Resource ID: w-008-4072 General Contract Clauses: Alternative Dispute Resolution (Multi-Tiered) (TN) PRACTICAL LAW COMMERCIAL TRANSACTIONS, WITH MATTHEW MULQUEEN AND NICK MARGELLO, BAKER, DONELSON, BEARMAN, CALDWELL & BERKOWITZ, PC Search the Resource ID numbers in blue on Westlaw for more. This Standard Clause requires the parties to resolve their disputes by alternative dispute resolution (ADR) under Tennessee law, including a period of negotiation and then mediation before submitting the dispute to litigation or arbitration. This type of clause is sometimes referred to as an escalation clause. This Standard Clause has integrated notes with important explanations and drafting tips. DRAFTING NOTE: READ THIS BEFORE USING DOCUMENT SCOPE OF STANDARD CLAUSE ADVANTAGES AND DISADVANTAGES OF MULTI-TIERED DISPUTE Contract parties sometimes include a RESOLUTION CLAUSES multi-tiered alternative dispute resolution (ADR) clause, also known as an escalation There are potential advantages and clause, that either requires or permits the disadvantages in including a multi-tiered parties to pursue some form of non-binding dispute resolution clause in a commercial ADR mechanism, such as mediation, before contract. A properly drafted multi-tiered embarking on the binding mechanism ADR clause can: (arbitration or litigation) they have chosen. Provide the parties with the opportunity These clauses usually require the parties to: to resolve disputes first in a forum that is: Negotiate among themselves at the zprivate; and operations level to resolve any dispute. zless adversarial than arbitration or Submit the dispute to negotiations at the litigation. designated senior executive level if the Preserve ongoing commercial parties cannot resolve the dispute at the relationships. operations level. Save significant amounts of time and Submit the dispute to mediation if the expense if the parties reach an amicable parties cannot amicably resolve the settlement to avoid the cost, expense, and dispute by negotiations. negative publicity of litigation or arbitration. Submit the dispute to either litigation or arbitration if the parties: However, a multi-tiered ADR clause can also: zchoose to continue the dispute; and Allow contract parties to defer their obligations by delaying the ultimate zcannot resolve the dispute by binding resolution of the dispute. mediation. © 2018 Thomson Reuters. All rights reserved. General Contract Clauses: Alternative Dispute Resolution (Multi-Tiered) (TN) Increase the cost of resolving the dispute State that they intend for the negotiation if the mediation does not result in a and mediation steps to be preconditions settlement because the parties incur to litigation or arbitration. Without attorneys’ and mediation fees. express language, a party risks that the other party may successfully attempt to ENFORCEABILITY AND DRAFTING commence arbitration or litigation without CONSIDERATIONS taking the preliminary steps. While there is not a lot of case law on this Consider to which person within their point, including in Tennessee, most courts respective organizations the dispute in the US generally enforce multi-tiered should be referred, because negotiations ADR clauses if they clearly express the are most likely to be successful when the preliminary negotiations and mediation individuals in question: as conditions precedent to the right to zare familiar with and have responsibility escalate the dispute to litigation (see RCR for the products or services that are the Bldg. Corp. v. Pinnacle Hospitality Partners, subject of the dispute; and 2012 WL 5830587, at *13 (Tenn. Ct. App. zhave sufficient authority within the Nov. 15, 2013) (relying on a party’s failure organization to make the decisions to satisfy the condition precedent as a necessary to resolve or escalate the bar to recovery)). Where the final stage is matter or dispute. arbitration, rather than litigation, courts Set a timetable for the informal phases of generally refer the issue of satisfaction the procedure to prevent the parties from of the condition precedent to arbitrators deliberately delaying any resolution. (see Restatement (Third) of U.S. Law of Int’l Comm. Arb. § 2-18 TD No 4 (2015) Clearly state the scope, application, (discussing US law)). and terms of any dispute resolution mechanism. In the absence of clear language, Tennessee Consider whether: courts generally disfavor conditions precedent (see Harlan v. Hardaway, 796 zthe dispute resolution clause should S.W.2d 953, 957-58 (Tenn. Ct. App. 1990)). apply to all disputes or whether any For example, if the court examines a clause carve-outs are needed; and determines that there is another zthe dispute resolution clause should reasonable interpretation, it views the clause apply when a claim