What are they?

Multitiered dispute resolution clauses are contractual provisions which provide for the resolution of disputes by a series or waterfall of alternative dispute resolution techniques – for instance, negotiation, followed by mediation, and then arbitration.

While dispute resolution clauses (providing for arbitration or litigation) are commonplace in commercial contracts, and mediation clauses are becoming more common, multitiered dispute resolution clauses are, perhaps, less common outside construction contracts, but they are gaining some recognition.

Traditionally, "agreements to agree", or to negotiate in good faith, are unenforceable for legal uncertainty. However, attitudes began to shift several years ago when certain English, Singaporean and Australian cases recognised that a properly drafted clause could provide sufficient legal clarity and be an enforceable condition precedent to a referral to arbitration. Hong Kong has arguably lagged behind. See, for instance, the Court of Appeal's decision in Hyundai Engineering & Construction Co. Ltd v. Vigour Limited [2005] 3 HKLRD 723.

Recent development

In HZ Capital International Ltd v CVE Co. Ltd & Ors [2019] HKCFI 2705, the court considered a clause in an agreement that provided for "consultation" prior to arbitration. The issue arose in the context of the respondents' application to set aside an order granting the applicant permission to enforce an arbitration award as a judgment.

One of the grounds on which the respondents sought to set aside the order was that the tribunal did not have jurisdiction to hear the dispute because the relevant agreement contained a condition precedent providing for mandatory negotiation which apparently had not been satisfied.

After considering the case law of various common law jurisdictions, the court held that, although the negotiation (or consultation) provided for in the dispute resolution clause was not described as a condition precedent, it was drafted in sufficiently certain terms to be enforceable. It so happened, on the facts, that the court found that the respondents had unequivocally waived the right to insist on strict compliance with the provision relating to mandatory negotiation, or had agreed to vary the dispute resolution clause as to negate the negotiation provision. The respondents' application to set aside the order granting permission to enforce the arbitration award was dismissed*.

Some practical points

Parties that wish to incorporate legally effective multitiered dispute resolution clauses in their commercial contracts should aim for contractual certainty – which means identifying a sufficiently clear process, by reference to the objective criteria that the parties are required to satisfy, prior to the main form of dispute resolution provided for in the contract (see, David Joseph QC, "Jurisdiction and Arbitration Agreements and their Enforcement" (3rd ed) at para. 18.20 – referred to in the HZ Capital International case, at para. 38).

Opinions tend to be divided on the use of multitiered dispute resolution clauses. To some, they provide more opportunity for negotiation which makes commercial and cultural sense – to others, such clauses provide obstacles to the enforcement of legitimate contractual rights and are unnecessary because parties can have without prejudice discussions whatever the contract says. A properly drafted multitiered dispute resolution clause is enforceable. Claimants which ignore them do so at their peril, even though it may give the other side an excuse to delay before embarking on the principal form of dispute resolution.

*Editorial Note: At the time of writing, a summons for leave to appeal against an interlocutory order is listed for hearing on 29 May 2020 (HCCT 48/2016).