Multi-tier Dispute Resolution Mechanisms - Enforcement Issues What is a multi-tier dispute resolution clause? When should such a clause be inserted in a contract? Are all the tiers enforceable? Scenario I: Final tier is arbitration Scenario II: Final tier is state court litigation – The Romanian case Special considerations for drafting the multi tier dispute resolution clause
Contractual clause dealing with the settlement of disputes between the contracting parties. Provides for distinct stages and separate procedures for solving the dispute. What is a multi-tier dispute resolution clause (MTDRC)
The typical ingredients of a MTDRC Stage 1: “good faith” negotiations or consultations between the parties for a certain period of time; Stage 2: Mediation, conciliation or other form of alternative dispute resolution (ADR) including binding but not final procedures such as expert determinations / dispute boards, etc.; Stage 3: Arbitration or state court litigation.
Rationale of having a MTDRC in the contract Long term complex projects particularly in the construction sector. The complexity of such projects entails the possibility of having very different issues under dispute bearing very different monetary values. The advantages of having a MTDRC in such contracts: Tailor-made system of dispute resolution encompassing appropriate methods of solving disputes for each type of disputes that might arise; Various mechanisms aiming at solving the disputes as quick and cost effectively as possible.
Examples of MTDRC in very complex projects The Channel Tunnel project: 2 stages: 1. A panel of three independent experts who would render a written decision within 90 days; 2.Arbitration The Hong Kong Airport Core Programme: 4 stages: 1.Decision of the Engineer 2.Mediation 3.Adjudication through a formal evidentiary proceeding with a written decision within 42 days 4.Arbitration
Examples of MTDRC in standard forms of contracts FIDIC Standard form of contracts (1999 edition): 1.Adjudication 2.Amicable Settlement 3.Arbitration World Bank Standard Bidding Documents for the Procurement of Works: 1.Adjudication 2.Amicable Settlement 3.Arbitration
The Subject of Inquiry What are the consequences if a party leapfrogs the initial tiers going directly to arbitration or, as the case may be, state court litigation? Are the first tiers enforceable?
Scenario I: Arbitration as the final tier – the ICC case Two degrees of control may be envisaged: Dismissal of the claim by the ICC Court under Article 6.2 In the few cases dealing with the issue, the Court either found that prima facie an arbitration agreement existed or that the issue did not relate to the existence or validity of the arbitration agreement and therefore referred the matter to the arbitral tribunal. Determination of the issue by the ICC Tribunal by virtue of the competence-competence principle Non fulfillment of a conciliation step: generally depends on the wording of the clause (mandatory vs. optional) and on the facts of the case (conduct of the parties). Non fulfillment of an intermediary adjudication procedure such as expert determination / dispute board: Inadmissibility (ICC Case No. 6238 and 6535); Prematurity (ICC Case No. 6276 and 6277); Staying of the proceedings and ordering the parties to go and fulfill the prior procedures.
Scenario I: Arbitration as the final tier – the ICC case ICC Case No. 9977 (Final Award of 22 June 1999) – prior amicable settlement procedure at senior management level for 14 days “A prior process like the one set forth in the Agreement, rather implies a an attitude and behavior of the parties inspired in a true and honest purpose of reaching an agreement” ICC Case No. 4840/1986 – Clause 67 of the FIDIC Conditions of Contract (second Edition) – mandatory prior recourse to an engineer “[S]uch submission of claims ‘in the first place’ to the Consultant for settlement is required under Clause 67 and is a condition precedent to filing arbitration with the I.C.C., and that it appears, therefore, that the Plaintiff’s claims for Phase II were prematurely and unduly referred to arbitration, and consequently this Tribunal does not have jurisdiction thereover.”
Scenario I: Arbitration as the final tier – the ICC case Particular circumstances: The ICC ADR Model Clause 4 - Obligation to submit dispute to ADR, followed by ICC arbitration as required The ICC Dispute Board Model Clause
Scenario I: Arbitration as the final tier - a CCIR case The arbitral clause in the contract provided for a mandatory conciliation procedure prior to commencing arbitration. Respondent objected to Claimant’s request for arbitration arguing that such is premature given the non-fulfillment by Claimant of the prior negotiation procedures. The arbitral tribunal held: “By contrast to the mandatory conciliation procedure envisaged by Article 720 1 of the Civil Procedure Code applicable in commercial disputes under the jurisdiction of the state courts, in arbitral matters the failure to fulfill the prior conciliation step, provided by the parties, does not entail a rejection of the claim as premature or, as certain state courts have held, as inadmissible but rather imposes, by virtue of the mandatory force of the contract, that such deficiency is remedied by ordering the claimant to first carry on the conciliation procedure.” ( CCIR Case no. 201/2007; Interlocutory award of November 1, 2007)
Scenario II: State court litigation as the final tier Romania - MTDRC providing for conciliation followed by state court litigation The issue: Enforceability of the conciliation step Differences between the provisions of Article 720 1 of the Civil Procedure Code (mandatory conciliation procedure applicable in commercial cases) and conventional agreements for conciliation Article 720 1 is the minimum requirement under the law; The parties may provide for a more detailed conciliation procedure but have to follow at least the requirements of Article 720 1 The court may decide that the claim is: Inadmissible Premature
Scenario II: State court litigation as the final tier Romania - MTDRC providing for mediation followed by state court litigation The issue: Enforceability of the mediation stage Possible approaches: May the judge stay the court proceedings? Law No. 192/2006 on mediation Article 6 provides that “the judicial and arbitral authorities as well as other entities having judicial attributions inform the parties of the possibility and advantages of recurring to mediation and guides them to follow such means in order to settle their dispute.” Article 62 provides that (in civil matters!) the judge will stay the proceedings in order to allow the pursuance of the mediation procedure The New Civil Procedure Code (Not yet in force) Article 21 The judge will recommend the parties the amiable resolution of the case through mediation, in accordance with the special laws.
Scenario II: State court litigation as the final tier Romania - MTDRC providing for expert determination / dispute board followed by state court litigation Poor case-law and doctrine on the matter. Possible approaches: The court has no express legal grounds to dismiss the case either as inadmissible or premature The court has no express grounds to order the staying of the proceedings The parties agreement will be considered a contractual arrangement with no effects on the state court’s jurisdiction The court may consider awarding damages for breach of contract It may be advisable to include a monetary evaluation of the prejudice for breach of the MTDRC in the contract
Concluding Remarks Special care when drafting the MTDRC Mandatory vs. optional stages – “may” vs. “shall”; Clear and objective criteria for moving from one stage to the next; Possibility to provide for damages in case of breach of the MTDRC; Choosing the final tier: arbitration vs. state court litigation. Special care when following the MTDRC Supporting documents attesting that efforts to negotiate in “good faith” have been undertaken by Claimant; Observe the time limits set up in the MTDRC.