Multi-tiered dispute resolution clauses in international contracts - efficiency vs. delay?

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1 CENTER FOR INTERNATIONAL LEGAL STUDIES International Arbitration Symposium Multi-tiered dispute resolution clauses in international contracts - efficiency vs. delay? Schloss Leopoldskron, Salzburg Session 2 / May 22, 2014 Prof. Dr. Renate Dendorfer-Ditges LL.M. (Illinois) MBA (Maastricht) Bonn/Germany 1

2 BASICS A clause may provide first for non-binding conciliation/mediation under conciliation/mediation procedures. If the conciliation/mediation is unsuccessful, the clause authorizes the dispute to be resolved by binding arbitration pursuant to specific arbitration rules. A three tier clause may provide first for negotiation, which, if unsuccessful, is followed by non-binding conciliation/mediation, then by binding arbitration. Multi-tiered dispute resolution clause provides for at least two consecutive stages of dispute resolution for all or for certain types of dispute arising out of or in connection with a contract. 2

3 GOALS and ADVANTAGES Full use of ADR-toolbox including negotiation, conciliation/mediation and arbitration Adversarial win/lose proceedings are considered in Multi-Tiered Clauses as ultima ratio Prompt, cost-effective dispute resolution = increasing efficiency of dispute resolution process Final dispute resolution guaranteed if ADR procedures fail Appropriate escalation of ADR techniques Negotiation and conciliation/mediation are required before litigation mind-set takes hold Positive pressure for amicable solution (Mediation with Muscles) Increasing sensitivity of the parties for dispute resolution Conservation, if possible, of underlying relationship 3

4 RISKS and CONSIDERATIONS Complexity increases potential for errors Lack of experience in drafting multi-tiered clauses Chinese Walls between ADR and Arbitral Proceedings; effectiveness of ADR needs free expression of the parties without having fear that statements could be used against them in subsequent arbitral proceedings; see Art. 7 (2) ICC ADR Rules and Art. 10 UNCITRAL Model Law on International Commercial Conciliation Three point scheme (see: Klaus Peter Berger, Arbitration International, Volume 22, No. 1, p. 1, 4) - Suitability of all ADR proceedings chosen for the actual project and their order in the escalation ladder - Weighing up of the disadvantages possibly associated with nonsuccessful escalation proceedings against the possible time and cost advantages of successful escalation proceedings - Establishment of smooth transitions from one dispute resolution level to the next. 4

5 Typical Uses: Long Term or Relationship Agreements Joint Ventures Distributorship or Licensing Agreements Supply Agreements Long Term Service Agreements Governing Documents for Closely Held Entities Construction or Infrastructure Projects Increasingly popular in domestic and international commercial contracts (see: at 11 [2006]): 44 % of global players prefer combination of ADR procedures and arbitration. Higher grade of acceptance in common law countries and Asia, exception in civil law countries (see: Thomas Arntz, Eskalationsklauseln, Cologne 2013, p. 62). 5

6 CPR Model Multi-Step Dispute Resolution Clause Negotiation between Executives: The parties shall attempt in good faith to resolve any dispute arising out of or relating to this Agreement promptly by negotiations between executives who have authority to settle the controversy and who are at a higher level of management than the persons with direct responsibility for administration of this contract. Any person may give the other party written notice of any dispute not resolved in the normal course of business. Within 15 days after delivery of the notice, the receiving party shall submit to the other a written response. The notice and response shall include (a) a statement of that party s position and a summary of arguments supporting that position, and (b) the name and title of the executive who will represent that party and of any other person who will accompany the executive. Within 30 days after delivery of the initial notice, the executives of both parties shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to attempt to resolve the dispute. All reasonable requests for information made by one party to the other will be honored. All negotiations pursuant to this clause are confidential and shall be treated as compromise and settlement negotiations for purposes of applicable rules of evidence. Mediation: If the dispute has not been resolved by negotiation as provided herein within 45 days after delivery of the initial notice of negotiation, or if the parties failed to meet within 20 days, the parties shall endeavor to settle the dispute by mediation under the International Institute for Conflict Prevention & Resolution (CPR) Mediation Procedure currently in effect or in effect on the date of this Agreement, provided, however, that if one party fails to participate in the negotiation as provided herein, the other party can initiate mediation prior to the expiration of the 45 days. Unless otherwise agreed, the parties will select a mediator from the CPR Panels of Distinguished Neutrals. 6

