently detailed and explicit about who must be involved in the discussions/negotiations, how to initiate the process, how long the process must take, and whether any information must be exchanged prior to or during the process.

Hence, it all depends on the language used, and the precision with which it is used. As it is the sole guide for the parties, the drafting should ensure that it is clear when one stage ends, and another begins.

RECOMMENDATIONS FOR DRAFTING MTDR CLAUSE

The following are some recommendations to be considered when drafting a MTDR clause:

  • Insert mandatory vocabulary, not a permissive language, it is important to ensure that pre-arbitration procedures are drafted in a clear, unambiguous, and binding manner instead of using open-ended language (i.e., use "must" or "shall" instead of "may", "might", or "should") and vague terms (e.g., "amicable negotiations", "best undertakings or efforts", "good faith").
  • Avoid using vague terms such as 'amicable negotiations, 'best undertakings' or 'good faith'. The interpretation of these terms during the disagreement period could be manipulated.
  • Define the time frame of each step. This allows each party to know how long the process will take and offers clarity on potential limitation/time bar issues.
  • The parties must ensure that the institution referred to, if any, in the clause exists if the pre-arbitration procedures require referring the dispute to authority as a pre-arbitral step.
  • Define every step, in full detail. Define the process precisely. Set out how each step is commenced and how it is to be conducted. Do not leave matters or steps 'to be agreed'.
  • Improve the success of enforceability of the pre-trial steps by specifying the consequences of t failure to comply with any of the stipulated steps. For example, a warning can be added at the end of the clause, mentioning that the pre-trial procedures are mandatory, and non-compliance with the MTDR clause may affect the jurisdiction of the Arbitral Tribunal.
  • In cases where pre-arbitral steps are optional, the parties must explicitly state that pre-arbitral steps are not binding, so that any party may initiate arbitration proceedings without having to exhaust the non-binding steps.3

CONCLUSION

An assessment as to include a pre-arbitration procedure in an agreement must be considered based on the risks that may arise from the failure to comply with such a clause. While recent years have seen increasing reluctance among national courts and arbitral tribunals to find pre-arbitration procedures as jurisdictional conditions precedent to arbitration, there is still a risk that a failure to comply with them may have admissibility consequences depending on the jurisdiction.

However, in conclusion, inserting an MTDR Clause in an agreement, and involving ADR in the process can be a double-edged tool. The inclusion of a cooling-off period where the parties can seek a compromise whilst preserving their commercial relationship is critical. Therefore, while drafting an MTDR clause, Parties should be very cautious, since the choice of each and every word of the clause will determine how successful the enforcement or otherwise of the clause may be.

Footnotes

1 Gary Born & Marija Scekic, 'Pre-Arbitration Procedural Requirements, A Dismal Swamp' in DD Caron, Practising Virtue: Inside International Arbitration

2 [2020] 14 SCC 643

3 https://globalarbitrationreview.com/ Five Years Later: Update on Multi-Tier Dispute Resolution Clauses

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.