There are various ingredients that point to a recipe for trouble and strife in the construction, engineering and energy sectors. Runaway super-inflation on materials, record breaking fuel and energy cost increases, global supply chain material shortages, and of course the repercussions of conflict. Cognisance therefore must be given to ensuring agreements have structured tiered alternative dispute resolution mechanisms in place, to enable parties to seek to resolve disputes and differences in a commercial, amicable and cost effective manner.
It is not unusual for international contracts in the sector to include tiered dispute resolution procedures under which parties agree to escalate at a dispute to various processes and stages before embarking upon litigation or arbitration. It makes commercial sense to resolve disputes quickly and cost effectively. However, when a dispute arises, and the red mist descends, agreed tiered ADR provisions are sometimes disregarded (usually in part) in favour of a more formal process such as adjudication, litigation or arbitration.
An interesting point has arisen from a recent decision in the Hong Kong Appeals Court. It is the arbitral tribunal and not the Courts that should resolve the issue of whether parties to a dispute have complied with their obligations set out in a tired dispute resolution clause, prior to the commencement of any arbitration proceedings.
Before looking at this case, it may be useful to summarise the background to the position on tiered dispute resolution provisions in addition tore-visiting a previous article on the issue (CL Vol 30No 8).
The circumstances of when tiered ADR agreements will be enforceable and when parties would be compelled to comply with them, was deliberated upon in Holloway v Chancery MeadLtd  EWHC 2495 (TCC). The three key requirements were identified as follows:
- the dispute resolution process must be sufficiently certain such that there is no need for any further agreement between the parties;
- the administrative processes for selecting a party to resolve the dispute should be defined; and
- the dispute resolution process should be setout in such detail which is deemed sufficiently certain.
Tang v Grant Thornton International Ltd EWHC 3198 (Ch) (Tang) emphasised that drafting needs to be sufficiently tight, to clearly define which dispute resolution provisions would be considered agreements to agree, rather than binding between the parties. Helpfully, the court clarified:
- the provisions must indicate a sufficiently certain and unequivocal agreement between the parties;
- the necessary steps which must be taken; and
- include clear definitions to enable the court to objectively determine the minimum required to dispute any agreement and how the dispute resolution process can be exhausted or validly terminated. Was the enforcement of ADR provisions within the public interest? This came before the court in Emirates Trading Agency LLC v Prime MineralExports Pte Ltd  1 WLR 1145 where it was decided that it was, and that it was not for the court to override clear agreements by the parties as to how they will resolve disputes and differences.
The enforceability or otherwise of tiered dispute resolution clauses was also considered in OhpenOperations UK Ltd v Invesco Fund Managers Ltd EWHC 2246 (TCC). This provided certainty for contractual parties through the momentum away from the perception of construing tiered dispute resolution clauses as agreements to agree.
Briefly, the case concerned a framework agreement in relation to a digital online platform. Disputes arose between the parties. A without prejudice meeting was held at the end of January 2019, but a settlement was not reached. A letter of claim was subsequently sent by Ohpen on 20 February 2019, the claim was issued on 23 April 2019. Ohpen claimed £4.7m for wrongful termination, whilst Invesco counterclaimed for £5.7m. On 24 May 2019 Invesco issued an application, seeking two declarations as follows:(1) that the court will not exercise any jurisdiction that it may have to hear the claim; and (2) an order for a stay of the claim pending compliance with the contractual dispute resolution procedure.
Clause 11 in the Framework Agreement set out a clear tiered escalation process.
Here the Court set out four applicable principles derived from previous case law, for when a party seeks a stay of proceedings on the basis that the parties first have to comply with contractual dispute resolution provisions. Those principles are as follows:
- “The agreement must create an enforceable obligation requiring the parties to engage in an alternative dispute resolution.”
- “The obligation must be expressed clearly as a condition precedent to court proceedings or arbitration.”
- The dispute resolution process “must be sufficiently clear and certain by reference to objective criteria, including machinery to appoint a mediator or determine any other necessary step in the procedure without the requirement for any further agreement by the parties.”
- “The court has a discretion to stay proceedings commenced in breach of an enforceable dispute resolution agreement ... the court will have regard to the public policy interest in upholding the parties’ commercial agreement and furthering the overriding objective in assisting the parties to resolve their disputes.”
The first point under consideration was whether the AD provision applied at all, following the termination of the Framework Agreement; to which the court held that the provisions did survive. Whilst an obvious point, it is both relevant and important for parties to appreciate that certain clauses will survive termination.