7 CPR Model Multi-Step Dispute Resolution Clause Arbitration: Any dispute arising out of or relating to this Agreement, including the breach, termination or validity thereof, which has not been resolved by mediation as provided herein within 45 days after initiation of the mediation procedure, shall be finally resolved by arbitration in accordance with the International Institute for Conflict Prevention & Resolution Rules for Non- Administered Arbitration currently in effect or in effect on the date of this Agreement, by three independent and impartial arbitrators, of whom each party shall appoint one in accordance with the screened appointment procedure provided in Rule 5.4. The arbitration shall be governed by the Federal Arbitration Act 9 U.S.C. 1 et seq., and judgment upon the award rendered by the arbitrators may be entered by any court having jurisdiction thereof. The place of arbitration shall be (city, state). OR Litigation: If the dispute has not been resolved by mediation as provided herein within 45 days after initiation of the mediation procedure, this Agreement does not preclude either party from initiating litigation upon 30 days written notice to the other party; provided, however, that if one party fails to participate in either the negotiation or mediation as agreed herein, the other party can initiate litigation prior to the expiration of the time periods set forth above. See: Sample-Language.aspx 7

8 ICDR Model Step Clause Two Tier In the event of any controversy or claim arising out of or relating to this contract, or a breach thereof, the parties hereto agree first to try and settle the dispute by mediation, administered by the International Centre for Dispute Resolution under its Mediation Rules. If settlement is not reached within 60 days after service of a written demand for mediation, any unresolved controversy or claim arising out of or relating to this contract shall be settled by arbitration in accordance with the International Arbitration Rules of the International Centre for Dispute Resolution. The parties should consider adding: The number of arbitrators shall be (one or three). The place of arbitration shall be (city and/or country). The language(s) of the arbitration shall be. 8

9 ICDR Model Step Clause Three Tier In the event of any controversy or claim arising out of or relating to this contract, or the breach thereof, the parties hereto shall consult and negotiate with each other and, recognizing their mutual interests, attempt to reach a solution satisfactory to both parties. If they do not reach settlement within a period of 60 days, then either party may, by notice to the other party and the International Centre for Dispute Resolution, demand mediation under the Mediation Rules of the International Centre for Dispute Resolution. If settlement is not reached within 60 days after service of a written demand for mediation, any unresolved controversy or claim arising out of or relating to this contract shall be settled by arbitration administered by the International Centre for Dispute Resolution in accordance with its International Arbitration Rules. See: 9

10 ICC Model Clause In the event of any dispute arising out of or in connection with the present contract, the parties agree to submit the matter to settlement proceedings under the ICC Mediation Rules. If the dispute has not been settled pursuant to the said Rules within 45 days following the filing of a Request for Mediation or within such other period as the parties may agree in writing, such dispute shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules of Arbitration. See: suggested-clauses/ 10

11 Escalation Ladder 1. Tier Naming Negotiation Amicable Process No third party Win/Win Solution 2. Tier: Plaining Mediation / Conciliation / Dispute Resolution Boards Amicable Process Third neutral party Win/Win Solution 3. Tier: Claiming Arbitration / Litigation Adversarial Process Third neutral party Win/Lose Solution 11

12 IBA Drafting Guidelines for Multi-Tier eddispute Resolution Clauses Multi-Tier Guideline 1: The clause should specify a period of time for negotiation or mediation, triggered by a defined and undisputable event (i.e., a written request), after which either party can resort to arbitration. Negotiation/mediation as condition precedent to arbitration/litigation. Suspension of limitation periods must be considered, e.g. Sec. 203 German Civil Code (BGB). Time period for negotiation/mediation should be short. Multi-Tier Guideline 2: The clause should avoid the trap of rendering arbitration permissive, not mandatory. Disputes may be submitted to arbitration. Ambiguous clause. Multi-Tier Guideline 3: The clause should define the disputes to be submitted to negotiation or mediation and to arbitration in identical terms. Ambiguities may suggest to submit some disputes to arbitration immediately. Broad reference should cover counterclaims. Counterclaims need to go through the several steps, not be raised for the first time in arbitration. See: IBA Guidelines for Drafting International Arbitration Clauses, 07 October 2010, London/UK 12

