United States: multi-step dispute resolution clauses D Jason File* WilmerHale, London [email protected] o-called ‘multi-step’ dispute resolution clauses disputes over the objection of one party on the basis that Shave become popular additions to domestic and neither party sought to mediate and therefore, that the international commercial contracts in the United States entire dispute resolution clause had not been and elsewhere.1 These clauses typically prescribe tiered ‘triggered’. The potential for such results highlights the procedures in the event of a dispute. importance of careful drafting of such multi-step dispute Such procedures often begin with the notification and resolution clauses in order to emphasise the parties’ description of a dispute by the aggrieved party followed selection of arbitration even when neither party elects to by a period of consultation, negotiation and/or avail itself of the mediation or negotiation component of mediation.2 In the event that the parties cannot agree on the clause’s procedure. a way to resolve the dispute, in whole or in part, multi- step dispute resolution clauses typically provide for Enforceability of the negotiation, mediation or other litigation, or, more commonly, arbitration under non-binding component specified rules. Under certain conditions, these clauses have the potential to encourage early resolution of Courts in the United States do not concur on whether an disputes with minimum acrimony by facilitating initial agreement to negotiate in any context is enforceable.3 discussions in less adversarial settings. Consequently, courts in the same federal district have With the onset of a dispute, however, disagreements held both that an agreement ‘to use best efforts to reach may arise regarding the proper application of such an agreement’, constituted an enforceable agreement,4 dispute resolution clauses. Depending on the and that ‘[a]n agreement to negotiate in good faith’ is circumstances, one party may believe that recourse to unenforceable because it is ‘even more vague than an the first step of the dispute resolution clause would be agreement to agree’.5 futile or would unnecessarily delay proceedings in a Ultimately, a court’s decision whether to enforce an time-sensitive situation and would thus prefer to advance agreement to negotiate appears to hinge, on a case-by- proceedings directly to a subsequent step in the clause case basis, on the definiteness of the contractual terms. such as arbitration. The other party may insist on As one New York court observed, it is possible to enforce negotiation or mediation first, either out of a good faith a definite and certain duty to negotiate in good faith, but belief that common ground can be found through such ‘even when called upon to construe a clause in a procedures, or perhaps more opportunistically as a contract expressly providing that a party is to apply his dilatory tactic. Or, both parties may wish to avoid best efforts, a clear set of guidelines against which to negotiation or mediation for one of the above reasons, measure a party’s best efforts is essential to the but one may seek to avoid the application of the dispute enforcement of such a clause’.6 resolution clause altogether in an attempt to litigate the In the context of contractual clauses requiring dispute in court, while the other may seek to enforce the negotiation or mediation of disputes (or, for that matter, arbitration component of the clause if there is one. other non-binding procedures), courts focus on the Such cases can raise important questions regarding definiteness of the negotiation or mediation procedures whether and in what contexts, the negotiation or designated by the contract. Where such clauses contain mediation component of a multi-step dispute resolution indicia of definiteness, such as a limited duration of clause can be enforced against an unwilling party. As the negotiation or mediation,7 a specified number of discussion below illustrates, the negotiation or negotiation sessions,8 specified negotiation mediation component of a multi-step dispute resolution participants,9 or mediation pursuant to specified rules clause can be enforced under United States law, but only or under the auspices of a particular dispute resolution if the clause is sufficiently definite so as to provide institution,10 courts appear more likely to enforce them. objective standards by which compliance can be The possible futility of seeking in good faith to enforce measured. Yet this rule can be a double-edged sword. As a non-binding component of a multi-step dispute shown below, a specific and strongly-written requirement resolution clause against an unwilling party is not for negotiation or mediation as a precondition to necessarily a reason for denying enforcement of that arbitration, for example, has led some courts in the component. At least one federal court of appeals has United States to retain jurisdiction over arbitrable held in the context of a ‘non-binding’ arbitration IBA Legal Practice Division MEDIATION COMMITTEE NEWSLETTER July 2007 UNITED STATES: MULTI-STEP DISPUTE RESOLUTION CLAUSES procedure that, despite the fact that one party believed plaintiff had instead filed suit in order to pursue the procedure would be futile, the possibility existed that mediation,17 the court observed that ‘surely a party may the procedure could generate an advisory result that the not be allowed to prolong resolution of a dispute by resistant party would find ‘favourable’.11 In that context, insisting on a term of the agreement that, reasonably the court enforced the dispute resolution clause, finding construed, can only lead to further delay’.18 that it was ‘unable to conclude’ that the procedure Ultimately, the negotiation or mediation components ‘would be futile’.12 of a multi-step dispute resolution clause can be enforced The context of multi-step dispute resolution clauses, in the United States, but enforceability depends on a however, leads courts to emphasise a further key factor variety of factors. Whether the clauses are definite in affecting whether an agreement to negotiate or mediate terms of time, place and procedures, for example, can is sufficiently definite to be enforced: whether or not the play an important role in determining whether such clause clearly makes resort to those less adversarial clauses are legally cognisable agreements. Similarly, procedures a mandatory precondition to escalating the whether the clauses describe negotiation or mediation dispute. Where multi-step dispute resolution clauses do as a mandatory condition precedent to further, more not state that negotiation or mediation is a condition adversarial, procedures will also enhance the likelihood precedent to the pursuit of more adversarial procedures, of enforcement. Enforcement can be obtained even courts in the United States tend to view negotiation or where a party is unwilling to participate, as some courts mediation provisions more flexibly – ranging from a hold out the possibility that a settlement could accrue reluctance to strictly enforce notice provisions or time from non-adversarial or non-binding procedures. limits surrounding the negotiation provisions to a Nevertheless, courts retain the prerogative to deny refusal to enforce those provisions at all.13 enforcement if it appears that it is sought for illegitimate, By contrast, where multi-step dispute resolution tactical reasons. clauses contain condition precedent language associated with negotiation or mediation provisions, Interaction between the negotiation or mediation courts will be more likely to enforce those provisions component and the arbitration component strictly according to their terms. Thus, where a contract contained a ‘mandatory negotiation’ clause14 and the Parties seeking to create enforceable duties to negotiate plaintiff commenced an arbitration before any or mediate as part of a multi-step dispute resolution negotiations could take place, the court vacated the clause may be surprised, however, by the ways some eventual arbitration award that was favourable to the United States courts have addressed the interaction plaintiff. Because the defendant had objected during between those non-adversarial components and the the arbitration that no negotiation had taken place in arbitration component of such clauses. Many parties advance of the arbitration and ‘the parties were required might, for various reasons, prefer to use negotiation or to participate in the mandatory negotiation sessions mediation as a condition precedent to arbitration. They prior to arbitration[,]…the trial court was correct in might assume that even if they decided not to pursue vacating the arbitration award’.15 negotiation or mediation in a particular dispute, their Likewise, where a defendant’s attempt to enforce a intent at the time of contracting to arbitrate all disputes mediation clause was resisted by the plaintiffs on the arising out of their contract would be respected. In many grounds that the plaintiffs had ‘substantially complied’ jurisdictions in the United States, under prevailing law, with the provision by writing letters detailing the nature they would be wrong. of their grievances, the court held: ‘The mediation For example, the First Circuit Court of Appeals clause here states that it is a condition precedent to any considered a construction contract with a multi-step litigation.…Because the mediation clause demands dispute resolution clause that provided, among other strict compliance