arises under a as a covenant, not a condition precedent, separate contract between the same to avoid any forfeiture (Law v. Bioheart, Inc., parties related to a similar subject; and 2009 WL 693149, at *14 (W.D. Tenn. Mar. zthe provisions relating to the timing 13, 2009) (citing Harlan, 796 S.W.2d at of negotiations and mediation are 957-58)). realistic. Although no particular language is Consider including terms tolling the mandatory, Tennessee courts look to the running of any statute of limitations for terms of the clause to see if the parties used the disputed claim during the pre-suit conditional terms, such as: negotiation or meditation process. ”If.” Tennessee Alternative Dispute Resolution ”Provided that.” Statutes and Rules ”When”.” In Tennessee, ADR is governed by: ”After.” The Rules of the Supreme Court, ”As soon as.” specifically Rule 31 (TN R S CT Rule 31, § 1). This rule: ”Subject to.” zauthorizes judges to order the parties of (Harlan, 796 S.W. 2d at 958.) many types of civil actions to participate When drafting a multi-tiered ADR procedure in ADR, including mediation and non- clause, the parties should: binding arbitration; and 2 © 2018 Thomson Reuters. All rights reserved. General Contract Clauses: Alternative Dispute Resolution (Multi-Tiered) (TN) zgenerally only applies to court-ordered advantages and disadvantages of ad ADR proceedings and does not govern hoc versus institutional arbitration, private, contractually agreed-upon see Practice Note, Ad hoc Arbitrations provisions for arbitration (Glassman, Without Institutional Support Edwards, Wyatt, Tuttle & Cox, P.C. v. Wade, (8-204-1373). Many ADR organizations, 404 S.W.3d 464, 468 (Tenn. 2013)). such as the American Arbitration The Tennessee Uniform Arbitration Association (AAA), recommend that the Act (TUAA) (T.C.A. § 29-5-301 et seq.), parties use the organization’s alternative which covers most private arbitration dispute resolution provision if the parties agreements. The TUAA: want to try to settle disputes by mediation and/or arbitration administered by those zis comprehensive, addressing most organizations. issues concerning an arbitration, including venue selection, enforcing The parties to the agreement are US agreements, hearings, awards, entities and the transaction takes place judgments, and appeals; and in the US. If any party is organized or operates in, or any part of the transaction zprovides that arbitration agreements takes place in a foreign jurisdiction, these are generally enforceable unless terms may have to be modified to comply grounds for their revocation exist with applicable laws in the relevant in equity or in contract law (see foreign jurisdiction. Buraczynski v. Eyring, 919 S.W.2d 314, 318 (Tenn. 1996); also see T.C.A. The agreement is governed by § 29-5-302(a)). Tennessee law. If the law of another state applies, these terms may have to be For application of the overlap between the modified to comply with the laws of the Federal Arbitration Act (FAA) and state applicable jurisdiction. arbitration law, see Practice Notes: These terms are being used in a Understanding US Arbitration Law: State business-to-business transaction. This Arbitration Law (4-500-4468). Standard Clause should not be used in Arbitration Procedures and Practice in a consumer contract, which may involve the United States: Overview: Applicable legal and regulatory requirements and Legislation (0-502-1714). practical considerations that are beyond the scope of this resource. ASSUMPTIONS USED IN THE These terms are not industry-specific. STANDARD CLAUSE This Standard Clause does not account This Standard Clause assumes that: for any industry-specific laws, rules, or regulations that may apply to certain The agreement contains a separate transactions, products, or services. provision relating to litigation or arbitration. This Standard Clause creates Capitalized terms are defined elsewhere the framework for alternative dispute in the agreement. Certain terms are resolution methods the parties must capitalized but not defined in this employ before they resort to litigation Standard Clause because they are defined or arbitration under a separate provision elsewhere in the agreement (for example, referred to in Section 4 of this Standard Agreement). Clause. BRACKETED ITEMS The parties have selected either arbitration or litigation as a means to Bracketed items in ALL CAPS should be resolve their disputes if the negotiations completed with the facts of the transaction. and mediation do not result in a Bracketed items in sentence case are either settlement. Arbitration can either be optional provisions or include alternative ad hoc arbitration or administered language choices to be selected, added, or arbitration. For an analysis of the deleted at the