4 minute read | January.09.2025
Parties drafting a contract often see dispute resolution clauses as boilerplate formalities. Other times, a deal team will draft a clause without ever having to experience one tested in anger. A poorly worded clause can lengthen and increase the cost of proceedings while shutting the door to relief – but the right approach can pay off.
Tiered dispute resolution clauses offer advantages in the U.S. and UK. Interested parties should draft clear clauses fit for an intended purpose, include mediation or another non-binding alternative dispute resolution method and make sure clauses don’t include contradictory information.
Here’s a look at the basics of tiered resolution clauses in the U.S. and UK, along with more detailed suggestions for companies considering them and how parties can maximise their utility in contracts.
A dispute resolution clause sets out how the parties to a contract will resolve a dispute in the event one arises. They come in various shapes and sizes, one of which is the tiered dispute resolution clause, also known as an “escalation clause.”
In contrast to other dispute resolution clauses (which permit the parties to bring the issue immediately before a court or arbitral tribunal), tiered dispute resolution clauses generally require parties to undertake a round, or rounds, of non-binding dispute resolution processes before moving the dispute to litigation/arbitration.
Ordinarily, these processes increase in formality. For example, a tiered dispute resolution clause may specify that first the parties should undertake direct informal discussions between principals, followed by a non-binding alternative dispute resolution (“ADR”) process (such as mediation), and then a binding litigation/arbitration if no settlement is achieved.
A good tiered dispute resolution clause will likely require parties to attempt ADR to comply with the contractually agreed process.
This offers the parties the option to suggest ADR as an initial attempt to resolve the dispute, without any perception that suggesting ADR is a sign of weakness. This is a particular advantage where parties may want to preserve a business relationship. It affords them an opportunity to resolve the disputes in a less adversarial setting, often outside the presence of counsel and a court or tribunal, and instead, between those carrying the business relationship.
However, where no goodwill remains between the parties, or an urgent need exists for interim relief, a badly drafted tiered dispute resolution clause can backfire. Instead of helping resolve a dispute without the expense of formal proceedings, an ineffective tired dispute resolution clause can become a bar to getting relief or, at worst, a landmine that might invalidate the entire process.
The English courts are clear that a tiered dispute resolution clause will be enforced if it is sufficiently clear and detailed. This is even the case if they contain obligations to negotiate in good faith or similar (such a concept normally not forming part of English law).
Cable and Wireless plc v IBM United Kingdom Ltd [2002] is an important case involving tiered dispute resolution clauses. In that case, the contract contained a clause which required: (1) negotiation by participating in specified ADR procedures, and if those were unsuccessful, (2) proceedings could be issued. The Court concluded that the parties had agreed to a specified procedure to resolve disputes and therefore it was sufficiently certain to require that the first step (i.e., ADR) had to be completed before proceedings could be issued.
The English courts have also held that failure to complete a preceding step specified within a clause can constitute a failure to satisfy a condition precedent to proceed to further steps in the tiered dispute resolution clause.
This was the case in Emirates Trading Agency LLC v Prime Mineral Exports Private Ltd [2014]. In Emirates Trading, the first step in the tiered dispute resolution clause required the parties to attempt to resolve the dispute by a “friendly discussion” during a four-week period. If that did not resolve the dispute, the non-defaulting party could refer the matter to an ICC arbitration. The Court concluded that indeed credence should be given to the provision as drafted by the parties.
However, in the context of questions relating to admissibility of disputes before arbitral tribunals, there is some nuance to the approach of the English courts.
The English courts in Sierra Leone v SL Mining Ltd [2021] and NWA v NVF [2021] have confirmed that the timeframe is not an absolute requirement for negotiation or discussions in a tiered dispute resolution clause. As a result, proceedings can begin earlier in such contexts if it is objectively clear that the negotiation or discussion will not lead to a settlement.
Courts across the United States align with the English courts in enforcing condition precedents as part of the general public policy favouring ADR, but only if the contractual language setting the processes is clear and unambiguous.
