Disputes often present challenges. Disputes about the dispute itself only compound these challenges. Parties can avoid procedural disputes through understanding and following any dispute resolution clauses (often multi-tiered clauses) included in the arbitration agreement. Parties who do not adhere to the contractual process risk further disputes, the arbitrator being unable to determine the dispute, and their associated time and cost.  

Arbitration agreements often include multi-tiered clauses (sometimes called escalation clauses). Such clauses usually nominate arbitration as the final forum for disputes but require the parties to first attempt to reach an outcome through other less formal means. These ‘tiers’ can be either mandatory or optional / aspirational. Aspirational preconditions may remind parties that they may, or ask parties to endeavour to, engage in pre-arbitration dispute resolution processes. Mandatory preconditions require parties to undertake steps before they can proceed to arbitration. For example, NZS 3910:2013 requires parties to submit their disputes to the Engineer to Contract for a Formal Decision before that dispute can be referred to arbitration. If a dispute that is subject to an unsatisfied mandatory precondition is referred to arbitration, there is a risk that the arbitrator may not be able to determine the merits of the dispute until the precondition is satisfied. In litigation, a court may decide to stay proceedings that have been commenced by a party who has failed to comply with all applicable conditions precedent or make an adverse costs award where a party has unreasonably refused to engage in mediation.

Identifying multi-tiered clauses

Multi-tiered clauses provide for a gradual approach to dispute resolution, where the parties agree to engage in an alternative dispute resolution process like negotiation, mediation or expert determination, before proceeding to arbitration or litigation.  

The importance of drafting: Mandatory vs optional multi-tiered clauses

If the contract includes a multi-tiered clauses clause, parties need to understand whether the clause imposes mandatory requirements which must be satisfied before the dispute can be referred to arbitration. Whether a multi-tiered clauses clause is mandatory or optional depends on how the clause is drafted. Parties will likely have to comply with clauses couched in mandatory language while they may be able to choose not to comply with preconditions expressed in aspirational terms. Below, we highlight typical language that may indicate that a mandatory multi-tiered clauses clause applies. If in doubt, we recommend seeking legal input.  

Optional

If the clause indicates the parties “may” or “should” go to (for example) mediation before initiating arbitration, this is likely an optional step before arbitration. Accordingly, parties can elect to refer their dispute directly to arbitration without fulfilling the earlier steps, without repercussions.

Mandatory

Mandatory clauses have stricter language. If the clause states that the parties “must” or “shall” go to (for example) mediation before initiating arbitration, this indicates that the clause sets out a mandatory precondition to arbitration. If parties fail to comply with the initial steps, they risk admissibility challenges. 

Consequences of non-compliance 

As noted, failing to comply with a mandatory multi-tiered clauses clause can be costly. It is therefore important to clearly identify whether a multi-tiered clauses clause is mandatory or optional. If a party does not comply with a mandatory multi-tiered clauses clause, that party will risk incurring additional costs of time and money to resolve whether that precondition to arbitration was satisfied, and may face preliminary disputes concerning jurisdiction and admissibility before proceeding to substantive arguments. That party also leaves open the risk that, if ultimately successful, the other party may challenge the award on the grounds that the precondition was not satisfied. 

Examples of mandatory multi-tiered clauses in standard form contracts

Multi-tiered clauses are common in standard form contracts, especially in the construction industry. By way of example, we consider below the dispute resolution clauses from the New Zealand-specific and widely used NZS 3910, and the international FIDIC contracts. We note that parties often alter these standard form contracts.

NZS 3910:2013

Most ongoing construction projects in New Zealand are governed by the NZS 3910:2013 (as typically amended by agreed special conditions). NZS 3910:2013 (clause 13.2.1) provides that every dispute arising under the contract shall be referred to the Engineer to Contract for a Formal Decision[1]; parties may refer to arbitration only those disputes subject to an Engineer’s Formal Decisions (or disputes referred to the Engineer which have not been determined by the Engineer within the 20 working day timeframe)[2]. In effect, these two provisions establish the Engineer’s Formal Decision as a precondition to arbitration[3]. Compliance with NZS 3910:2013’s multi-tiered clauses clause is, therefore, mandatory. On the other hand, clauses 13.2., 13.2.3 and 13.3, providing for negotiation, the referral of disputes to an expert and mediation, respectively, do not create mandatory preconditions to arbitration as these clauses contain permissive language providing that parties "may" meet to navigate, submit the dispute to an expert, or request mediation.

NZS 3910:2023

New Zealand Standards has recently, in November 2023, published NZS 3910:2023, the successor to NZS 3910:2013. NZS 3910:2023 has overhauled the contract’s dispute resolution regime. Now, “[b]efore referring any matter for dispute resolution under this section 13, the parties will endeavour to promptly resolve any dispute…by negotiation…” (emphasis added)[4]. On our reading, clause 13.1.1 appears to be framed as a mandatory precondition to arbitration, albeit one with which it may be difficult to provide compliance. However, the guidelines say that negotiation is “encouraged” (and we understand that the review committee has publicly stated at the Society of Construction Law Panel Event that the intention was for this clause to be optional). Nevertheless, in our view, this language is mandatory. NZS 3910:2023 also affirms the parties’ ability to mediate at their own option through use of words "The Principal and the Contractor may at any stage agree to refer a matter for resolution by way of mediation..."[5]. 

