Mind the steps! Multi-tiered arbitration clauses

A multi-tiered arbitration resolution clause is, in its simplest form, the methodology agreed by the parties that has “multi-tiers” before resorting to the final dispute resolution method.

In practice, we see these multi-tiers before finally resorting to arbitration as initially resorting to various ADR methods, such as negotiation, mediation or expert determination. In this case, the parties should undertake certain steps prior to commencing arbitration in an attempt to amicably settle a dispute before resorting to arbitration.

When drafting a multi-tiered arbitration clause, parties must consider the consequences of the text formation of the clause. A multi-tiered clause may either be a simple-to-understand and short form or a very lengthy and detailed form that would have different interpretations. Each case shall be determined by its own merits: there is no one-size right form that suits all and the text formation can alter the fate of the dispute.

The famous case (award of the First Civil Law Court of the Swiss Federal Tribunal) has a multi-tiered arbitration clause as the focus involved two contracts of association between a BVI company and an Algerian state entity for oil-related exploration in Algeria. Two contracts for the formation of a group were also signed and while there was an arbitration clause providing for ICC arbitration in Geneva and the Algerian law applicable to the merits of the case. The clause also contained a mandatory requirement that conciliation pursuant to the ICC ADR Rules in force as from July 1, 2001 should be attempted as the initial “tier”.

An appeal was made to the Federal Tribunal and the Federal Tribunal had decided on the consequences of failing to comply with a mandatory prerequisite to an arbitration. Court had decided to annul the award but to stay the arbitration and invite the arbitrators to set a time limit within which the parties should complete the conciliation procedure. This might be a procedural stroke of genious as it is both complying with the system and yet respecting the procedural economy at the same time.

However, this again is not a solution that overcomes the risk of the insisting-party bearing the arbitration costs as the initial tiers may be evaluated as futile still remains.

Multi-tiered arbitration clauses shall be handled with utmost care both when drafting and executing.

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