Is mediation mandatory when a multi-tier arbitration clause exists? (Part 01)

Mediation is a popular method of dispute resolution in many countries and is often encouraged before parties proceed to arbitration. However, the question arises: is it mandatory for parties to mediate before initiating arbitration if there is a multi-tier arbitration clause in their agreement? This article examines the issue from legal and practical perspectives. 

1. Overview of Multi-Tier Arbitration Clauses 

Multi-tier arbitration clauses are provisions in contracts where the parties agree to prioritize alternative dispute resolution (ADR) mechanisms before resorting to arbitration. These ADR mechanisms may include negotiation, mediation, adjudication, or expert determination. Such clauses can be structured to ensure that the outcome of a particular mechanism is binding unless one party opts to escalate the dispute to the next tier, such as expert determination, before moving on to arbitration. 

In commercial transactions, contracts often stipulate multiple dispute resolution methods, including court proceedings or arbitration. A common hybrid dispute resolution clause is “mediation-arbitration”, which requires the parties to attempt mediation first and only proceed to arbitration if mediation fails. 

Typically, mediation is considered a voluntary process, and parties may choose whether or not to engage in mediation sessions before proceeding directly to arbitration. However, some argue that if the contract explicitly requires mediation before arbitration, then mediation becomes a mandatory step. 

In the following section, Apolat Legal will introduce and analyze court rulings and decisions from various jurisdictions on whether mediation is mandatory when a multi-tier arbitration clause is included in a commercial contract. 

2. Case Study: The Dutch Judiciary’s Approach to Multi-Tier Arbitration Clauses 

In 2017, a Dutch company, Project Partner Search Beheer B.V. (“PPSB”), transferred its shares in a subsidiary to Lotamblau Investments B.V. (“CSW”). The share purchase agreement between PPSB and CSW included the following dispute resolution clause: 

“Any disputes between the parties arising out of this agreement will initially be resolved through mediation. Should the parties be unable to resolve such disputes in this manner, they will be submitted to arbitration (by a single arbitrator) to the exclusion of the ordinary courts, unless urgent intervention by a judge is required.” 

In 2019, a dispute arose and PPSB initiated arbitration, requesting the Rotterdam District Court to appoint an arbitrator in accordance with the Dutch Arbitration Act. CSW opposed this request, arguing that mediation was a prerequisite under the agreement. However, the District Court still appointed an arbitrator. 

Throughout the proceedings, CSW maintained its objection to the arbitrator’s jurisdiction, citing the same argument, and requested a suspension of the arbitration to allow for serious mediation efforts. However, the arbitrator rejected this request, reasoning that mediation would cause unnecessary delays given the parties’ apparent lack of cooperation. Ultimately, the arbitrator’s final award partially upheld PPSB’s claims and dismissed CSW’s counterclaims. 

CSW then sought to annul the arbitral award in the Court of Appeal, arguing that the arbitration award was invalid because the mediation requirement, as a precondition, had not been fulfilled. 

The Court of Appeal ruled that the content and effect of the mediation clause must be interpreted based on the specific circumstances and the reasonable expectations of the parties. Applying the Haviltex standard (a Dutch contract interpretation principle), the Court determined that mediation should proceed only with mutual consent. The Court interpreted the clause as permitting arbitration if it was foreseeable that mediation would not resolve the dispute, such as due to one party’s unwillingness to mediate. 

On appeal to the Supreme Court, CSW argued that the Court of Appeal’s reasoning was internally inconsistent. CSW contended that the arbitration agreement was valid only after it was determined that mediation could not resolve the dispute. The Advocate-General, an advisor to the Supreme Court, agreed in part, stating that mandatory mediation clauses in multi-tier arbitration agreements could constitute a precondition to the validity of the arbitration agreement. Failure to comply with such a clause would render the arbitration agreement invalid. 

While the Supreme Court partially agreed with the Advocate-General, it upheld the Court of Appeal’s view that the Haviltex standard should apply to interpreting dispute resolution clauses in commercial contracts. The Court emphasized that while a mediation clause could influence the interpretation of the agreement, it does not necessarily render mediation mandatory. 

Finally, the Supreme Court held that arbitrators may suspend proceedings upon a party’s request to allow for mediation if deemed appropriate. However, arbitration could proceed if the adjudicating body found mediation futile or unnecessary given the circumstances. 

The Dutch judiciary demonstrates a flexible approach to multi-tier arbitration clauses, often treating mediation as a non-mandatory process. Mediation is typically conducted only with mutual agreement, and tribunals may bypass mediation and proceed directly to arbitration if mediation appears ineffective. 

In the next part of this article, Apolat Legal will analyze and evaluate the practice of resolving disputes involving multi-tier arbitration clauses in Vietnam, providing recommendations for more appropriate solutions in different scenarios. 

See more

1/ Commercial Mediation – Improvement Or Barriers

2/ Decree No. 22/2017/ND-CP on commercial mediation

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