Resolving a dispute should not lead to a dispute over how to resolve the dispute under a contract’s dispute resolution clause. Yet this scenario often plays out in situations where a commercial contract or an investment treaty contains a multi-tiered dispute resolution clause, with pre-arbitration requirements specifying, inter alia, that parties should first negotiate amicably or in good faith; mediate; submit a dispute to a non-binding decision by an expert, such as accountant or engineer; or exhaust local remedies. Only after such requirements are met can they proceed to binding arbitration. Along the way, costs are incurred, patience can wear thin, a party can choose to ignore a requirement, missteps lead to delays, and the efficacy and other benefits and objectives of arbitration are lost. This article discusses briefly some of the key reasons why these clauses end up in litigation, what is the effect of non-compliance with pre-arbitration requirements, and what parties should consider when drafting their dispute resolution clause to avoid this outcome.
Consider the case where an arbitration clause in a commercial contract provides that, prior to commencing arbitration, key executives of each party shall meet to try and resolve a dispute, and if no agreement is reached, then the parties will submit the dispute to non-binding mediation; if mediation does not resolve the dispute within a certain time period, then either party shall demand arbitration. The goal is laudable: to provide opportunities for parties to resolve their dispute amicably prior to engaging in formal and costly legal proceedings. But what if a party demands arbitration, ignoring the other requirements. The question then becomes, are the pre-arbitration requirements mandatory and who—a court or the arbitral tribunal—makes that determination. And if the requirements are mandatory, what are the consequences of commencing an arbitration without having completed the pre-arbitral steps.1