13 Multi-Tier Clause Pitfall No. 1 - Drafting: No clear choice of ADR procedures, but leave it up to the parties to use their best efforts to agree upon an appropriate method of non-judicial dispute resolution as ex post choice Lack of clear and undoubted wording, especially for deadlines, persons responsible for negotiation Lack of certainty regarding optional or mandatory ADR procedures: Mere Right to Comply vs. Obligation to Comply (see Klaus Peter Berger, Arbitration International, Volume 22 No. 1 p. 1, 5 et seq). Lack of smooth transition from one tier to the next tier in order to ensure proper functioning of the escalation process in practice. Explicit language that arbitrators shall be empowered to hear all disputes arising out of or relating to the contract, including disputes as to whether the conditions precedent for arbitration have been met (see: D Jason File, IBA Mediation Committee Newsletter July 2007, p. 33, 35). 13

14 Multi-Tier Clause Pitfall No. 2 Missing Determination of the Point of Failure: Clause itself contains criteria for failure of ADR proceeding, e.g. given deadlines for amicable settlement as an objective criteria (lapse of time). Proceeding deemed to have failed if one party communicates this in writing to the other party, or if the Neutral makes a similar statement directed at both parties (subjective criteria); considering the nature of voluntariness. Problematic: Escalation clauses focusing on an appropriate agreement of both sides regarding the failure of ADR process. Checklist of the English Court of Appeal in Halsey v. Milton Keynes General NHS Trust, Steel v. Joy, Halliday [2004] EWCA Civ 576 for refusal to initiate ADR proceeding: - Nature of the dispute; - merits of the case; - extent to which other settlement methods have been attempted; - costs of ADR would be disproportionately high; - delay in setting up and attending the ADR would have been prejudicial; - ADR has a reasonable prospect of success. 14

15 Multi-Tier Clause Pitfall No. 3 Condition Precedent and Enforceability: Definition: A Condition Precedent is an event which must occur, unless its non-occurrence is excused, before performance under a contract becomes due, i. e., before any contractual duty arises. Mediation clause creates a condition precedent (mediation taking place) before performance under the arbitration clause becomes due. If a party simply refuses to participate in mediation, the arbitration clause could be rendered unenforceable until mediation takes place. Result: No resolution is possible. Respondent must plead the failure to comply with mandatory ADR proceedings (see: Sec para. 6, 1032 para, 1 German Code of Civil Procedure) if successful, court or tribunal must dismiss action as currently inadmissible (pactum de non petendo). Important: Clause must clearly refer to those less adversarial procedures as a mandatory precondition to escalating the dispute (see: D Jason File, IBA Mediation Committee Newsletter July 2007, p. 33, 34). 15

16 Court Decisions regarding Condition Precedent and Enforceability: United States: HIM Portland LLC v. DeVito Builders, Inc., 317 F.3d 41 (1 st Cir. 2003) - Contract for motel renovation - Multi-tier ADR clause: mediation before arbitration - Party sought to compel arbitration. - Court declined to compel arbitration, as the condition precedent (mediation) had not taken place - Question: If both parties wish to avoid the application of the dispute resolution clause may find success litigating in court on the basis of the remainder that the dispute resolution clause has not been activated, see: Weekly Homes, Inc v. Jennings, 936 SW 2d 16, 19 (Tex. App. 1996); White, 641 A.2d at 1385; but: Howson v. Dean Witter Reynolds Inc, 537 US 79, 84 (2002) Kemiron Atl., Inc. v. Aguakem Int l Inc., 290 F.3d 1287 (11 th Cir. 2002) - Purchase and Sale Agreement, containing a clause with mediation first and arbitration as second step if mediation fails -... the parties agreed to conditions precedent before arbitration can take place and, by placing those conditions in the contract, the parties clearly intended to make arbitration a dispute mechanism of last resort.

