by Samarth Chaddha, May 2020

A tiered resolution clause (or a stepped or acceleration clause) involves a series of steps in the dispute resolution process. Each step is designed to handle a dispute. The purpose behind including a tiered clause is to set out the option of resorting to arbitration. Sometimes, resorting to arbitration may be seen as a sign of weakness by a party. Still, a tiered clause incorporates arbitration into a contract without the possibility of a party questioning the decision to go to arbitration at a later stage.

From a business standpoint, relationships between contracting parties need to be sustained. If there is a need to go to arbitration or court, that can ruin these coveted relationships. If one is involved in a significant construction or engineering project, a breakdown in relations at a crucial juncture can represent an unwanted turn in business relations. Hence, a tiered dispute resolution clause allows for an acceleration of the dispute resolution mechanism. Parties can aim to have an amicable settlement discussion, especially those that have been involved in the project from the beginning. Early settlement of a somewhat larger, more complex dispute in the future can lead to lesser costs in terms of arbitration or litigation in the court.

There may be a requirement to notify the other party of an intention to commence arbitration under certain contracts. The referring of a dispute to the engineer or the dispute resolution board becomes akin to a condition precedent before initiating the arbitration.

Practically though, parties may skip this process, but run the risk of being liable for a breach of contract.

Thus, the non-breaching party can rely on the enforcement of a tiered dispute resolution clause. Some courts in certain jurisdictions will rectify an arbitration award for failure to comply with the tiered dispute resolution clause.

However, some courts will resort to the wording or interpretation of the contract in question – therefore, not every pre-litigation step will be regarded as essential. Some steps, if poorly drafted (where no guidance is provided on time-limits for each step, etc.) may also be seen as insufficiently confident, and render the dispute resolution as unenforceable. An example is if a party has to draft notice before they commence an arbitration, this should be clearly outlined in the contract, with the consequences of a breach clearly outlined within the agreement.

Failing to identify effects gives the preceding steps less force and renders them unenforceable. Thus, it is mindful to clearly define what pre-litigation steps need to be taken with detail, to ensure enforcement of the dispute resolution clause in the likelihood of the opposing party breaching.

It is also a good idea to check with your client if the options that a multi-tiered resolution clause provides are acceptable to your client. A tiered clause will likely consist of either a multi-step clause providing for a series of direct negotiations, which the client may not want. A tiered clause can also involve mediation in case the negotiation fails, which is an option the client may prefer instead of direct negotiations. The good thing with tiered clauses is that they are flexible to a certain extent, allowing for short-form and long-form, such that clients of varying degrees and natures can be satisfied.

A tiered clause can also allow for various forms of dispute resolution to be incorporated, such as mediation, conciliation, etc. so it is essential to avoid making the clause too complicated. In certain corporate transactions, there may be the need to adopt an expert for accounting, valuation issues, which should be addressed within the definition of a ‘dispute’ as referred to arbitration.

A tiered dispute resolution clause shifts the focus away from the rights of a party in a contract to a client’s interests and needs. The use of such clauses allows for flexible solutions to be available to clients, rather than resorting to just one remedy of going to a court in case there is a dispute. With a global increase in confidence in arbitration mechanisms, the use of tiered dispute resolution clauses is only likely to increase.

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