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Multi-Tiered Dispute Resolution Clauses – Potholes or Prudence






Multi-tiered dispute resolution clauses have become a ubiquitous feature in commercial contracts, offering parties an alternative avenue for resolving disputes outside traditional court proceedings.

 

Where a dispute resolution clause has been agreed upon by parties, the court’s primary task or duty is to give effect to that clause. Additionally, there may be even further prerequisites to arbitration, such as a mediation or negotiation clause on top of an arbitration clause, ie. multi-tiered dispute resolution clauses. The intention is to amicably resolve the dispute by exhausting all other avenues to resolve a dispute.


Judicial Perspective On Dispute Resolution Clauses


Judicial trends increasingly affirm the validity of multi-tiered dispute resolution clauses agreed upon by parties before arbitration can proceed. The Federal Court in Juara Serata Sdn Bhd v Alpharich Sdn Bhd [2015] 6 MLJ 773 dismissed an appeal regarding a building contract dispute involving RM1.2 million owed for completed construction works. The High Court initially ruled in favor of the respondent, Alpharich Sdn Bhd, based on an interim payment certificate issued by the project's architect after the defects liability period had ended. The certificate confirmed that the works were fully completed and payment was due.

 

Despite accepting the completion of the project initially, Juara Serata later refused to pay, arguing that the work was defective and not as per the contractual terms, thus necessitating third-party interventions for completion and rectification. The High Court found that Juara Serata failed to express dissatisfaction or challenge the architect's certification at any point, nor did it issue instructions to rectify any alleged defects.

 

The Court of Appeal upheld this decision, reinforcing that the appellant had failed to adhere to the dispute-resolution protocol agreed upon in the dispute resolution clauses of the contract. These clauses mandated that any dispute first be referred to the architect or consultant for a decision and if unresolved or the decision was unacceptable, the matter should then be moved to arbitration.

 

The Federal Court dismissed the appeal, confirming the decisions of the lower courts. The Federal Court held that the courts below did not err in applying the principle that parties were bound by the terms of their contract to follow the outlined dispute resolution process. The court stressed that the appellant’s failure to refer the architect's decision to arbitration within the specified time rendered the architect’s decision final and binding.

 

A fortiori of the same, where a dispute resolution clause exists, it can only be interpreted as parties having intended for the dispute resolution to be a precursor to the final resolution of their dispute, the courts could only give effect to it as they have so agreed: Total Future Sdn Bhd v Government of Malaysia & Ors [2013] 9 MLJ 288. The authorities underscore mandatory compliance with specified preconditions in contract clauses for dispute resolution.

 

The Enforcement Of Dispute Resolution Clauses:

From The Commonwealth Perspective

 

In the Singaporean Court of Appeal case of International Research Corp PLC v Lufthansa Systems Asia Pacific Pte Ltd and Another [2014] 1 SLR 130, the court dealt with a clause which mandated that parties initially attempt to resolve their disagreements through progressively higher levels of management. Should these efforts fail, only then could the matter be escalated to arbitration. The Court of Appeal agreed with the High Court that the clause was clear and indeed mandatory and must be complied with by the parties as a condition precedent to arbitration.

 

The Australian courts too have demonstrated a distinct willingness to enforce multi-tiered clauses to arbitration; via “genuine and good faith negotiations” clauses. In the New South Wales Court of Appeal case of United Group Rail Services Limited v Rail Corporation New South Wales [2009] NSWCA 177, it was held that the clause within the contracts provided that parties were to refer the dispute to a senior representative of each party to undertake “genuine and good faith negotiations”, only then would the dispute be referred to arbitration. The court further stated:

 

“The public policy in promoting efficient dispute resolution, especially commercial dispute resolution, requires that, where possible, real and enforceable content be given to clauses such as cll 35.11 and 35.12 precondition clauses to encourage approaches by, and attitudes of, parties conducive to the resolution of disputes without expensive litigation, arbitral or curial.”

 

(Note: clauses 35.11 and 35.12 refer to clauses requiring parties to ‘meet and undertake genuine and good faith negotiation with a view to resolving the dispute or difference'.)

 

These examples reflect a judicial commitment to uphold the dispute resolution clauses agreed upon by parties, reinforcing the preference for resolving disputes through designated mechanisms over initiating litigation immediately, thereby adhering to the principles of contractual fidelity and judicial efficiency.

 

Conclusion

 

The evolving judicial stance towards dispute resolution clauses in commercial contracts is a reflection of a broader intent to reduce the judicial burden and encourage dispute resolution outside the courts. By upholding these clauses, courts are not merely honoring the letter of the contract but also foster a business environment conducive to resolving disputes amicably and economically. This approach helps maintain the integrity of contractual agreements and supports the overarching goal of judicious resource allocation in dispute resolution. Such judicial prudence, therefore, underscores the importance of dispute resolution clauses as not mere contractual formalities but pivotal elements that facilitate a constructive dialogue before entering the arduous phases of arbitration.


2 May 2024

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