17 Court Decisions regarding Condition Precedent and Enforceability: United States: Thompson v Liquichimica of America Inc, 481 F Supp 365, 366 (SDNY 1979): Agreement to use best efforts to reach an agreement is enforceable. Candid Productions, Inc v. Int l Skating Union, 530 F Supp 1330, 1337 (SDNY 1982): An agreement to negotiate in good faith is amorphous and nebulous, since it implicates so many factors that are themselves indefinite and uncertain that the intent of the parties can only to fathomed by conjecture and surmise. Fluor Enters Inc v Solutia Inc, 147 F Supp 2d 548, 651 (SD Tex 2001): Denying motion for summary judgment based on a party s alleged violation of the standstill provision in a contract which barred suit until 30 days after the commencement of a mediation procedure, where rules referenced in the parties contract suggest that the standstill provision began to run on the date that preliminary steps to hold mediation were commenced, rather than the date when the first actual mediation meeting was held+ kim9k9.... mediation provision met the test under both Missouri and Texas law that the contract be so worded that it can be given certain of definite legal meaning

18 Court Decisions regarding Condition Precedent and Enforceability: Singapore High Court: International Research Corp PLC v. Lufthansa Systems Asia Pacific Pte Ltd. [2012] SGHC Cooperation Agreement for Application and Services Implementation SAP R/3 - Clause 37.2 contained a multi-tiered dispute resolution mechanism for (1) a committee of Parties Contact Persons, (2) committee consisting of Datamat s designee and Lufthansa Systems Director Customer Relations; (3) a committee consisting of Datamat s designee and Lufthansa Systems Managing Director, and (4) arbitration. - Lufthansa initiated SIAC arbitration against IRCP and Datamat and failed to comply with preconditions - Arbitral tribunal held that requirements were too uncertain to be enforceable - Singapore High Court: Parties objective intention was for the dispute resolution mechanism and mediation procedure in Clause 37.2 was not uncertain and therefore enforceable - Consequence: Tribunal had no jurisdiction to resolve the dispute if the mediation procedure had not been complied with - Citation: HSBC Institutional Trust Services (Singapore) Ltd v. Toshin Development Singapore Pte Ltd. [2012] SGCA 48: provisions which require contracting parties to negotiate in good faith are enforceable From a traditional Asian perspective, a confer in good faith or friendly negotiation clause represents an executory contractual promise no less substantive in content than a price, payment, or delivery term. It embodies and expresses the traditional Asian supposition that the written contract is tentative rather than final, unfolding rather than static, a source of guidance rather than determinative, and subordinate to other values such as preserving the relationship, avoiding disputes, and reciprocating accommodations that may control far more than the written contract itself how a commercial relationship adjusts to future contingencies.

19 Court Decisions regarding Condition Precedent and Enforceability: Switzerland: Swiss Supreme Court, , Case no. 4A 46/ Contract governed by Swiss law for the delivery of a production line - December 3, 2010 award partially granted the claim for payment whilst rejecting the Respondent s objections that preliminary requirements of the Contract had not been complied with. - Question: validity and scope of a contractual requirement for a duty to seek an amicable settlement or engage a neutral expert before arbitration proceedings. - Dispute among legal writers regarding the consequences of failing to take contractually required preliminary steps before initiating an arbitration. - The Court refused a categorical answer (should it make the request for arbitration inadmissible? should the Party in breach pay damages?) and concluded in the case at hand that preliminary requirements had not been breached or could not be claimed in good faith. Cassation Court of the Canton of Zurich, , ZR 99 (2000) No. 29 Conciliation clause is treated as an agreement of purely substantive nature, therefore ordinary courts would accept jurisdiction. Violation of conciliation procedure will be limited to withdrawal from the conciliation agreement combined with a claim for compensation of possible expenses Zurich Court of Appeals, , ZR 101 (2002), No. 21, p. 77, 78: Different position in an obiter dictum.

