Multi-tiered dispute resolution clauses in arbitration
Av advokaten FINN MADSEN
The validity and scope of multi-tiered dispute resolution clauses are much debated issues in Swedish and foreign arbitration law. In this article it is posited that the parties’ agreement that implementation of certain pre-arbitration steps to resolve their grievancies constitutes a condition precedent for initiating arbitration should, under certain circumstances, serve as a bar to the jurisdiction of arbitrators under Swedish law. This follows, in principle, from the parties’ autonomy to decide on their dispute resolution procedure.
Multi-tiered dispute resolution clauses state that when a dispute arises, parties must undertake certain steps prior to commencing arbitration in an attempt to amicably settle a dispute before resorting to arbitration. Steps that are to precede arbitration generally comprise various ADR methods, such as negotiation, mediation or expert determination.
Multi-tiered clauses provide the parties with a contractual “cooling off period” during which they may resolve their grievances without incurring the costs and delays associated with arbitration. Such clauses may be of particular value in circumstances where parties wish to minimise upsetting their ongoing relationship that might result from escalated proceedings. Multi-tier dispute resolution clauses have become commonplace in international contracts, particularly in construction contracts, joint venture agreements and other contracts where long-term relationships are created and continuous cooperation between the parties is required. They can also be found in so-called combination clauses from dispute resolution institutions and in international contract forms. In international jurisdictions, uncertainty exists as to the circumstances under which such clauses constitute jurisdictional conditions precedent to the commencement of arbitration and thus bar the jurisdiction of arbitral tribunals pending compliance with the prescribed pre-arbitral steps. The Swedish Arbitration Act (“SAA”) does not specifically address the issue of whether or not a multi-tiered dispute resolution clause is enforceable. Nor is there any guiding ruling from the Swedish Supreme Court on this question and the opinions expressed in leading legal commentaries on Swedish arbitration law differ on the topic.
This article is intended to provide some viewpoints regarding the legal effects of such clauses under Swedish law.1
2 Views in legal literature
In Sweden, the principle of contractual freedom prevails. However, it has been held by some Swedish legal writers that requirements to participate in negotiation or mediation procedure or other ADR-procedures before initiating arbitration might be invalid and/or unenforceable from a procedural perspective. This has been called the procedural invalidity principle and statements in the preparatory works to the Swedish Code of Judicial Procedure, which was enacted in 1942, have been cited in support of this principle. In the preparatory works it was stated, as the prevailing perception at the time, that contracts regarding procedural matters were invalid unless the opposite is expressly provided by statute. The principle is founded on the idea that whereas the parties can dispose of their substantive obligations, decisions regarding procedural issues are reserved for the courts.2 In her doctoral thesis Jur. Dr. Lotta Maunsbach opines that occasionally institutional rules and other non-statutory regulations provide that parties may not institute litigation or arbitration before holding mediation or settlement negotiations, but in Sweden such rules have no procedural effect and constitute, instead, a form of gentlemen´s agreement between the parties.3 Among others, former Supreme Court Justice Stefan Lindskog4 — citing the right of access to justice requirement in Article 6 of the ECHR and Chapter 2, Section 11 of the Swedish Instrument of Government — has also expressed doubt as to whether such clauses may serve as a bar to arbitration or judicial proceedings. Different views have also been expressed, for example by Professor Emeritus of Procedural Law Lars Heuman, who has asserted that a temporary impediment to initiating proceedings will not contravene the access to justice principle.5 In addition to the aforementioned, sitting Swedish Supreme Court Justice Eric Runesson has opined6 that if the agreement on pre-arbitral proceedings is considered sufficiently precise so as to be given some
1 It has been assumed by me that, unless the parties have agreed otherwise, a multitiered dispute resolution agreement in an international contract will be governed by Swedish law, even if the choice of law provision in Section 48 of the SAA applies only to the “arbitration agreement.” 2 Doctoral thesis by Lotta Maunsbach, Avtal om rätten till domstolsprövning, Processuella överenskommelsers giltighet i svensk rätt (Engl: Agreements regarding Access to Justice, the Validity of Procedural Agreements pursuant to Swedish Law (2015), p. 100. 3 Maunsbach, work cited above p. 177. 4 Lindskog, Skiljeförfarande en kommentar (Engl: Arbitration, A Commentary), p. 55, 3rd ed. 5Heuman, Officialprövning eller åberopsskyldighet vid tillämpningen av preklusionsregler? (Engl: Ex Officio review or duty to invoke when applying preclusion rules) in Juridisk Tidskrift (2006/2007 p. 60) and Skiljemannarätt (Engl: Arbitration Law), p. 47. 6 The Swedish Arbitration Act of 1999, Five Years On, p. 16 et seq.
legal effect as a contractual term but is ignored by the party initiating the arbitration, the other party should be allowed to suspend its promise to tolerate arbitration, unless otherwise agreed.
