Alternative dispute resolution (“ADR“) mechanisms have gained recognition and acceptance. Common types of ADR include mediation, neutral evaluation and arbitration, which generally provide more flexibility when compared with litigation. Commercially, it is in parties’ interests to resolve disputes amicably through mediation or negotiations, preserving relationships and saving costs. This increased recognition and acceptance of ADR mechanisms may have led to many contracts providing for multi-tiered dispute resolution mechanisms. Examples include clauses which provide that disputes are first to be resolved by negotiations, followed by neutral evaluation if the former is unsuccessful, or perhaps for disputes to be resolved by mediation, followed by arbitration if mediation fails.
This article discusses recent case law on the enforceability of multi-tiered dispute resolution clauses. While there may be advantages from a commercial perspective to be derived from multi-tiered dispute resolution clauses, there are also potential pitfalls which parties should be wary of when negotiating and drafting such clauses.
Enforceability of Multi-Tiered Dispute Resolution Clauses in Singapore
The Singapore Court of Appeal decision in International Research Corp PLC v Lufthansa Systems Asia Pacific Pte Ltd [2014] 1 SLR 130 (“Lufthansa“) clarified issues of enforceability, interpretation and performance of a multitiered dispute resolution clause.
Lufthansa concerned an application to challenge an arbitral tribunal’s ruling that it had jurisdiction to resolve a dispute. One of the issues that impacted upon the tribunal’s jurisdiction was whether the preconditions for the commencement of arbitration in the multi-tiered dispute resolution clause were enforceable, and if so, whether they had been satisfied.
The dispute resolution mechanism in Lufthansa provided that parties shall commence arbitration if the disputes cannot be settled by negotiations in accordance with the process stipulated. In particular, it contemplated that a dispute would be escalated up the hierarchies of the respective parties with representatives of increasing seniority attempting a resolution.
In determining if the tribunal had jurisdiction over the dispute, it took the view that the requirement for negotiation in the multi-tiered jurisdiction clause was too uncertain to be enforceable and deemed it unnecessary to consider if the negotiation process had been adhered to as a precondition to arbitration.
The Singapore High Court and the Court of Appeal took a different view. Both Courts held that the requirement for negotiation was not too uncertain to be enforceable applying the principles set out in the Court of Appeal’s decision of HSBC Institutional Trust Services (Singapore) Ltd v Toshin Development Singapore Pte Ltd [2012] SGCA 48 (“Toshin“).
The issue in Toshin was whether an express term, obliging parties to negotiate in good faith, is valid and enforceable. The appellant argued that it is much too uncertain to be enforceable. The Court of Appeal disagreed and held that the said obligation was certain and capable of being observed by parties. At its core, it encompasses a requirement that parties:
(i) Act honestly; and
(ii) Observe accepted commercial standards of fair dealing in the performance of identified obligations. This includes a duty to act fairly, having regard to the legitimate interests of the other party.
The Court of Appeal further opined that the choice made by contracting parties on how they wanted to resolve potential differences between them should be respected, and Courts should not be overly concerned with the inability of the law to compel parties to negotiate in good faith in order to reach a mutually acceptable outcome.
Performance of the Multi-Tiered Jurisdiction Clause
Whilst the Court of Appeal in Lufthansa agreed with the High Court on the issue of enforceability of the dispute resolution clause, it disagreed on the High Court’s finding that the process had been complied with. The clause provided that the dispute would be escalated through three committees comprising specific representatives, before parties resort to arbitration. The Court of Appeal found that this was not done, even though there were some meetings between the parties prior to arbitration.
Implications
In Singapore, it appears that agreements to negotiate or mediate are generally enforceable. Courts are likely to respect parties’ choice of dispute resolution mechanism and give effect to such agreements, without being overly concerned about the inability of the law to compel parties to negotiate in good faith. Where parties choose to stipulate that they would negotiate or mediate prior to commencing arbitration, they will be expected to abide by the agreement, failing which the arbitral tribunal will not have jurisdiction over the dispute.
Therefore, if parties insert a multi-tiered dispute resolution clause in their contract, they should ensure that any preconditions to arbitration are carefully considered and not unnecessarily onerous. When in doubt, it may be advisable not to include too much detail in the process, which may affect parties’ ability to commence arbitration when they want to. Taking Lufthansa as an example, the dispute resolution clauses contemplated that a dispute would be escalated through three committees, comprising specific persons, including the Respondent’s Director Customer Relations and the Respondent’s Managing Director. While there were some meetings between some representatives of parties to negotiate a resolution of the dispute, parties did not abide by the process set out in the agreement prior to commencing arbitration. The Court of Appeal consequently held that the tribunal did not have jurisdiction.