20 Court Decisions regarding Condition Precedent and Enforceability: Germany Federal Supreme court (Bundesgerichtshof), , NJW 1977, p. 2263: If conciliation is agreed in Articles of Association (Gesellschaftsvertrag), any action before court without the attempt of conciliation is inadmissible. Federal Supreme Court (Bundesgerichtshof), , NJW 1984, p. 669: If conciliation is agreed in a contract, both parties are obliged to co-operate in carrying out the settlement negotiations; action brought before the courts prior to negotiation is inadmissible. Confirmed: Federal Supreme Court (Bundesgerichtshof), , NJW 1999, p Supreme Court of Germany (Bundesverfassungsgericht), , NJW-RR 2007, p. 1073: Mandatory conciliation as included in conciliation law is in accordance with the Constitution.

21 Court Decisions regarding Condition Precedent and Enforceability: Germany Federal Supreme Court (Bundesgerichtshof), , NJW- RR 2009, p. 637: A conciliation clause can also include any dispute regarding the validity of a contract and has to be considered as precondition to litigation. Federal Labor Court (Bundesarbeitsgericht), , NZA 1999, p. 1350: Agreement to call an ecclesiastic conciliation committee does not exclude the recourse to litigation. District Court (Landgericht) Heilbronn, , ZKM 2011, p. 29: Considering the fact that mediation can be terminated by the parties at any time, a Mediation Clause cannot be interpreted as a preliminary waiver of action in state courts; Mediation Clauses included in Business Terms (Allgemeine Geschäftsbedingungen) are intransparent and therefore invalid.

22 Court Decisions regarding Condition Precedent and Enforceability: ICC Cases (cited according to Alexander Jolles, (2006) 72 Arbitration , also: CIArb publication November 2006, p. 329 et seq.) ICC case No. 6276, Partial Award of : Claim had not satisfied first and second tiers and therefore request for arbitration is not impossible for the future but is a present premature. ICC case No. 7422, Interim Award of : Arbitrators should not evaluate the parties conduct in respect of their confidential negotiations and claimant would be entitled to have the question of its applicability decided by the arbitrators. ICC case No. 8462, Final Award of : Enough indications for meeting the first tier of negotiation in the case. ICC case No. 9977, Final Award of : Prior management contacts fulfilled the first tier of negotiation in the case. ICC case No , Interim Award of : The word may in a three-tier clause was a non-binding term providing that the reference of the dispute to an expert was permissive not mandatory.

23 Consequences: Focus of the courts less on issue of doctrine and strict legal concepts than on pragmatic findings or individual solutions. Both, arbitrators and state courts had to decide on whether prearbitration requirements have been met Conflicting views whether a failure to satisfy negotiation or mediation requirements affect the tribunal s jurisdiction; see Art. 13 of the UNCITRAL Model Law suggesting that the tribunal has jurisdiction and should make use of its authority to enforce the pre-arbitral steps. In most cases the failure to satisfy a contractual pre-arbitration requirement is treated as a matter of admissibility and therefore a procedural approach and not as a matter of substantive law. Request for arbitration should be considered as inadmissible if parties agreed in a binding and unequivocal manner to first engage in other steps to resolve their dispute. In case of inadmissible arbitration because of pre-arbitral procedures, the proceeding should be stayed and not be closed.

24 Multi-Tier Clause Pitfall No. 4 Applicable Law: Applicable law for formation and validity: Conflict of Law Rules (e.g. Rom I-Regulation) Lex arbitri not applicable for mediation clauses Choice of Law vs. Center of Gravity Test Applicable law for waiver of arbitration / litigation depending whether it is considered as substantive or procedural law - if procedural law: lex fori-principle - if substantive law: Conflict of Law Rules See in detail: Thomas Arntz, Eskalationsklauseln, Cologne 2013, p. 166 et seq. 24

25 Thank you for your Attention Prof. Dr. Renate Dendorfer-Ditges LL.M. MBA Rechtsanwältin/Wirtschaftsmediatorin DITGES PartG mbb Rechtsanwälte Wirtschaftsprüfer Steuerberater Kaiserplatz Bonn Telefon:

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