I) Introduction. II) Nature of the multi-step dispute resolution clause. III) Requirements for exercising the negotiation clause: subjective requirements, requirements as to form, time limits for the request, requirements as to content, requirements to prove compliance with the obligation to negotiate. IV) Commencement of arbitration without fulfillment of the obligation to negotiate. V) Vacating the arbitral award due to breach of the negotiation clause. VI) Enforceability of the negotiation clause and anti-suit injunctions. VII) Conclusion.
It is increasingly common for parties who agree to include an arbitration clause in a contract to establish an obligation to negotiate before commencing arbitration proceedings. These obligations are referred to as "escalation clauses," "multi-tier clauses," or "multi-step alternative dispute resolution clauses."1
In essence, if a party wishes to start arbitration proceedings, it must first negotiate with the other party in order to try to reach an amicable solution to the dispute2 (hence the reason why these clauses are said to have a "filtering" effect).
These clauses come in many forms. Some are extremely simple (e.g., when the parties undertake, before starting arbitration, to "use their best efforts to reach an agreement"), whereas others are more complex and establish a maximum term for the negotiations, name the individuals who will participate in the negotiation (e.g., the CEO, General Manager), and others even state the number of meetings that must be held.3
The purpose of the multi-tier clause is clear: to require the aggrieved party to inform the other party of the existence of a controversy, providing an opportunity for the situation to be resolved outside arbitration, thereby avoiding the financial costs and delays involved in the arbitration process.4 Failing this, the clause may also serve to provide the respondent with an opportunity to prepare its defense better if a negotiated solution cannot be reached.5
In short, these clauses allow the parties to reflect on the facts that gave rise to the dispute and explore the possibilities of reaching an amicable resolution.
These clauses could have significant importance for the parties at a later stage: the parties entering into an agreement that includes an obligation to negotiate may have a strong interest in being able to resolve their disputes without having to resort to arbitration. It is clear that the time, expenses and reputational burdens associated with arbitration far exceed the costs of negotiation. Consequently, the parties should be mindful about the inclusion of a negotiation clause in the agreement.
Negotiation clauses raise many questions. What are the effects of disregarding the clause? Does the arbitral tribunal have jurisdiction if the clause has been breached? Can the breach be remedied? Can a party be compelled to comply with the clause? Can an arbitral award be set aside for failure to comply with the clause? The remainder of this article seeks to provide answers to these and other questions.
Finally, it is important to mention that although Spanish legal scholars and case law have examined similar concepts (such as the failure to exhaust administrative remedies, which is referred to in former article 533.7 of the Spanish Code of Civil Procedure of 1881, and the mandatory labor conciliation under article 63 of the Labor Procedure Act), these issues have not been explored in an arbitration context. However, there has been an intense debate on this issue in the courts and among legal scholars in the United States, giving rise to a number of contradictory decisions, which will be discussed below.
NATURE OF THE MULTI-STEP DISPUTE RESOLUTION CLAUSE
The multi-step dispute resolution clause can be considered as: (a) a condition precedent to the commencement of arbitration, (b) a procedural requirement for arbitration, or (c) a procedural step that ought to be followed for a party's own benefit ("carga procesal").
The legal nature of the clause has relevant consequences on matters such as whether the clause may be enforced or whether a breach may be remedied, so this preliminary question must be resolved before reaching any conclusions regarding these issues.
On one side of the debate are those who believe that the clause bars recourse to arbitration until the negotiation process has been complied with, and is therefore a type of condition precedent. This position is particularly popular among U.S. courts when the parties clearly desire to establish the obligation as such. The clause has similarly been considered to be a pactum de non petendo, a temporary waiver of the right to commence arbitration until negotiation has ended.6
In HIM Portland LLC v. DeVito Builders Inc.,7 the First Circuit Court of Appeals held that: ..
[u]nder the plain language of the contract, the arbitration provision is not triggered until one of the parties requests mediation. Consequently, because neither party ever attempted to mediate this dispute, neither party can be compelled to submit to arbitration.
Likewise, in Weekly Homes Inc. v. Jennings,8 the Texas Court of Appeals held that:
The trial court correctly interpreted the contractual language to require satisfaction of the provisions of the mandatory negotiation clause as a condition precedent to arbitration, and correctly determined that this arbitrability issue was one for the courts to determine, not the arbitration. Although the arbitration clause begins with broad language that generally grants jurisdiction to the arbitrator to determine the issue of arbitrability, express language in the contract restricts the breadth of that clause. The arbitration provision that makes arbitrable "any dispute or question arising under the provisions of this agreement" is qualified by the clause "which has not been resolved under the mandatory negotiation provision".
Indeed, some U.S. courts have held that the negotiation clause must be considered a condition precedent in those cases in which the parties have expressly defined it as such.9
In my opinion, this interpretation is correct in the specific situations described above. However, in general terms, when the parties establish a multi-tier dispute resolution system that includes an obligation to negotiate before arbitration, but does not expressly provide that the obligation suspends the effect of the subsequent stages (e.g., the arbitration proceedings), a breach of the obligation to negotiate should not prevent a party from commencing the following stages to resolve the conflict. A different interpretation would lead directly to court proceedings (as the arbitration clause would not be triggered because the condition necessary to trigger it had not been met). This is precisely what the parties were attempting to avoid. For this reason, the effects of a breach of the negotiation clause should be considered within the arbitral proceedings itself. As Born sharply explains, "... even where an agreement provides for arbitration only after a lengthy process of other dispute resolution mechanisms, it stills remains an arbitration agreement. Arbitration delayed is not, so to speak, not arbitration." 10
In other words, suspending the effects of the multi-tier resolution dispute process because of a simple failure to negotiate, would invalidate the entire dispute resolution structure created by the parties in order to avoid going to court in the first place. Thus, by simply failing to initiate the negotiation phase (or refusing to engage in a negotiation requested by the other party), a party could avoid arbitration and take the case to court.11 This is the conclusion of the Court in Dave Greytak Enters Inc. v. Mazda Motors of America Inc.12:
The good-faith-negotiation provision, when considered in its entirety and in context, was intended basically as the first step of a more comprehensive procedural scheme and obligation -imposed upon both parties- "to seek prompt and expeditious non-judicial resolution of disputes between them." The highly detailed nonjudicial dispute resolution procedures ... begin with management review, progressing to a stipulation as to the facts and issues in dispute, moving to third-party resolution and, finally, to binding arbitration. Those procedures and their sequence, make it evident that litigation was intended as a last resort, and not ... the beginning point, of the dispute resolution process.
It seems therefore, that the negotiation clause would be better characterized as a procedural arbitration requirement, i.e., a set of requirements which affect the right to obtain a decision on the merits (and not a condition precedent).13 Indeed, breach of the negotiation clause would not prevent the commencement of arbitration. In the words of the Zurich Court of Cassation,14 the "obligation to mediate was a substantive obligation which did not prevent procedural commencement of arbitration." In Int'l Ass'n of Bridge v. EFCO Corp. and Constr. Products Inc.,15 the Eighth...