This is the case in California, even though condition precedents are heavily disfavoured there.
The case of Lange v. Schilling made it clear that failures to meet clear and unambiguous condition precedents are not excused, as California courts nonetheless support the general policy of encouraging mediation and other ADR practices.
Another case – Golden State Foods Corp. v. Columbia/Okura LLC – clarified that condition precedents will be enforced even if that results in the dismissal of a prematurely filed lawsuit and leaves a party without recourse. In Golden State Foods Corp., the court granted summary adjudication of certain claims because the plaintiff failed to satisfy the condition precedent of submitting its claims to mediation as required by the parties’ contract, resulting in the case’s dismissal.
In a recent decision in Florida, the Second District Court of Appeal provided further insight into who decides whether the condition precedent has been satisfied (Patterson v. Melman). Patterson held that a court cannot decide “whether the actual occurrence of mediation is a condition precedent to arbitration and whether the condition ha[s] been fulfilled.” Instead, the arbitrator must make that decision because it is one of procedural arbitrability. Interestingly, the court also mentioned that the failure to perform a condition precedent, such as mediation, may not constitute waiver when the failure can be cured (i.e., by completing mediation).
In line with the other states, New York also enforces condition precedents as part of its public policy favouring and encouraging arbitration and ADR, for example as exhibited in the case Ferguson v. Elec. Co. Inc. v. Kendal at Ithaca Inc. However, the courts will only do so if the processes are the “clear, explicitly and unequivocal intent of the parties.” O’Brien & Gere Ltd. v. Nextgen Chem. Processes, Inc. Therefore, as long as the language meets the basic principles of contract construction, it will be enforced. In another case, Archstone Dev. LLC v. Renval Construction LLC, the Court held that a claim was properly dismissed because the plaintiff “did not pursue mediation as required” by the parties’ contract.
Unclear drafting can lead to disputes about how to interpret a clause and could lead to rejection of the steps as a precondition. This will simply add to the dispute that already exists between the parties.
To avoid this, use ordinary language when drafting.
The dangers of arguably contradictory steps can bring are exemplified in Sanum Investments Limited v St Group Co. Limited and others.
In Sanum Investments, the contract in question contained a two-tier dispute resolution clause. The clause provided that the first dispute resolution step was to conduct litigation before the Laos courts, and that if any party was unsatisfied with the outcome, it could escalate the dispute to the second step of an international arbitration in Macau.
After St Group succeeded in the courts, Sanum Investments progressed to the second tier of the clause and pursued arbitration. The structure of the two-tier dispute resolution clause created a procedural quagmire, driving up costs and delaying the outcome.
Non-binding ADR such as mediation is becoming increasingly popular in many places. So are more informal steps, such as “friendly discussions” between representatives of the parties in dispute.
When conducted properly, such processes can help parties narrow the scope of a disagreement in a less adversarial setting. This can help them decide whether to escalate a dispute. It can even resolve the dispute and save both parties time and money while preserving their long-term business relationship.
This point is related to the dangers discussed in the second tip.
Put simply, the dispute resolution clause should reflect a realistic process the parties are comfortable with. For example, if the parties would prefer to resolve a dispute in private, an arbitration clause may be preferable.
Likewise, the parties may prefer to resolve a dispute before courts whose decision-making may be more predictable. In that case, the parties should consider a clause referring a dispute to the English or U.S. courts.
Similarly, it is important that a condition precedent to commencing formal substantive proceedings does not prevent urgent interim relief from a court or an emergency arbitrator. That is why specific and narrowly worded language matters – it can help ensure an escape route for such circumstances.
Orrick’s arbitration team has significant experience in dealing with high-value, multi-jurisdictional, and large-scale disputes around the world in a variety of industries, before both U.S. courts, English courts, and arbitral tribunals.
If you have any questions about the content of this article or wish to discuss a matter further with us, please contact Mark Beeley, Hagit Elul, Deena Dulgerian, or Ben Stafford.