In this connection, one should also mention Professor of Procedural Law Peter Westberg,7 who states that non-compliance with multi-tiered dispute resolution clauses will normally not constitute a bar to judicial proceedings. However, Westberg asserts as follows with regard to arbitration proceedings: “In this context, multi-tiered dispute resolution must also be posited against how arbitrators might conceivably perceive mediation as a first step in conflict resolution. It is likely that the arbitral tribunal will consider itself bound by the two-step procedure and refuse to allow a party to unilaterally initiate arbitration proceedings in violation of the mediation clause. Depending on the wording of the mediation clause, the arbitral tribunal may be given the opportunity to consider whether mediation has been initiated and implemented but has failed” (my translation).
Based on the above, it has to be concluded that there seems to be no uniform view among Swedish legal scholars as regards the legal effects of such clauses as are under discussion here.
3 Decision by arbitrators sitting in Sweden and the Svea Court of Appeal
According to an award rendered in 2000 in case No. 21/1999 under the SCC Arbitration Rules, the arbitral tribunal held that since the dispute had not been referred to an adjudicator in accordance with the applicable dispute resolution clause before arbitral proceedings were instituted, the tribunal lacked jurisdiction to resolve the dispute.8 The tribunal emphasized that the tribunal, deriving as it does its powers from the parties’ agreement, is required to respect and implement the agreement in respect of dispute resolution procedures no less than in other contractual areas. Moreover, the tribunal pointed out that “the absence of valid adjudication decides the fate of this arbitration, irrespective of any compliance or lack of compliance with any other aspects of the agreed procedure.” In SCC arbitration case No. 179/2009, where the award was challenged in the Svea Court of Appeal and thus became public (T1032910, T 10401-10), the tribunal held that a requirement that the parties negotiate in good faith for a period of 30 days before initiation of any arbitration was valid. The tribunal found that the parties had been
7 Civilrättskipning (Engl: Civil Procedure), p. 413 et seq. 8 Reported in Stockholm Arbitration Report 2000:2, pp. 59–86. The case has been commented on by M.I.M. Aboul-Enein, p. 86. See also Interlocutory Arbitral Award in SCC case 10/2005, in which the tribunal did not find enough reasons to decide whether sufficient negotiations in favour of a settlement agreement had taken place, and Capper, Observations, Stockholm International Arbitration Review 2007:2, p. 235 et seq.
negotiating to settle the dispute amicably for the requisite period of time and thus the precondition for initiating arbitration had been met.
Moreover, in a judgment dated 19 December 2016, in case T 2675-14, the Svea Court of Appeal considered whether the provision regarding negotiation prior to instituting proceedings in Art. 26 (2) of the Energy Charter Treaty (“ECT”) was binding. The appellate court held that the duty to negotiate did not constitute a condition precedent for commencing arbitration proceedings. The court explained that, in its opinion, unless expressly supported by the wording of the provision,9 additional conditions should not be imposed in order for an arbitration agreement to arise when an investor accepts the offer by requesting arbitration against the state. In the court’s view, the provision failed to provide any such support. Consequently, the court found that failure to observe a duty to negotiate might constitute an impediment to initiating arbitration, provided that the obligation is expressed with sufficient clarity. The appellate court did not consider whether the provision contravened any Swedish mandatory law relating to the principles of access to justice.10
4 The preparatory works to the Swedish Mediation Act
With the enactment of lagen (2011:860) om medling i vissa privaträttsliga tvister (Engl: “the Mediation Act”), Directive 2008/52/EC of the European Parliament and of the Council of 21 May 2008 on certain aspects of mediation in civil and commercial matters has been incorporated into Swedish law. It can be mentioned that the European Council, in a recommendation regarding the Directive, emphasized that states should consider the extent to which an agreement to refer a dispute to mediation should restrict the parties’ ability to bring judicial proceedings. In the preparatory works to the Mediation Act (Govt. Bill 2010/11:128 p. 43) it was considered whether mediation under the Act should serve as a bar to proceedings, but it was decided not to include such a provision. Thus, parties to mediation under the Act are not precluded from initiating judicial or arbitration proceedings. However, it was not considered whether principles relating to access to justice might prevent the inclusion of a provision to this effect.
