Multi-tiered, or multi-step, clauses are dispute resolution clauses in agreements containing a phased process to resolve differences, which starts with a number of alternative dispute resolution steps which start with negotiation between senior managers, mediation, dispute boards, etc. and ends with arbitration if the first alternative steps prove unsuccessful.
It has been said that these clauses work as a filter only letting the most serious disputes go through to arbitration.
This type of clause has been used considerably during recent years in the most diverse types of contracts and industries.
Advantages of the clause
- The advantages generally associated with these type of clauses concern escaping the negative consequences of an arbitration proceeding. The aim of these clauses is to arrive at a solution through processes that are not harmful to the commercial relationship and considerably save the parties time and money.
- Further, if the outcome of alternative dispute resolution procedures fails to work, the parties have more time to prepare their defense.
Disadvantages of the clause
- These clauses become sources of problems especially where one of the parties fails to observe the multi-tiered procedure, or where the wording of the clause is unclear or ambiguous as regards the various steps and the mandatory nature or otherwise of the pre-arbitration steps.
- When talking about multi-tiered clauses, legal commentators have in fact focused on the problems associated with clauses of this type and have tried giving guidance for avoiding them. To be more specific, the main topic is the effects and consequences of such clauses on the arbitration proceeding, in addition to their recognition and enforcement of the ensuing award, if one of the parties fails to follow the procedure envisaged in the multi-tiered clause.
- Another potential matter of conflict is where one of the parties seeks injunctive relief from a judicial court under a legal system that requires the party to commence an arbitration proceeding within a given time (days, generally) which means the party cannot observe the multi-tiered procedure.
In short, whereas any arbitration agreement that has not been carefully worded may pose problems when it comes to the commencement of the arbitration proceeding or to the recognition and enforcement of the award, these risks multiply when we enter the domain of multi-tiered clauses. Therefore, rather than just pasting a specimen multi-tiered clause into an agreement, proper thought should be given to whether a multi-tiered procedure is in the parties’ interests, and if so, extreme care taken over how the clause is worded to avoid, or mitigate, any potential problems. This involves introspection on the part of both the parties on whether multi tier arbitration clauses are necessary,whether they involve elements such as clearly determining whether or not the pre-arbitration steps (negotiation, technical expert, dispute boards, etc.) are mandatory, the time periods, or, if applicable, the events determining failure of the pre-arbitration steps and allowing them to be skipped.