Dispute escalation provisions and International Arbitration - a rising threat in England & Wales?

In this article, Clyde & Co considers the enforceability of dispute escalation provisions. Laura Nelson, Senior Associate, and Ana Favretto, Trainee Solicitor, in Clyde & Co’s London office, consider this subject from the perspective of English and Welsh law

When agreeing the terms of a contract at the outset of a relationship, many parties sometimes include explicit contractual provisions setting-out steps that must be complied with should a dispute arise. Parties may choose to adopt a staged approach such as including service of a notice of dispute, an initial meeting of the parties or directors of those entities to engage in negotiations, and a period that should be allowed before a dispute can be referred to either the court or arbitration. Contractual provisions of that nature are known as dispute escalation clauses and are commonly seen in long-term agreements such as construction contracts (e.g., the FIDIC 2017 suite) and power purchase agreements for the supply of renewable energy.  A failure by one party to comply with the exact process prescribed may give rise to arguments that the court or tribunal lacks jurisdiction to hear the dispute.

At the time of drafting, it is, therefore, important to consider the impact a dispute escalation clause may have later in the relationship should a dispute arise, and whether the contractual provisions accurately reflect the intention of the parties.

Multi-tiered ADR clauses and the need for certainty

Historically, under English law a dispute escalation clause was viewed as an “agreement to agree” and, therefore, lacking sufficient certainty to be enforceable[1].  More recently, the courts have adopted a different approach and will usually enforce a dispute escalation clause if it makes clear what steps must be taken by the parties, and that those steps are mandatory.   When drafting this type of clause, it is therefore important to ensure that each step is clearly defined and there is no ambiguity as to the time period for completion of those steps. To avoid potential deadlocks, is essential to specify clear deadlines if parties are required to complete each step before moving on to the next e.g., 30 days for a meeting of directors, 30 days for negotiation to take place thereafter, and 60 days for a mediation to take place. 

In the important case of The Channel Tunnel Group Ltd and Another v Balfour Beatty Construction Ltd and Others[2], the court looked at this issue in an arbitration context.  The parties had contractually agreed to first submit any dispute to a panel of experts, moving onto an ‘appeal’ under ICC Rules of Conciliation and Arbitration if a party was dissatisfied with the decision. When a disagreement arose over works related to a cooling system, the Claimants applied for injunctive relief in the UK, which Balfour Beatty challenged. The House of Lords decided to stay the proceedings brought by the Claimants, on the basis the Court had inherent jurisdiction to “inhibit proceedings brought in breach of an agreed method of resolving disputes”[3].

More recently, the issue arose in the 2014 case of Emirates Trading Agency Llc v Prime Mineral Exports Private Ltd[4] (“Emirates v Prime Minerals”). The clause that was the subject of the dispute required the parties to engage in “friendly discussions” over a specified time period. The court’s view was that it should give effect to the parties’ agreement and held that the discussions were a pre-condition precedent to the right to refer the claim to arbitration. The tribunal, therefore, lacked jurisdiction and any award would be deemed invalid and ineffective. The case has been criticised as it is generally thought that the parties were unlikely to have intended that the clause would have such consequences.

Failure to comply with the requirements

So, what is the effect of failing to meet the established pre-arbitral requirements? The Arbitration Act 1996 (the “AA”) is the relevant legislation governing arbitration agreements in England and Wales. The AA does not contain any explicit provisions requiring parties to take certain steps to settle a dispute prior to it being referred to arbitration, but it does not necessarily follow from this that failure to comply with a contractual escalation clauses actually precludes a tribunal from dismissing a request to refer the dispute to arbitration or ruling that it lacks substantive jurisdiction.

Under section 30 of the AA, the tribunal has competence to rule on its own jurisdiction, unless otherwise agreed by the parties. That includes making a ruling on both whether there is a valid arbitration agreement between parties, and what matters have been submitted in accordance with the arbitration agreement. Under section 31(3), any objection to substantive jurisdiction must be raised at the outset of proceedings, no later than the time at which the objecting party takes its first step in the proceedings.

Similarly, the London Court of International Arbitration (the “LCIA”) Rules 2020 give a tribunal the power to rule on its own jurisdiction and authority to hear a dispute, and an objection must be raised no later than the time for submission of a Respondent’s Statement of Defence. The arbitral tribunal may decide the objection to its jurisdiction or authority. Despite having the power under both the AA and the LCIA Rules, a tribunal may nonetheless be reluctant to accept jurisdiction as this may give rise to a challenge or grounds for appeal of an award under section 67 of the AA, and challenges to enforcement on the basis that the tribunal lacked jurisdiction.

The New York Arbitration Convention is also important in the context of enforcement.  Articles II.1 and II.3 provide that where there is an agreement in writing to submit a dispute to arbitration, and unless that agreement is null and void, inoperable or incapable of being performed, the court of a Contracting State shall recognise an arbitration agreement between the parties and, at the request of a party, refer the dispute to arbitration. Parties should therefore be mindful not to render the agreement “inoperable” on the basis that pre-arbitral stages in a dispute resolution procedure have not been complied with.

In Emirates v Prime Minerals, the facts allowed it for the court to take for granted that the tribunal had jurisdiction. In the more recent case of Sierra Leone v SL Mining Ltd[5], the court considered a similar clause which stipulated a three-month period for negotiation between the parties. In this instance, the court decided that the clause was not a pre-condition to arbitration and did not prevent arbitration proceedings being commenced within that period. The court’s view was that the three-month period was an opportunity for the parties to engage in negotiations, but they were under no obligation to do so, and proceedings could be commenced within that period if settlement was not possible. The court then went on to decide that this was an issue of admissibility rather than jurisdiction i.e., whether the tribunal should not, versus could not, hear the case as, ultimately, it was the tribunal who was best placed to decide whether the relevant conditions precedent were met.

The court also took this position in NWA v NVF[6], where the agreement included a 30-day window for mediation in which a party to an arbitration agreement commenced proceedings without engaging in mediation as provided by the relevant agreement. The requirement to seek a settlement first was procedural, and therefore falling within the tribunal’s powers.

Those recent decisions support what can be considered as the English courts’ pro-arbitration, non-interventionist approach. The decisions matter in light of the new Commercial Court Guide instruction that a challenge to the tribunal’s substantive jurisdiction under section 67 AA will only be appropriate where “substantive jurisdiction… as referred to in section 30” is affected. Practitioners should keep in mind the courts’ latest decisions on admissibility, but note that the circumstances were fact-specific and outcomes will still be dependent upon the interpretation of an arbitration clause, meaning that non-compliance with dispute escalation provisions could still lead to a finding that the tribunal lacks jurisdiction.

This series from Clyde & Co’s arbitration teams will continue with further articles dispute escalation provisions from the perspective of other jurisdictions.