9 The appellate court noted that in Art. 26 (1) ECT it is stated, by way of introduction, that disputes between a contracting state and an investor must, if possible, be settled amicably. Under item (2), if a dispute cannot be settled in that manner within three months from the date on which any of the parties requested amicable settlement, an investor may choose to submit the dispute to various types of dispute resolution, for instance arbitration in accordance with the subsequent items in the article. Furthermore, the court held that the wording of the relevant provisions fails to provide any answer as to what is possibly incumbent on the parties during the imposed three-month period, for example as regards the attempts that must be made to reach an amicable settlement (pp. 48–49). 10 The decision can be found on the Swedish Arbitration Portal, www.arbitration.sccinstitute.com.
5 International case law and other legal sources
In my book Commercial Arbitration in Sweden, 5th ed., p. 237 et seq I state that a number of international decisions have ruled that a commitment to negotiate or mediate prior to initiating proceedings constitutes a binding commitment that parties must respect.
In the English case, Cable & Wireless v. IBM, which involved a dispute resolution agreement containing an escalating resolution procedure, the High Court of Justice held, in a judgment dated 11 October 2002, that the ADR provision was analogous to an arbitration clause and the court stayed the proceedings pending referral to ADR of all outstanding disputes. For a comment on the case and earlier English case law, see Mackie, The Future for ADR Clauses After Cable & Wireless v. IBM, Arbitration International Vol. 19 No. 3, 2003, p. 345 et seq. In Wah (aka Alan Tang) and Anr -v- Grant Thornton International Limited and Ors  EWHC 3198 (Ch), the principle established in Cable & Wireless was affirmed by the High Court, but it ruled that the tribunal had jurisdiction since the prescribed escalation steps were insufficiently certain to be legally binding. In Emirates Trading Agency LLC -v- Prime Mineral Exports Private Limited  EWHC 2104 (Comm), an agreement to first endeavour to resolve the dispute through amicable negotiations during a continuous period of four weeks before proceeding to arbitration was held to be enforceable and operate as a condition precedent to commencing arbitral proceedings. There was a similar outcome in Peterborough City Council v Enterprise Managed Services Ltd  EWHC 3193 (TCC), where a stay in proceedings was ordered to allow the parties’ dispute to be determined by an adjudicator. Regarding these and other English cases, see Flannery and Merkin, Emirates Trading, good faith, and pre-arbitral ADR clauses: a jurisdictional precondition? Arbitration International Vol. 31 No. 1 2015, p. 63 et seq.
Moreover, French case law supports the view that multi-tiered clauses serve as a bar to proceedings; see Poiré v. Tripier, by Cour de Cassation commented on by Jarrosson in Arbitration International Vol. 19 No. 3, 2003, p. 363 et seq. The same position was adopted in subsequent French Supreme Court cases (Com. 17 June 2003; Civ. 1ère, 30 October 2007; Civ. 1ère, 9 November 2006). On 29 April 2014, the French Cour de cassation (Cass. com. Medissimo v. Logica, 29 April 2014, n° 12-27.004) issued a decision regarding the criteria that a multi-tiered dispute resolution clause should meet in order to render claims inadmissible if disregarded. If the parties have agreed to submit their dispute first to “conciliation” without specifying the procedure in relation thereto, then the clause may be considered binding upon them but may not lead to inadmissibility of claims brought by a party that has failed to comply with the escalation clause by bringing the dispute directly before a judge. On 12 December 2014, the French Supreme Court affirmed the Court of Appeal’s decision (no. 13-19684). The
same outcome in a Supreme Court Case on 16 November 2017, no. 164642.
In the Swiss Federal Supreme Court’s decision dated 7 July 2014 (4A_124/2014), the court upheld a multi-tiered dispute resolution clause. The court held that the Dispute Adjudication Board (DAB) under a Fidic contract constituted a mandatory pre-arbitration tier but that, in certain cases, the principle of good faith allowed an exception such that a party could not object to arbitral proceedings due to the lack of a DAB decision. In 4_628/2015, the Swiss Supreme Court annulled a partial award because conciliation had not been properly terminated under the applicable ICC ADR Rules. With respect to international case law regarding clauses under discussion here, in International Commercial Arbitration11 Gary Born has pointed out that the language of a provision is important when determining whether it constitutes a “condition precedent” or similar precondition to arbitration, the breach of which bars access to arbitration. Provisions that specifically provide that a particular pre-arbitration step is a “condition precedent” or “condition” will generally be more likely to be characterized as precluding access to arbitration if they are breached. Similarly, provisions with specific time periods and concrete pre-arbitration steps are more likely to be categorized as conditions precedent than mere contractual obligations. Moreover, Born has emphasized that it is important that pre-arbitration negotiation and litigation requirements do not limit the party’s access to justice.
