Multi-tiered Dispute Resolution Clauses

It is perhaps an obvious statement but the larger or more complex the construction project, the more potential exists for things to go wrong and for more disputes to arise during the course of the project.

Traditionally arbitration has been favoured on major projects due to its perceived flexible procedural approach, neutrality, expertise of the arbitrators, time and cost effectiveness compared to court proceedings and confidentiality.  Another factor in the international context, is the cross border enforcement of arbitral awards through the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (“The New York Convention”), where the contracting parties may not be based in the same country or indeed in the same country as the construction project.

However, most of these perceived advantages do not stand up to scrutiny.  Whilst many of the procedural requirements of legal proceedings have been incorporated into many institutional arbitration rules (for understandable reasons), this has led to arbitrations potentially taking just as long to conclude as legal proceedings and incurring the same levels of costs (if not more if there are three arbitrators).  Again, from an international context, the importance of enforceability has diminished, certainly within the European Union and where the arbitrating parties are subject to bilateral trading arrangements.

A further factor is that if disputes arise during the course of the project, requiring the parties to arbitrate or litigate those disputes during the course of the project may seriously affect the commercial relationship between the parties and may greatly disrupt the performance of the contract.

Whilst most construction projects in the UK have the benefit of statutory adjudication (a form of interim binding alternative dispute resolution), certain types of projects in the UK and certainly many international projects will not.

These factors have led to an increasing prevalence of multi-tiered dispute resolution clauses (“MTDRCs”) within the contract.  Such clauses provide a number of stages of alternative dispute resolution procedures with legal or arbitration proceedings being the process of last resort.

There are many forms of MTDRC, setting out various requirements, but typically consist of:

1. A requirement of senior employees of each party to meet to try to resolve the dispute;
2. If the dispute is not resolved by senior employees it is referred to a third party to give an interim decision on the dispute, such as adjudication or expert determination.
3. If either party is dissatisfied with the interim decision, they can commence legal or arbitration proceedings.

Although many standard forms of contract now contain MTDRCs (e.g. NEC4, FIDIC, World Bank standard forms) and many dispute resolution institutions provide suggested wording for MTDRCs, care must taken when drafting such clauses to ensure they are enforceable.  This is particularly the case where there the clause purportedly obliges the parties representatives to meet and negotiate a resolution.

A failure to follow the correct procedure could mean that an arbitration commenced without complying with prior MTDRC steps would result in an unenforceable arbitral decision.  The worst case scenario would be where there are time bars or limitation issues which could mean a party losing its right to ultimately litigate / arbitrate the dispute.

With that in mind, and whatever the governing law of your contracts any dispute resolution procedure benefits from clear and precise rules that are readily understandable and may well avoid disputes about the dispute resolution procedure.

Drafting Points to Consider:

• Use Mandatory not permissive language (“the parties shall”, not “the parties may”)
• Avoid using terms such as “good faith”, “friendly negotiations”, “best endeavours”.
• Do not leave matters or steps “to be agreed”.
• Define the process precisely.  Clearly set out how each step in the MTDRC is commenced and how it is to be conducted.  For example, if there is a dispute resolution board, ensure parties agree on a defined set of specific rules (e.g. International Chamber of Commerce Dispute Rules Board).
• Give each step a time limit.  This allows each party to know how long the process will take, avoids open ended rounds of negotiations and ensures the parties have clarity on potential limitation / time bar issues.
• Specify the consequences of a failure to comply with a prior step. For example, “the parties may not commence arbitration without first having the matter decided by Adjudication on an interim basis.” A failure to specify any consequences may give immediately preceding steps little force and render those steps unenforceable.

This article was written by Michael O'Connor. For more information please contact Michael on +44 (0)20 7427 6441 or michael.o'connor@crsblaw.com