Multi-tiered dispute resolution clauses

1. Multi-tiered dispute resolution clauses “Arbitration: The In-House Counsel’s Perspective” London, 16 March 2015 Prof. Henry Peter Lugano, Switzerland

2. “ Stairway to heaven or highway to hell? ” (Jan-Michael Ahrens) • Definition/Concept • Components • Tailor-made clauses • Non compliance with clauses • Conclusion

3. I. Definition/Concept • “Multi-tiered dispute resolution” clause = “escalation” clause, “stepped” clause, “multi-step” clause, “ADR-first” clause, “pre-arbitral procedure” • Definition: “Multi-tiered dispute resolution clauses merge ADR and arbitration procedures and provide for a sequence of dispute resolution processes generally composed of negotiation, mediation, expert determination, and finally arbitration” (D. Kayali, p. 551 (Annex 5)) • Purpose: time and costeffectiveness, business solutions, protectexisting and future business relationship

4. II. Components of multi-tiered dispute resolution clauses • Amicableresolution/negotiation • Management escalation • Expert determination • Tie-break mechanism : if deadlock, someonedecides • Mediation • Arbitration These components canbecombined

5. III. Tailor-made multi-tiered dispute resolution clauses Two tiers escalation clauses (Annex 1) • First management escalation, thenarbitration (a) • First management escalation, then tie-break mechanism (b) • Firstmediation, then arbitration (c)  International Chamber of Commerce (ICC) ADR Model clause D  Centre for Effective Dispute Resolution (CEDR) Model clause

6. III. Tailor-made multi-tiered dispute resolution clauses Three tiers escalation clause (Annex 2) • Adjudication body then, if rejected, amicable settlement, then arbitration  International Federation of Consulting Engineers (FIDIC) escalation clause

7. III. Tailor-made multi-tiered dispute resolution clauses Tailor-made vs. standardized • Historically mostly made to measure • Tend to become standardized • The fact that a clause is tailor-made does not mean that arbitration must be ad-hoc  even in that case the parties can opt for an institutional arbitration (see Annex 1(a))

8. IV. Non compliance with multi-tiered dispute resolution clauses What are the consequences of non compliance with multi-tiered dispute resolution clauses ? • Is it a jurisdictional issue or a breach of agreement issue, or both? “the very formulation of the issue in dispute […] may in itself be discussed to the extent that it appears to oppose insurmountably the material sanction (damages to be paid to the other party) to the procedural sanction (inadmissibility of the claim or rejection for the time being)” (Swiss Supreme Court decision of 16 May 2011 (4A_46/2011), 3.4 (Annex 4))  In other words, “Does a party who fails to comply with a contractual provision to mediate merely expose itself to an obligation to pay damages to the adverse party or does such party run the risk of the arbitral tribunal declaring its claim inadmissible or even rejecting the claim?” (C. Boog, p.106; Swiss Supreme Court decision of 6 June 2007 (4A_18/2007), 4.3.1)

9. IV. Non compliance with multi-tiered dispute resolution clauses • Are the pre-arbitral steps optional or mandatory? • Depends on the wording of the clause For example: FIDIC DAB pre-arbitration procedureismandatory  “That the mandatory recourse to the DAB may suffer certain exceptions does not suggest that resorting to this body would allegedly be voluntary but rather confirms the general rule making the recourse to this alternate dispute resolution mechanism compulsory before introducing a request for arbitration”(Swiss Supreme Court decision of 7 July 2014 (4A_124/2014), 3.4.3.3(Annex 3))

10. IV. Non compliance with multi-tiered dispute resolution clauses • If mandatory: effect of non-compliance with agreed pre-arbitral procedure? • Damages to be paid by the party in breach? • Lack of jurisdiction of AT  meaning? • Lack of jurisdiction as a whole?  inadmissibility or even rejection of the request for arbitration • Lack of jurisdiction regarding the merits? • Jurisdiction given but frozen?  stay of the proceedings in order to cure the omission • Kompetenz-kompetenz  it is for AT to decide whether it has jurisdiction

11. IV. Non compliance with multi-tiered dispute resolution clauses • The Swiss Supreme Court has been faced several times with the issue but has not (yet) made any final or generally applicable determination • Seems however that compliance with pre-arbitral requirements is a (i) “jurisdictional objection” the nature of which is (ii) rationae temporis (Swiss Supreme Court decision of 7 July 2014 (4A_124/2014), 2.1, 3.1.1 (Annex 3)) • British courts (Comments on Channel Tunnel, Cable & Wireless cases by Crimades), ICC case law (D. Jiménez Figueres (Annex 6)) and Swiss leading authors (Poudret/Besson, Kaufmann-Kohler/Rigozzi) favor this “stay to cure” approach

12. V. Conclusion • Beware of issue • Careful thinking and drafting • Agreed process must be complied with • If non compliance  risk  probably temporary jurisdictional issue

13. Attorneys at law Via Canonica 5 6901 Lugano (Switzerland)Tel. +41 91 910 19 00 - Fax +41 91 910 19 01henry.peter@psmlaw.chwww.psmlaw.ch