In this connection it can be added that Article 14 of UNCITRAL’s Model Law on Mediation provides that an undertaking not to initiate arbitral or judicial proceedings shall be given effect by an arbitral tribunal or a court of law until the terms of the undertaking have been complied with.
Thus, it appears that, internationally, procedural requirements which include pre-arbitral procedures are not deemed invalid per se but are recognized as bars to arbitration provided that the parties are shown to have intended the requirement of pre-arbitral steps to serve as a condition precedent to arbitration and that the requirements do not unduly limit a party’s access to justice.
6 The interpretation of the SAA having regard to the principles underlying the New York Convention and legal developments abroad
From what has been stated above based on international sources, it is clear that jurisdictions other than Sweden, where principles pertaining to access to justice are likewise applicable, do not consider such clauses as here discussed to contravene per se the principle of access to justice.12
11 Sec. Ed. (2015), p. 931. The Supreme Court referred to Born’s work in the Belgor case infra. 12 See also IBA Litigation Committee, October 1, 2015, Multi-tiered Dispute Resolution Clauses and country reports.
The Swedish Supreme Court has on several occasions, most recently in the case reported in NJA 2019 p. 171 (“Belgor”), interpreted the SAA in light of the principles underlying the New York Convention and legal developments abroad. Thus, developments internationally should be taken into consideration when deciding on the position under Swedish law. I am convinced that the legal development in Sweden in this field should not depart from the development in other comparable arbitration venues. In the event a multi-tiered dispute resolution clause were to be deemed unconscionable by preventing or hindering a party from access to justice, it can be mentioned here that such a clause is amenable to adjustment under Section 36 of the Swedish Contracts Act, which permits adjustment of unconscionable contract terms.
7 The interpretation of a dispute resolution clause
In the Belgor case mentioned above, the Supreme Court emphasized that the scope of an arbitration agreement is determined based on customary contract interpretation principles.13 The Supreme Court further emphasized that the wording of arbitration agreements is often standardized. As a result, there are often no specific circumstances upon the basis of which it is possible to determine a specific joint and common intention of the parties. In instances where the wording provides for differing interpretations and other relevant aids to interpretation provide no guidance, the natural starting point is that the arbitration agreement should fulfil a sensible function and serve as a reasonable set of rules for the parties’ respective interests.14 Corresponding principles should probably also apply not only to the arbitration agreement but also the other parts of a dispute resolution agreement.
This implies, as I understand, that if the dispute resolution clause clarifies through mandatory language that a party must undertake certain steps prior to commencing arbitration and such steps represent a condition precedent for initiating arbitration, and a clearly defined negotiating or mediation process or other form of ADR has been put in place with a balanced time limit, then, according to the standards upheld by the Supreme Court when interpreting dispute resolution agreements, the parties’ agreement ought to be sufficiently clearly expressed to serve as a bar to the jurisdiction of the arbitrators. The pre-arbitral steps must be described with such clarity that it is possible for the tribunal to assess whether or not the required steps have been taken.
13 In the case reported in NJA 1999 p. 586, the Supreme Court summarized the general principles of contractual interpretation such that not merely nuances in the wording of a clause but also the drafting of such clause and what might be gleaned regarding the intention of the parties may be of significance. 14 The Court cited its previous decision in paragraph 10) of NJA 2015 p. 741 (“Partneravtalet”)(Engl. “Partner Agreement”).
It has to be recognized that, as regards such clauses as currently under discussion, parties attach considerable benefit to resolving contentious contractual issues without resorting to costly arbitration proceedings and to preserving working relations between cooperating parties. Moreover, such clauses are recognized internationally, even if the requirements applied for accepting them as bars to arbitration may vary to some extent.
The principle that procedural agreements by the parties should not be recognized does not apply to arbitration proceedings, at least not to the same extent as in judicial proceedings. According to section 21 of the Swedish Arbitration Act, the arbitrators shall act in accordance with the decisions of the parties, unless they are impeded from doing so. The parties’ autonomy to decide on their dispute resolution procedure should thus be accepted unless cogent reasons pertaining to legal certainty dictate otherwise. Be that as it may, it seems that legal principles expressed long ago in connection with the enactment of the Code of Judicial Procedure and primarily focused on agreements regarding judicial procedure should not stand in the way of the parties’ autonomy to decide on their dispute resolution procedure in connection with arbitration. This is provided that such agreements do not unreasonably impinge on the parties’ right of access to justice.
In cases where a party’s access to justice is impeded by a dispute resolution clause to an intolerable extent, the clause can be adjusted by applying Section 36 of the Contracts Act. This may also be the case in situations where a time bar rule would apply if a party were to be prevented from initiating proceedings and in other situations where a party risks suffering damage or loss of rights by having to observe prearbitral steps in the agreement.