Other Jurisdictions on Enforceability of Agreements to Mediate/Negotiate
In contrast, the English courts take a stringent approach. In Sulamerica CIA Nacional De Seguros S.A. and others v Enesa Engenharia S.A. and others [2012] 1 Lloyd’s Rep 671 (“Sulamerica“), the English Court of Appeal held that an enforceable agreement to mediate must define the parties’ rights and obligations with sufficient certainty. It found the following mediation clause unenforceable as it did not set out any defined mediation process or refer to the procedure of a specific mediation provider. The clause provided as follows:
“if any dispute or difference of whatsoever nature arises out of or in connection with this Policy including any question regarding its existence, validity or termination, hereafter termed as Dispute, the parties undertake that, prior to a reference to arbitration, they will seek to have the Dispute resolved amicably by mediation…”
The English High Court in Wah (aka Tan) v Grant Thornton International Ltd and Others [2012] EWHC 3198 (Ch) (“Wah“) set out the following criteria for a mediation clause to be binding:
(i) It must contain a sufficiently clear commitment to go to mediation;
(ii) It must explain what each party must do to start the mediation;
(iii) It must be sufficiently clear for a court to determine:
(a) how much the parties must participate, as a minimum, in the mediation; and
(b) when the parties can end the mediation without breaching the agreement.
This seems to be in stark contrast to the Singapore position, which leans towards enforcing mediation agreements to give effect to parties’ choice, even though they may not have specified a detailed process at the time of entering into the contract.
In Australia, it was held in Aiton Australia Pty Ltd v Transfield Pty Ltd [1999] NSWSC 998 (“Aiton”) that dispute resolution clauses “expressed as a condition precedent” to litigation do not oust the Court’s jurisdiction, but merely postpone parties’ rights and are enforced by forbidding parties from using other procedures until the end of the ADR procedures.
The New South Wales Supreme Court (“NSWSC”) held that equity would not order specific performance of dispute resolution clauses as supervising such performance is untenable, but the NSWSC would exercise its inherent jurisdiction to prevent abuse by adjourning or staying proceedings in favour of ADR procedures. The NSWSC held that commencing litigation “in the face of an enforceable” ADR agreement may be “an instance of abuse of process”.
However, the NSWSC also held that such stays would only be granted if the ADR procedures are sufficiently detailed to be meaningfully enforced. The NSWSC held that the following minimum requirements must be met for a dispute resolution clause to be enforceable:
(i) It must make completion of the dispute resolution process a condition precedent to commencement of court or arbitration proceedings;
(ii) The process established by the clause must be certain. “There cannot be stages in the process where agreement is needed on some course of action before the process can proceed because if the parties cannot agree, the clause will amount to an agreement to agree and will not be enforceable due to inherent uncertainty”;
(iii) “The administrative processes for selecting a mediator and in determining the mediator’s remuneration should be included in the clause” and if parties cannot agree, “a mechanism for a third party to make the selection will be necessary”; and
(iv) The clause should set out in detail the processes or incorporate rules by reference.
In Aiton the mediation clause was unenforceable because it failed to state how the mediators’ costs was to be paid and as this clause was not “severable from the negotiation clause, the agreement to negotiate is also unenforceable”.
10 years later, the parties in United Group Rail Services Limited v Rail Corporation New South Wales [2009] NSWCA 177 (“United”) agreed that a mediation clause was void for uncertainty because the “nominated dispute centre did not exist”.
4 more years on, in WTE Co-Generation and Visy Energy Pty Ltd v RCR Energy Pty Ltd and RCR Tomlinson Ltd [2013] VSC 314 (“WTE”), the Victoria Supreme Court (“VSC”) took a more liberal approach, albeit marginally, holding that the following principles also applied in deciding the enforceability of multi-tiered dispute resolution clauses:
(i) Such clauses should be construed robustly to give them commercial effect. The bargain should be upheld by “eschewing a narrow or pedantic approach in favour of commercially sensible construction, unless irremediable obscurity or a like fundamental flaw indicates there is, in fact, no agreement”;
(ii)“If business people are prepared in the exercise of their commercial judgment to constrain themselves by reference to express words that are broad and general, but which nevertheless have sensible and ascribable meaning”, the Courts must give effect to them;
(iii) Public policy in “promoting efficient dispute resolution” requires that “enforceable content be given to contractual dispute resolution clauses”;
(iv) Recent authority favours construing dispute resolution clauses in a way that makes them work rather than declare them void for uncertainty or as an attempt to oust the Court’s jurisdiction;
(v) “The Court does not need to see a set of rules set out in advance by which the agreement, if any, between the parties may in fact be achieved. The process need not be overly structured. However, the process from which consent might come must be sufficiently certain to be enforceable”
Nevertheless, despite the change in judicial attitude, the VSC still held the clause in WTE to be unenforceable as the clause concerned provided for “senior executives” to “meet to attempt to resolve the dispute or to agree on methods of doing so” and this was uncertain because there was no “process prescribed to determine which option is to be pursued” and “no method of resolving the dispute [was] prescribed”. The Court summarised at [46] as follows:
“It is one thing for a court to strive to give commercial effect to an imperfectly drafted contractual clause, which is well accepted as the approach to construction of contractual terms. It is also accepted that a valid dispute resolution clause does not require a set of rules to be sent out in advance which directs the parties how an agreement is to be achieved, if agreement is possible. But, as a minimum, what is necessary for a valid dispute resolution clause, is to set out the process or model to be employed, and in a manner which does not leave this to further agreement. It is not for the Court to substitute its own mechanism where the parties failed to agree on it in their contract”.
