Multi-tier ADR clauses appear in different forms

Multi-tier ADR clauses appear in many forms. Their underlying idea is to provide a structured approach to managing disputes that arise between two or more parties. They typically stipulate that once a dispute arises, the parties must first attempt to resolve it through less formal means, such as negotiation and/or mediation, before resorting to proceeding like arbitration or litigation. This progression is not only designed to facilitate early settlement and reduce the dispute resolution costs, but also introduces a sequential requirement that should – or must – be fulfilled before advancing to more binding forms of dispute resolution. 

Long-standing Swiss law confirms validity of multi-tier ADR clauses, but also their limited procedural effect

It is well-established according to the Swiss case law and the Swiss legal doctrine that multi-tier ADR clauses can be validly concluded under Swiss law. Furthermore, in its recent decision 4A_313/2024 of 30 October 2024, the highest Swiss court confirmed that in case the compliance with a multi-tier ADR clause is at issue, an award rendered by an arbitral tribunal having its seat in Switzerland can only be challenged before the highest Swiss court on grounds of irregular composition (art. 190 para. 2 lit. a of the Swiss Private International Law Act [PILA]) or lack of jurisdiction (art. 190 para. 2 lit. b PILA) (ibid., consid. 4.1). It further held that the enforceability of multi-tier ADR clauses is a question of contract interpretation and must be decided on a case-by-case basis (consid. 5.1.2). It re-confirmed that in order to assess the exact scope of the multi-tier ADR clause, it is first necessary to ascertain the real and common intention of the parties (subjective interpretation). If this proves impossible, the court or tribunal must resort to an objective interpretation of the contract (consid. 5.2). In the case at hand, the Swiss Supreme Court confirmed the challenged award, wherein the arbitral tribunal had held that the reference in the contract at issue did not allow to apply the multi-tier ADR clause contained in another contract of the parties. Furthermore, in its decision 4A_628/2015 of 16 March 2016, the Swiss Supreme Court held that a failure to comply with a pre-arbitral tier could lead to the stay of the arbitration proceedings until the pre-arbitral tier has been implemented, but not to the rejection of the jurisdiction, meaning that a challenge of an arbitral award whereby the recurring party invokes non-compliance with a multi-tier ADR clause (here called «multi-tier ADR clause defense») cannot «derail» an arbitration, but only delay it. The procedural effect of such clauses is therefore of limited effect. 

Despite these well-established principles, and in particular the one confirmed in the Swiss Supreme Court decision 4A_628/2015 of 16 March 2016, multi-tier ADR clauses regularly give raise to procedural disputes and challenges before the highest Swiss court. Although parties regularly agree on such clauses in international contracts, once a dispute arises, compliance with such clauses often becomes an issue. Disputes on procedural issues entail risks and are not only costly, but also delay the dispute resolution and even allow the losing party to attack the arbitral award. 

This raises the question whether multi-tier ADR clauses offer a chance for a quick settlement, or whether they rather constitute a procedural nuisance. Like in many instances, there is no one-size-fits-all answer to this question. 

Pros and cons of multi-tier ADR clauses

Whereas at best, multi-tier ADR clauses encourage parties to resolve disputes through negotiation or mediation before escalating to arbitration, potentially saving time and cost, they often add complexity and ambiguity to the dispute resolution process. If not carefully drafted, they can lead to disputes about the terms of the dispute resolution process. Whereas some arbitration practitioners opine that if sophisticated parties who have been working together, often for years, cannot resolve their dispute by settlement negotiations, mediation will not help much, either (naturally, mediation practitioners have a different opinion on this question). In any event, although multi-tier ADR clauses are designed to resolve disputes quickly and cost-efficiently, in practice, parties regularly fight on whether the agreed ADR process was observed, whereby often one party (the future claimant) pushes for, and the other one (the future respondent) obstructs it. For example, in a recent arbitration under the Swiss Rules of International Arbitration, respondent argued that claimant had not tried to resolve the dispute «in good faith», as stipulated in the contract, when at some point it had filed for arbitration, arguing that the settlement negotiations had been futile. 

Be that as it may, failing mandatory negotiation and mediation steps delay the commencement of arbitration. If preliminary stages are not successful, the overall costs of dispute resolution increase, as parties bear the costs of multiple processes. Practice shows that multi-tier ADR clauses offer parties opportunities to engage in tactical plays and not only to test the other party’s legal position, but also to delay binding dispute resolution. Parties may thus use preliminary stages strategically to delay resolution or to gain tactical advantages, undermining the efficiency the clause aims to promote.

Conclusions

Multi-tier ADR does lead to a binding resolution of the conflict but depends on good faith negotiations between the parties. Although it the view of this author, it perfectly makes sense to include negotiation clauses (in particular top management negotiation requirements) as a pre-arbitration step, it is questionable whether an additional mandatory step compelling the parties to mediate the conflict before resorting to arbitration is helpful. Of course, mediation can be a very effective means to resolve disputes. But particularly in civil law countries, where mediation is not (yet) so widely spread to resolve commercial disputes, and in view of the discussed potential down-sides of multi-tier ADR clauses, parties should carefully consider whether they agree on mandatory pre-arbitration steps, in particular mediation, or whether multi-tier ADR should rather be designed tailor-made once the disputes arises, as a voluntary dispute resolution process. In any event, to avoid unnecessary ambiguity, multi-tier ADR clauses should be drafted in a concise and clear way, following well-proven model clauses, and should contain well-defined deadlines stipulating when the next dispute resolution step can be taken, should the prior dispute resolution step fail. Finally, once a dispute arises, the party seeking protection of its rights should carefully formally follow the agreed ADR steps and document them, thus reducing the risks of procedural hurdles further down the road.