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S8 | MONDAY, AUGUST 7, 2017 | Alternative Dispute Resolution | NYLJ.COM
Be Careful What You Ask For: Multi-Tiered Dispute Resolution Clauses
BY RICHARD DE PALMA
Generally speaking, a “multi-tiered” dispute resolution clause is a contrac- tual provision requiring that parties to a dispute engage in certain preliminary settlement-focused efforts as a prerequisite to bringing a claim in arbitration or filing a court proceeding. Such provisions typically require that the parties meet and make some
RICHARD DE PALMA is partner and vice chair of the business litigation practice group at Thompson Hine in New York.
level of effort during a defined term to settle the dispute (often identifying the persons who must be involved) before either party can file a claim against the other under the relevant contract. Multiple preliminary steps are sometimes mandated, such as informal negotiations followed by formal mediation, prior to filing. Examples of these clauses are included in “Compilation of Sample Mediation Clauses,” issued in 2016 by the New York City Bar Association’s Alternative Dispute Resolu- tion Committee.
Such clauses are most frequently found in commercial contracts, but they also are pres- ent in many forms used in non-commercial relationships like employment contracts or
HR policies, and they can cover tort claims as well as more standard commercial dealings. It is widely noted that they are used predomi- nantly in construction contracts, and while the construction industry routinely incor- porates them, they are now fairly prevalent in all types of contracts and in a variety of industries.
These clauses are generally enforceable under New York law, but counsel may encoun- ter some twists if the clause is not carefully drafted or if the arbitrator or court is not properly educated on the legal effect of the language employed. Indeed, the drafting may influence (actually should influence) whether a dispute over compliance is heard by a court
or an arbitrator (at least in instances where the dispute would ultimately be arbitrated).
Pros and Cons
Before we review how these clauses work, let’s address a preliminary question that cur- rent writing on the subject seems to ignore: Why bother at all with such a clause? If parties to a dispute are inclined to discuss settlement, typically they will, especially given escalating litigation and arbitration costs, so why force parties who are not inclined or ready to settle at the beginning of a dispute to go through the process? Including the clause may have sounded fine during contract negotiation and drafting (if it was ever raised at all), but the parties have a much better sense of whether such efforts are worthwhile after an actual dispute arises.
There are pros and cons to including requirements encouraging settlement efforts in a dispute resolution clause. On one hand, when parties attempt to settle a dispute, it is possible they will succeed, which is true even if the parties were initially reluctant and forced by the contract to do so. The obvious benefits are the costs and time saved if the dispute is resolved at this early stage. These clauses typically require specific personnel to be involved in the negotiations, and the participants should be carefully chosen dur- ing the drafting stage. Senior personnel who were not involved in the activities that led to the dispute may have cooler heads or may be driven by different considerations, poten- tially advancing settlement chances. Most clauses also specify a time period during which negotiations must stay open, providing a cooling-down period that may enhance the possibility of settlement. Another potential benefit (depending upon your viewpoint) is that the clause prevents one party from racing to file to secure claimant or plaintiff status, which likewise prevents or delays the surprise of being served when your cli- ent is the adverse party, who may not yet even be fully aware of the dispute. Even in unsuccessful negotiations, gaining a better understanding of the nature of the dispute and how your counterparty approaches it can be beneficial.
On the other hand, some cases present significant disadvantages to incorporating these requirements. If the claims or parties are not ripe for settlement, such clauses can result in unnecessary delay, expense and inconvenience. Even when settlement is unlikely, the mandated proceedings can be rather protracted, depending upon the clause at issue, which is of particular concern when claims may be close to time barred. Also, some counsel may intentionally abuse the process, using it to obtain tactical delay, drive up costs for the adversary or as an opportunity for pre-filing discovery. And there
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