Mandatory Mediation: Multi-tier Clauses and the Court System

Recently, the English Court of Appeal in Wright v Michael Wright Supplies Ltd & Anor [2013] EWCA Civ 234 lamented the difficulties faced by the courts in managing cases filed or defended by litigants in person. One issue raised was the court’s difficulty in managing the “chaos” that such litigants create in conducting their cases without the assistance of counsel. For a local example, see Zhu Yong Zhen v AIA Singapore Pte Ltd and Anor, [2013] SGHC 37, where the High Court held at paragraph [2] that “[u]nfortunately, perhaps owing to Mdm Zhu’s lack of representation, there was a proliferation of irrelevant issues in submissions and at trial, resulting in rather prolix proceedings“.

As a result, Sir Alen Ward (delivering the unanimous judgment of the Court of Appeal) called on lawyers and judges to revisit his holding in Halsey v Milton Keynes General NMS Trust [2004] EWCA Civ 576[2004] 1 WLR 3002 that “to oblige truly unwilling parties to refer their disputes to mediation would be to impose an unacceptable obstruction on their right of access to the court” (see paragraph [3]).

As the Court of Appeal noted, one of the reasons that the UK Ministry of Justice had recently seen fit to remove the availability of legal aid from “swaths of litigation” was because of its view that “mediation [wa]s a proper alternative which should be tried and exhausted before finally resorting to a trial of the issues” (see paragraph [3]).

However, if parties are truly unwilling to even try mediation, what good would the courts do by ordering compulsory mediation? The Court of Appeal itself noted that “[y]ou may be able to drag the horse (a mule offers a better metaphor) to water, but you cannot force the wretched animal to drink if it stubbornly resists” (see paragraph [3]). So why then did the Court of Appeal consider that it was time to review the rule in Halsey v Milton?

The Singapore Situation

Parenthetically, we should note that these issues of litigants in person, access to justice/costs and the most appropriate mode of dispute resolution are not limited to the UK, In fact they had also been raised at the inaugural Litigation Conference 2013 in Singapore and were recently the subject of the Honourable the Chief Justice Sundaresh Menon’s Keynote Address at the Subordinate Courts Workplan 2013 Seminar (see also here).

We express no view on the issue of legal aid one way or the other. However, we do endorse the view that alternative dispute resolution, which includes negotiations and mediation as well as arbitration, are very useful tools in resolving disputes between parties in an efficient and cost effective manner. This applies generally to all litigants, including commercial parties.

Multi-Tier Clauses in UK and Singapore

Commercial parties which wish to incorporate mandatory mediation (or negotiations between senior members of manager) as a precondition to arbitration may do so through what is commonly known as a multi-tier clause. However, parties should note that a poorly drafted multi-tier clause might end up prolonging the arbitration 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.

In an Asian context, such clauses might also be helpful as a face-saving measure. In particular, a party that wishes to engage in negotiations or mediation will not be seen as losing “face” if the multi-tier could be used as a pretext to initiate contact with the counterparty.

On the futility point, the Singapore High Court in International Research Corp PLC v Lufthansa Systems Asia Pacific Pte Ltd and anor, [2013] 1 SLR 973; [2012] SGHC 226 (“IRCP v Lufthansa“) has stated that futility in performing the pre-conditions cannot justify (a) non-compliance with the pre-conditions or (b) a court order to compel parties to arbitrate pursuant to the multi-tier clause. This is because only compliance with the pre-conditions can confer the tribunal with jurisdiction over the parties and the dispute (see paragraph [105]). We discuss the case here.

It is also worth noting that the English and Singapore courts have taken a divergent attitude as to how specific/certain the pre-conditions have to be before the multi-tier clause can be enforced. In this respect, the Singapore courts appear to adopt a lower threshold than the English courts when considering this issue.

This contrast can be observed in the English case of Wah (Aka Alan Tang) and another v Grant Thornton International Ltd and others [2012] EWHC 3198 (Ch) and the Singapore case of IRCP v Lufthansa. While the multi-tier clause was upheld by the Singapore High Court in IRCP v Lufthansa, a somewhat similar (and more detailed) clause was rejected by the English High Court in Wah v Grant Thornton. For a more extensive discussion about the different thresholds applied by the English and Singapore courts, see our previous post here.

Furthermore, the Singapore Court of Appeal has shown its willingness to uphold agreements to negotiate in good faith (in the context of a rent review clause in a concluded tenancy agreement), see HSBC Institutional Trust Services (Singapore) Ltd (trustee of Starhill Global Real Estate Investment Trust) v Toshin Development Singapore Pte Ltd, [2012] SGCA 48 (see our case analysis here).

Notably, the Singapore Court of Appeal refused to draw a distinction between an agreement to negotiate in good faith and an agreement to submit a dispute to mediation. The Court of Appeal considered them “similar in nature” to best endeavour clauses which have been upheld by the Singapore courts (see paragraph [43]).

In turn, the High Court in IRCP v Lufthansa relied on HSBC v Toshin to uphold the multi-tier clause (see paragraph [93]),

“…Given the Court of Appeal’s attitude towards mediation clauses, any doubts about an obligation to negotiate in good faith under a multi-tiered dispute resolution clause should be laid to rest. If an obligation to negotiate in good faith which [wa]s part of a broader contractual framework such as a rent review mechanism under a lease agreement is enforceable, the obligation to refer a dispute to various specifically constituted panels pursuant to [Clause] 37.2 should also be enforceable. They [were], after all, essential steps stipulated in the Dispute Resolution Mechanism and expressly made condition precedents to resolution of a dispute by arbitration.”

The precise scope of a mandatory mediation clause remains unclear. IRCP v Lufthansa requires that the pre-conditions in a multi-tier clause be sufficiently certain such that the court can determine if the pre-conditions can be complied with. Accordingly,

[a] court looking at the conduct of the parties c[ould] easily discern if the entire mediation procedure in [clause] 37.2 was complied with or not. Not only [wa]s there an unqualified reference to mediation through the respective committees, the process [wa]s clear and defined” (see paragraph [97]).

However, notwithstanding that the formal procedure had not been complied with to the letter, the High Court held that the clause had been complied with effectively. The High Court was satisfied on the basis of the affidavit evidence adduced that “there were several rounds of high-level meetings between [the relevant parties] 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 [110]).

Accordingly, the High Court did not have to resolve the question as to whether it had the power to order a stay or adjournment of the arbitration proceedings for parties to comply with the preconditions in the multi-tier clause. Somewhat disconcertingly, the High Court remarked that Lufthansa had “not cited any authority which suggest[ed] that the court ha[d] the power to grant a stay or order an adjournment of the arbitration, and that such power should be exercised in the present circumstances” (see paragraph [103]).

Conclusion

The comments of the English Court of Appeal in the context of an acrimonious case involving 2 litigants in person might seem somewhat far removed from the concerns that parties might have in the context of commercial international arbitration. However, the issues are similar. These include (a) the (probable) futility of making acrimonious and unwilling parties negotiate or mediate a settlement as well as (b) the power of the Court to order a halt to proceedings (whether court or arbitration).

We welcome our readers’ views and comments on multi-tier clauses and their experiences with such clauses.

About Shaun Lee

International Dispute Resolution and Arbitration lawyer. Fellow of the Chartered Institute of Arbitration. Panel of Arbitrators and Panelist for DNDR at the KLRCA.
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