On the issue of “good faith” negotiations, in 2009, the NSWCA in United recognized the fact that the “place of good faith in the law of contracts” is not settled in Australia, but in New South Wales, it is a part of the law of performance of contracts and went on to hold at [68] that a “negotiating process can be constrained by an obligation on a party to conduct itself in good faith”.
What constitutes “good faith”? The NSWSC held that it depends on the circumstances, but involves “honest and genuine negotiation, within the framework of fidelity to the bargain” and does not involve fiduciary obligations or duties to act in the other party’s interests.
Hence, whilst Australia is being more liberal in its enforcement of multi-tiered dispute resolution clauses, it is yet to be as liberal as the Singapore Courts.
Possible Reason for the Differences
A possible reason for the difference in judicial attitudes towards the enforcement of multi-tiered dispute resolution clauses could be due to Singapore’s push to become a center for resolving disputes in line with its metamorphosis into a service based economy.
Singapore is already fast becoming an established regional and international arbitration center with many firmly established arbitral institutes. With the upcoming International Commercial Court and alongside it, the Singapore International Mediation Centre (“SIMC“), a strict approach towards the enforcement of mediation clauses would not aid in Singapore’s development as a leading international dispute resolution center.
Perhaps, the judiciary’s view of arbitration, as captured in “Tjong Very Sumito v Antig Investments Pte Ltd [2009] 4 SLR(R) 732 at [28] that arbitration is today no longer “viewed disdainfully as an inferior process of justice” and there is now “[a]n unequivocal judicial policy of facilitating and promoting arbitration” (as cited at [27] of Lufthansa) is now being accorded to mediation or any other methods of alternative dispute resolution as well.
Another reason for the Singapore judiciary’s adoption of the less stringent approach could also be the judiciary’s recognition of the age old tradition in Asian cultures of resolving disputes amicably and its benefits to Singapore society, as highlighted by the Court of Appeal in Toshin at [40], the key part of which states as follows:
“We think that the “friendly negotiation” and “confer in good faith” clauses……are consistent with our cultural value of promoting consensus whenever possible. Clearly it is in the wider public interest in Singapore as well to promote such an approach towards resolving differences”.
Drafting Multi-Tiered Jurisdiction Clauses
Given the different judicial attitudes to the enforcement of mediation agreements, how should parties draft a mediation agreement?
First, lawyers need to pay closer attention to all forms of dispute resolution clauses. These “midnight clauses” or “4am clauses” can no longer be drafted with impunity and on the basis that they can be ignored. It is common to find a party to a contract with a multi-tiered dispute resolution clause ignoring the early stages of the dispute resolution process calling for negotiations or mediation and proceeding immediately to arbitration or litigation, albeit in a fit of anger or with a genuine desire to get a final binding resolution of the dispute speedily.
Parties have to be carefully advised on the procedure, time and costs involved in all levels of dispute resolution before a suitable clause may be crafted.
Parties who are after quick, efficient and low costs methods of dispute resolution may well be advised to adopt many of the fast track arbitration schemes available in the market rather than adopt a multi-tiered dispute resolution procedure.
Having said the above, if parties are serious about negotiations and mediation as a part of their dispute resolution process then, in terms of legal criteria, they are well advised to draft their dispute resolution clauses in accordance with the VSC’s guidelines in WTE.
The VSC’s criteria are tough to satisfy, but once satisfied the mediation agreement is highly likely to be binding in England, Singapore and Australia.
Assuming that the parties want to mediate in Singapore, the simplest method of satisfying the VSC’s criteria may be to choose institutional mediation where the various institutes have their standard set of mediation procedures.
Co-written by CHEW YEE TECK, ERIC (Director, Archilex Law Corporation)
