When agreeing to the terms of a contract at the outset of a relationship, parties sometimes include explicit contractual provisions setting out steps that must be complied with should a dispute arise. Parties may choose to adopt a staged approach such as including service of a notice of dispute, an initial meeting of the parties or directors of those entities to engage in negotiations, formal mediation between the parties, and a period that should be allowed before a dispute can be referred to either the court or arbitration. Contractual provisions of that nature are known as dispute escalation clauses and are commonly seen in long-term agreements such as construction contracts. A failure by one party to comply with the exact process prescribed may give rise to arguments that the court or tribunal lacks jurisdiction to hear the dispute.
At the time of drafting such a clause, it is, therefore, important to consider the impact a dispute escalation clause may have later in the relationship should a dispute arise, and whether the contractual provisions accurately reflect the intention of the parties.
When enforcing a dispute escalation clause such factors to consider include whether the clause makes clear what steps must be taken by the parties, and that those steps are mandatory. When drafting this type of clause, it is therefore crucial to ensure that each step is clearly defined and there is no ambiguity as to the time period for completion of each step. To avoid potential deadlocks, it is essential to specify clear deadlines if parties are required to complete each step before moving on to the next, e.g., 30 days for a meeting of directors, 30 days for negotiation to take place thereafter, and 60 days for a mediation to take place. Regarding mediation in Oman-related disputes, it is important as well to consider whether to include any such provisions requiring parties to enter into a mediation, given the absence in Oman of the concept of “without prejudice” negotiations in a mediation.
Another issue to consider is whether such dispute contains all issues as currently between the parties. For example, if new issues and disputes arise between the parties during the course of the dispute resolution process, consideration should be given whether the new disputes form part of the current dispute or are separate, and whether a party needs to revert to the beginning of the dispute resolution process in order to comply with the dispute escalation provisions as agreed between the parties.
Failure to comply with the requirements
So, what is the effect of failing to meet the established pre-arbitral requirements? Failure to comply with dispute escalation provisions could result in a party facing a preliminary issue or jurisdiction challenges in an arbitration. Although a number of International Institutional Arbitration Center Rules (LCIA Rules 2020, DIAC Rules 2022, ICC Rules 2021) give a tribunal the power to rule on its own jurisdiction, a tribunal may nonetheless be reluctant to accept jurisdiction on the basis that the pre-arbitral stages in a dispute resolution procedure have not been complied with.
The New York Convention is important in the context of enforcement. Articles II.1 and II.3 provide that where there is an agreement in writing to submit a dispute to arbitration, and unless that agreement is null and void, inoperable or incapable of being performed, the court of a Contracting State shall recognise an arbitration agreement between the parties and, at the request of a party, refer the dispute to arbitration. Parties should therefore be mindful not to render the agreement “inoperable” on the basis that pre-arbitral stages in a dispute resolution procedure have not been complied with.
In summary, when agreeing to the terms of a contract at the outset of a relationship, parties should be mindful of the requirements and dispute escalation provisions as agreed in a dispute resolution clause in a contract. If a dispute arises between the parties, a party should also be mindful of accurately and fully complying with the escalation provisions as set out in the dispute resolution clause so as to avoid any potential issues and challenges to jurisdiction arising in any subsequent arbitration.