Finally, the court considered whether the dispute resolution provisions operate as a ‘condition precedent’ to commencing proceedings. The court held that it was a condition precedent.
C v D
The issue of tiered escalation dispute resolution clauses in the context of arbitration agreements came up recently in the Hong Kong Court of Appealing C v D. The case, in brief, involved a Hong Kong satellite owner and operator (C) in dispute with a Thai company (D) that in turn operated satellites in the Asia Pacific region. The dispute itself arose in relation to certain non-governmental approved broadcasts which were allegedly reaching Chinese television. C was to design, build and launch the satellite, which it did in 2014.
Broadcasts into China required approval from the Chinese government, but it was alleged that video signals from D’s transponders (equipment used to transmit and receive signals) were nonetheless reaching China. Each party owned half of the transponders in the satellite. The underlying agreement between C and D related to the transmission of broadcasts by satellites on frequencies owned by the governments of China and Thailand. The Chinese government issued a notice requiring D to stop transmission from D’s transponders. D refused to comply, on the basis that this was contrary to the contract.
C issued commands to the satellite which switched off the transponders which prompted the dispute to be referred to arbitration in 2017. Ultimately, an arbitral tribunal agreed with D’s position. However, C still disagreed and demanded that D cease transmission from its transponders.
The award was challenged before the Court of Appeal by C, as not being binding. Its basis was that the arbitration tribunal lacked jurisdiction due to D failing to comply with escalation provisions that provided an obligation to conduct formal negotiations before commencement of arbitration proceedings.
Late in 2018, D wrote a letter to C alleging that C had breached the agreement between the parties, and resulted in D commencing arbitration proceedings. C’s response, was that D had failed to comply with the escalation provisions provided for in the agreement between the parties. Firstly, by not undertaking 60 days of formal negotiations in an attempt to resolve the dispute and, that as a consequence of this, the arbitration tribunal lacked jurisdiction.
However, in April 2020 the arbitral tribunal issued an award in favour of D, stating that C was liable to D in damages. Furthermore, that in sending the letter in 2018, D had fulfilled its obligations to comply with the escalation clause provided for in the agreement.
It was therefore determined that where there is an arbitration, and a tiered escalation mechanism exists in the agreement, the question of compliance and satisfaction with such a mechanism should be resolved by the arbitral tribunal and not the courts. If parties to a dispute want the courts to deal with this, then it must be made sufficiently certain and unequivocal within in their agreement. The court went on to say:
“In our view, the question of whether the prearbitration procedural requirements under [the contract] has been fulfilled is a question intrinsically suitable for determination by an arbitral tribunal, and is best decided by an arbitral tribunal in order to give effect to the parties’ presumed intention to achieve a quick, efficient and private adjudication of their dispute by arbitrators chosen by them on account of their neutrality and expertise (…) In all, we reject C’s contention that the partial award deals with a dispute not within the terms of the submission to arbitration.”
David Bateson, a leading international arbitrator now acting for 39 Essex Chambers, comments on the current position in Singapore:
“In Singapore the courts approach to challenges that pre-arbitration procedural requirements have not been met, accords with the recent Hong Kong Court of Appeal case of C & D (2022). That is that such challenges are objections to the admissibility of the claim, rather than the jurisdiction of the tribunal, and consequently the tribunal is fully seized to deal with the challenge. Refer to the Singapore Court of Appeal decision in BBA v BAZ(2020).”
In terms of alignment with the US position, Owen Newman, a partner at Duane Morris(Chicago Office), specializing in multijurisdictional disputes and international arbitration comments:
“The decision in C v D is in line with the U.S.Supreme Court opinion in BG Group, PLC v. Republic of Argentina, 572 U.S. 25 (2014),written by Justice Stephen Breyer, and follows the international trend that tiered dispute clauses should be within the jurisdiction of the Arbitral tribunal to decide.
Furthermore, it is worth noting that the BGGroup opinion did not change the U.S. standard that issues of “arbitrability” are to be decided by the court. Under American law, issues such as “whether the parties are bound by a given arbitration clause,” and “whether an arbitration clause in a concededly binding contract applies to a particular type of controversy” are still presumptively for the court to decide. As such, circuit courts such as the Fifth Circuit have made sure to reiterate that BG Group was limited to the narrow issue of tiered dispute clauses and not any other procedural issue.
Republished by permission.