In Part 4 of our Technology and Outsourcing Hot Spots Series, we considered how a properly drafted dispute resolution clause can give parties an appropriate dispute resolution mechanism which allows for an enforceable decision and avoids costly and time consuming jurisdictional fights prior to the determination of the substantive dispute. Such considerations apply with especial force in multi-tier arbitration clause and unilateral arbitration clauses.
Part 5 of our series examines some of the more popular variations of the arbitration clause and in particular, the multi-tier arbitration clause and the unilateral arbitration clause.
Multi-tier arbitration clause
A multi-tier arbitration clause essentially imposes certain pre-conditions to be fulfilled before arbitration can be initiated by the parties. For example, it might mandate that parties first attempt negotiations between senior management of parties to the dispute. If such negotiations prove unsuccessful, the parties must then submit to mediation under the auspices of a mediation centre. Finally, it is only when such a mediation fails that the aggrieved party or parties may commence arbitration. The idea behind such clauses is that it prevents parties from jumping straight into arbitration and forces parties to engage in a non-adversarial setting to maintain and preserve their business relationship. If successful, this results in substantial savings of time and costs.
However, there are pitfalls, especially when poorly drafted multi-tier clauses end up prolonging the arbitral process and increasing costs. For example, the party resisting the arbitration may challenge the tribunal’s jurisdiction in the arbitration itself. It may also then challenge any positive jurisdictional award before the supervisory courts on the basis that the pre-conditions of the multi-tier clause have not been fulfilled. Conversely, in order to fulfil the pre-conditions, parties may be obliged to go through the motions of negotiations and mediation even though it may be clearly evident that those steps will ultimately be futile.
Hence, parties have on occasion simply ignored the multi-tier clause and gone straight to commencing arbitration on the basis that the pre-conditions in the multi-tier clause were insufficiently certain so as to be enforceable. In this respect, it is worth noting the slightly divergent approach of the English and Singapore courts regarding the issue of whether a multi-tier clause is sufficiently certain to be enforceable. In particular, The Singapore courts appear to adopt a lower threshold than the English courts when considering the issue.
This contrast can be observed in the English case of Wah (Aka Alan Tang) and another v Grant Thornton International Ltd and others  EWHC 3198 (Ch) and the Singapore case of International Research Corp PLC v Lufthansa Systems Asia Pacific Pte Ltd and anor,  SGHC 226 (discussed here). While the multi-tier clause was upheld by the Singapore High Court in IRC v Lufthansa, a somewhat similar clause was rejected by the English High Court in Wah v Grant Thornton.
The clause in IRCP v Lufthansa provided that,
“Any dispute between the Parties relating to or in connection with this Cooperation Agreement or a Statement of Works shall be referred:
37.2.1 first, to a committee consisting of the Parties’ Contact Persons or their appointed designates for their review and opinion; and (if the matter remains unresolved);
37.2.2 second, to a committee consisting of Datamat’s designee and Lufthansa Systems’ Director Customer Relations; and (if the matter remains unresolved);
37.2.3 third, to a committee consisting of Datamat’s designee and Lufthansa Systems’ Managing Director for resolution by them, and (if the matter remains unresolved);
37.2.4 fourth, the dispute may be referred to arbitration as specified in Clause 36.3 [sic] hereto.”
The relevant clauses in Wah v Grant Thornton were as follows. Section 14.2 read,
“The relationships among the parties are in the nature of a long-term arrangement among professional firms. The resolution of any dispute or difference arising out of or in connection with this Agreement (which shall also be deemed to include the Articles) or the breach thereof requires special treatment. It is the desire of the parties that any such dispute or difference should be settled quickly and privately in a binding fashion.”
And in Section 14.3,
“(a) Any dispute or difference as described in Section 14.2 shall in the first instance be referred to the Chief Executive in an attempt to settle such dispute or difference by amicable conciliation or [sic] an informal nature. The conciliation provided for in this Section 14.3 shall be applicable notwithstanding that GTIL may be a party to the dispute or difference in question.
(b) The Chief Executive shall attempt to resolve the dispute or difference in an amicable fashion. Any party may submit a request for such conciliation regarding any such dispute or difference, and the Chief Executive shall have up to one (1) month after receipt of such request to attempt to resolve it.
(c) If the dispute or difference shall not have been resolved within one (1) month following submissions to the Chief Executive, it shall be referred to a Panel of three (3) members of the Board to be selected by the Board, none of whom shall be associated with or in any other way related to the Member Firm or Member Firms who are parties to the dispute or difference. The Panel shall have up to one (1) month to attempt to resolve the dispute or difference.
