Tiered dispute resolution clauses – problems in drafting

There are various forms of tiered dispute resolution clauses requiring negotiation and/or mediation before arbitration, and difficulties may arise when the procedure is not followed. A recent English case, NWA and Other v NVF and Others [2021] EWHC 2666, has added further insight to the interpretation of these clauses and the need for clarity in their drafting.

NWA and Other v NVF and Others involved a tiered dispute resolution clause that required ­disputes to be referred (a) to LCIA mediation in London and (b) if not settled by mediation within 30 days of ­commencement of the mediation, the dispute was to be referred to LCIA arbitration. In this instance, NVF had first made a request for LCIA arbitration, asking that it be immediately stayed in favour of LCIA mediation. Presumably, there was a time bar that required ­arbitration to be commenced before any mediation could be carried out. NWA, as respondent in the arbitration, ignored the request for mediation, the notice of arbitration and the LCIA’s own invitation to respond. Some 55 days after the notice of arbitration was filed, the LCIA appointed an arbitrator and notified this to the parties. NVF followed up, again offering to stay the arbitration 30 days for a mediation. At this point, NWA replied that a time bar had passed, and refused to ­participate in the proposed mediation. NVF made two further offers to mediate that were ignored, and then proceeded with the arbitration.

The arbitration decision

A replacement arbitrator decided that the requirement to refer disputes to LCIA mediation was not sufficiently clear and certain to be enforceable, with the effect that it posed no bar to starting arbitration without ­mediating, and that in any event the ability to start arbitration before any mediation had run 30 days was not expressly injuncted, so even a clear mediation term would not prevent NVF arbitrating without mediating. NWA then appealed to the High Court, on the basis that the arbitrator had no jurisdiction due to the lack of a mediation before the arbitration had commenced. In effect, NWA denied the arbitrator’s finding that a mediation was not a condition precedent to commen­cing arbitration.

The appeal decision

The High Court first addressed the issue of whether non-compliance with the mediation term was a ­matter merely affecting the admissibility of the particular claim being brought in arbitration or one that stopped any arbitration commencing and therefore removing the arbitrator’s substantive jurisdiction to determine the claim. In the former case, it would be for the ­arbitrator to decide if any non-compliance prevented the claim from being pursued, whereas in the latter, the arbitrator had no jurisdiction to consider the question, leaving it for the courts to handle.

The High Court construed the dispute resolution clause as showing the parties had intended all disputes to be arbitrated swiftly, rather than litigated in court. While there was also a 30 day window to mediate a dispute, where one party refused to mediate, the High Court did not regard this as removing the arbitrator’s jurisdiction to resolve the dispute. Instead, it was a matter of admissibility for the arbitrator to determine the consequences of any alleged breach of that procedural condition. This followed Sierra Leone v SL Mining Limited ([2021] EWHC 286 (Comm)) and joined with it in distinguishing two earlier High Court decisions (Emirates Trading Agency LLC v Prime Mineral Exports Pte Ltd [2015] 1 WLR 1145 and Tang v Grant Thornton International Limited [2013] 1 All ER (Comm) 1226) which considered the issue a jurisdictional one, repeating that those decisions had not had the benefit of full argument on the issue.

As such, English law has settled into accepting that the effect of non-compliance of a tiered dispute resolution procedure is for the arbitrator to decide, unless there are very clear words indicating that non-compliance excludes the claim in question from the arbitration agreement.

The High Court also indicated that if the mediation term was worded sufficiently clearly to constitute a condition precedent to being able to arbitrate a dispute, NWA’s refusal to mediate would be a breach of such a condition precedent and they could not rely upon their own breach to contend that NVF had failed to comply with the condition precedent; alternatively, compliance with the alleged condition precedent was waived by the parties.

Commentary

Compliance with a tiered dispute resolution clause only tends to become sensi ive when there is a potential time bar involved. Otherwise, the process can simply be repeated properly and the claim arbitrated if negotiation/mediation does not produce an agreement. What this case highlights is that the respondent will not be allowed to ignore or delay a mediation request as a way to create the time bar defence.

The case also underlines how difficult it is to make prior negotiation/mediation steps conditions precedent to arbitration, such as by mentioning the need for clear terms on how the mediation can be started (and if necessary continued) by one party if the other is not co-operating, on the time allowed for mediation, on an injunction against arbitration during the negotiation/mediation or even on an exclusion of claims that have not been mediated from the arbitration agreement. Moreover, if the condition precedent works and the claim cannot be arbitrated, it can still be brought in a court with jurisdiction to hear it, unless time barred.

As such, if parties intend that a dispute must be negotiated and/or mediated before any arbitration can start, they will need to be very careful in drafting their dispute resolution clause. They will also need to consider if such prescriptive drafting is going to help: These clauses are usually drafted on the basis that the parties will remain reasonable and co-operate in negotiations or mediation to try to find an amicable settlement, but drafting it to cover the possibility that the other party does not co-operate may not be appreciated by that party, and if the parties do subsequently stop co-operating, then firm drafting forcing them to mediate may not improve matters. So there remains a good case for the tiered dispute resolution agreement that is not a condition precedent to arbitration.

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