FIDIC

The FIDIC Red Book (1999) (FIDIC) is a construction contract widely used internationally. It includes a very prescriptive multi-tiered clauses clause which provides that all claims for an extension of time or additional payment under the contract shall be submitted to, and first determined by, the Engineer[6]. Under FIDIC, all disputes, including those arising from the Engineer’s decisions, must be first referred to the Dispute Adjudication Board appointed under the contract[7]. Parties disputing the Dispute Adjudication Board’s decision (or where the Board fails to issue a decision within 84 days) may issue a notice of disapproval. A party can only refer a dispute to arbitration after it has issued a notice of disapproval[8]. Where either party has issued a notice of disapproval, “both Parties shall attempt to settle the dispute amicably”[9]. While at first glance the language appears mandatory, it is not, beacause FIDIC makes clear that parties may commence arbitration “even if no attempt at amicable settlement has been made”.[10] This illustrates the importance of considering the wider contract.

Ensuring compliance: The New Zealand position

Once the contract includes a multi-tiered clauses clause and the party has determined that it is mandatory, compliance is key. Parties who include mandatory preconditions in their arbitration agreements should ensure clarity that the condition is mandatory and how that condition may be satisfied. On the latter point, parties should be aware of how compliance is assessed; aspirational language such as “in good faith” or “using their best endeavours” imports legal, as well as commercial understandings. Such aspirational language may be readily agreeable at the negotiation stage, however, at the compliance stage there are frequently disputes as to whether a party’s conduct was genuinely in good faith or their best endeavour. Once preconditions are set, parties will have to satisfy those conditions before they are able to advance to arbitration.[11] 

The courts have adopted a pragmatic approach to interpreting multi-tiered clauses and aim to give effect to the parties’ intentions[12]. Such an approach reflects a policy favouring arbitration, especially in international disputes with sophisticated commercial parties[13]. Where the parties have expressed a clear intention to resolve their disputes by way of arbitration, the courts will generally not “allow any inconsistencies or uncertainties in the wording or operation of the arbitration clause to thwart that intention”.[14] 

Nevertheless, even when there are clear guidelines, a party cannot use a multi-tiered clauses clause to take advantage of their own default. For instance, if there are multi-tiered clauses mandating that the parties negotiate prior to arbitration, then a party cannot refuse to engage in the process to thwart the commencement of proceedings.[15] 

Check the contract to avoid costly consequences

While disputes may be complex there are often opportunities to resolve them at an early juncture. Many contracts encourage the parties to engage in informal dispute resolution processes early with the aim of reaching an amicable agreement while avoiding disproportionate outlay in costs. Parties should be sure to check their contracts to see whether they contain any multi-tiered clauses and if so, whether these are mandatory or optional. Negotiating parties should turn their minds toward how they want their disputes to progress, whether they want to engage in early informal dispute resolution procedures, and whether such procedures should be mandatory or optional. When setting mandatory preconditions, parties should take particular care to clarify how such conditions may be satisfied. Parties who fail to take notice of such clauses risk complicating their disputes and paying in additional cost and delay.
 

For tailored guidance and support in both domestic and international arbitration, contact our dedicated team of construction law experts who have significant experience advising clients under the New Zealand Arbitration Act 1996 (and related jurisdictional issues) and a wide range of institutional arbitration rules, such as ICC, LCIA, DIAC, AMINZ, SIAC, the UNCITRAL Rules, and others.

If you would like to discuss any of the themes highlighted in our arbitration series, please get in touch with one of our experts.

Footnotes

[1] Clause 13.2.1.
[2] Clause 13.4.1.
[3] SRG Global Remediation Services (NZ) Ltd v Body Corporate 19728 [2022] NZCA 518.
[4] Clause 13.1.1.
[5] Clause 13.2.
[6] Clause 20.1.
[7] Clause 20.4.
[8] Clause 20.6.
[9] Clause 20.5.
[10] Clause 20.5.
[11] Williams and Kawharu on Arbitration (2017, 2nd ed, LexisNexis) at 240 citing Cable & Wireless v IBM [2002] EWHC 2059 (Comm); [2002] 2 All ER 1041 (Comm).
[12] Porter v Gullivers Travel Group Ltd [2007] NZCA 345 at [35].
[13] Marnell Corrao Associates Inc v Sensation Yachts Ltd (2000) 15 PRNZ 608 (HC) [62].
[14] Marnell, above n 3, at [61].
[15] Marnell, above n 3, at [61]–[65].

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