(d) Until the earlier of (i) such date as the Panel shall determine that it cannot resolve the dispute or difference, or (ii) the date one (1) month after the request for conciliation of the dispute or difference has been referred to it, no party may commence any arbitration procedures in accordance with this Agreement.”
And finally in Section 14.4,
“Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the rules of the London Court of International Arbitration, which rules are deemed to be incorporated by reference into this Section. The number of arbitrators shall be 3. The Claimant and Respondent shall each nominate one member of the Tribunal. The seat, or legal place, of arbitration shall be London, England. The language to be used in the arbitral proceedings shall be English.”
While both courts came to different conclusions about the enforceability of the multi-tier clause, it is important not to lose sight of the fact that both courts came to the same substantive decision in the main i.e. that the tribunal had substantive jurisdiction to determine the dispute between parties. Furthermore, both courts took a very pragmatic approach as to whether the pre-conditions to arbitration had been met (if such a question had to be decided).
In IRCP v Lufthansa, the Singapore High Court upheld the multi-tier clause and the substantive jurisdiction of the tribunal even though Lufthansa had not expressly set out to fulfil each and every pre-condition in the escalation clause. The learned judge was satisfied that the pre-conditions had been fulfilled based on the affidavit evidence adduced, which demonstrated that “there were several rounds of high-level meetings between Lufthansa, Datamat and IRCP to resolve the Payment Dispute. The parties have had their attempts at negotiations and in that respect, the object of [Clause] 37.2 has been met” (see paragraph ). Interestingly, the Singapore court rejected Lufthansa’s argument that the pre-conditions did not have to be complied with if such compliance would have been futile and would not have resolved the dispute (see paragraph ).
In Wah v Grant Thornton, the learned judge held that the provisions in Section 14.3 “lack[ed] sufficient definition and certainty to constitute enforceable conditions precedent to the commencement of arbitration in accordance with the provisions of Section 14.4” (see paragraph [82(1)]).
However, the English High Court considered that further or alternatively, on a “true construction” of Section 14.3(d), it did not prevent an arbitration from being commenced 2 months after the request for conciliation had been submitted and/or that the arbitration could be commenced prior to the expiry of those 2 months if the conciliation process had failed. The English court considered that there could be two reasons for such failure: (i) if it were not possible to establish a panel because there were no members of the Board willing to serve and/or (ii) because all such members of the Board took the view that the dispute or difference could not be resolved by such a panel.
On that basis, the learned judge reasoned that the tribunal had jurisdiction since the arbitration had been commenced well after any such 2 months stipulation had expired and after it was clear that no panel could be established because none of the members of the Board considered that the dispute or difference could be resolved (see paragraph [82(2)]).
Unilateral arbitration clauses
Unilateral arbitration clauses are dispute resolution clauses that give one of the parties (generally the one in the stronger bargaining position) the option to determine whether the dispute will proceed to arbitration or litigation. So for example, a unilateral arbitration clause might stipulate that parties shall litigate their dispute, but give one party an option to refer the dispute to arbitration. Alternatively, the clause might stipulate that parties shall arbitrate their dispute, but give one party the option to refer the dispute to litigation instead.
The main benefit of a unilateral arbitration clause is that it gives a party the flexibility to choose its forum for dispute resolution. In an outsourcing or technology agreement, there are different types of disputes that could arise out of those agreements. These could have an impact on a party’s preferred mode of dispute resolution. For example, where the dispute involves a straightforward invoice claim, then depending on the jurisdiction, litigation might be faster or more cost effective than arbitration. On the other hand, if a party is concerned with confidentiality, neutrality of the decision maker and/or foreign enforcement, then arbitration could be preferred over litigation.
However, not every jurisdiction permits such unilateral arbitration clauses to be enforced. For example, England, France, Germany and Italy permit such unilateral clauses. However, in Sweden, the equality of the parties’ bargaining position determines whether such clauses are enforceable. In Russia, the Supreme Commercial Court has struck down such a clause because it lacked mutuality.
A properly drafted (alternative) dispute resolution clause can give parties an efficient and cost effective method of resolving their disputes. However, dispute resolution clauses are often one of the last clauses to be considered, even in closely negotiated contracts. This only invites trouble. Parties ought to carefully manage the drafting process to ensure that each party’s obligations and scope of work are explicitly set out in the written agreement and also to ensure that the agreed dispute resolution mechanism does not itself become a source of dispute.