Multi-tiered dispute resolution clauses may be enforceable if (i) the procedure is certain (eg. specific mediator or center is specified); (ii) mandatory language is used (‘shall’ instead of ‘may’); (iii) a clear time limit is provided before arbitration is available; and (iv) duties to act ‘in good faith’ to resolve the dispute are in the context of a clause which is certain in all other aspects noted above.
A 2014 English Commercial Court case upheld ‘friendly discussion’ obligation clauses in a contract because it had the certainty required for an enforceable contract clause. The clause was a ‘multi-tier’ or escalation clause, which provided for different ways of dispute resolution as disputes escalated. The case marked a departure from previous English decisions, but is consistent with other jurisdictions, including Australia.
Takeaway:
- To be enforceable, the four (4) elements of a multi-tiered dispute resolution mechanism must be drafted in mandatory language (‘shall’, ‘must’).