Effective resolution – key considerations for dispute escalation clauses

Multi-tiered or dispute escalation clauses are provisions in commercial agreements requiring the parties to undertake one or more rounds of alternative dispute resolution (“ADR”) mechanisms (such as negotiation and/or mediation) before (if the dispute is not resolved) progressing to litigation or arbitration. 

Dispute escalation clauses are popular in the construction, energy and infrastructure sectors. Where the parties are often dealing with complex, high-value long-term projects, dispute escalation clauses provide a mechanism for contracting parties to resolve a dispute without recourse to litigation or arbitration. As such, commercial relationships have a chance of being preserved and conflict can be resolved in a timely and efficient manner. Dispute escalation clauses place ADR at the fore when a dispute first emerges, without either party having to potentially lose face (or signal weakness) by suggesting that the parties submit to such processes. 

When drafting (or considering) a dispute escalation clause, there are a number of important practical and commercial issues to bear in mind, including:

• Which form(s) of ADR? Often the choice here is between a mediation process or negotiation. Whilst it is possible for a clause to provide for the parties to submit to more than one form of ADR, given the time, complexity and costs involved in multiple stages of ADR, one process may often be considered sufficient. Whilst the decision must be made on a case-by-case basis and is dependent on the type of project and/or business relationship, essentially the choice is between a cheaper, more informal and unstructured process in negotiation or a more formal, prescribed process in mediation, which may prove more costly.
• Is the ADR process a pre-condition to litigation or arbitration? Here, there are a number of options to consider in the drafting. Essentially, it should be made clear whether the ADR process(es) to be followed are optional or if they are to be a pre-condition to commencement of litigation or arbitration. As a third option, ADR processes (such as mediation) could be run in parallel with proceedings. 

In circumstances where an ADR process is expressed as being a pre-condition to litigation or arbitration, issues can arise where, for example, proceedings are commenced by one party before the relevant ADR process is initiated (or has concluded). In such circumstances, additional costs, delay and satellite litigation can ensue, oriented around whether: i) the requirement to complete ADR before a litigation or arbitration process is enforceable; and/or ii) particularly in the case of arbitration, if non-compliance with ADR steps means that the tribunal lacks jurisdiction to determine the claim. Here, clear drafting is key. Important considerations are:

• Use of precise language, which provides for specific steps, deadlines and requirements for each tier in the dispute escalation process;
• Where an informal negotiation phase is to be followed, it is helpful to draft a fixed start and end date for the process and identify (by reference to a role description) the negotiators;
• Where a mediation process is to be followed, it is important to consider the process to be followed for selection, appointment and payment of the mediator and the mediation itself;
• The need to be clear on whether parties are simply entitled (i.e. as an option) to initiate a particular ADR process or if there is a requirement to initiate and complete that process before proceeding to the next stage; and  
• The need to provide a mechanism for a final, binding and enforceable resolution of the dispute if the ADR process fails (i.e. through recourse to litigation or arbitration)

Essentially, any adopted mechanism must be clear to follow and practical, bearing in mind the nature and characteristics of the project in question. As such, an effective mechanism can reap benefits in terms of potentially resolving a dispute early, with minimal cost and damage to commercial relationships. By contrast, ambiguity may lead to increased costs, delay, satellite litigation and further unwelcome complications. 

When engaging with a dispute escalation clause, it is vital for parties to seek specialist advice early and to consider, in particular, any limitation issues. Where limitation may be in issue, to protect against the other side having a limitation defence, careful consideration should be given as to whether it is possible to enter into a standstill agreement or (if this is not possible) issuing proceedings and then requesting a stay.  

written by Christopher Wenn

Christopher is a Senior Associate in Burges Salmon's Dispute Resolution team. Chris specialises in general commercial disputes, with a particular interest in financial and energy disputes.