The use of multi-tier dispute resolution clauses in commercial contacts is increasing. They typically provide that the parties shall negotiate, mediate or go through an expert determination procedure before commencing arbitration or litigation. Multi-tier dispute resolution clauses and especially the question, shall arbitration or litigation proceedings be suspended if agreed pre-arbitral or pre-litigation steps have not been performed, is a continued subject of debate. A recent Swiss Supreme Court decision may help clarify the legal situation also in Finland.
On 29 March 2016, the Swiss Supreme Court, Bundesgericht, issued a landmark ruling on the consequences of ignoring an agreed pre-arbitral step. The Swiss Supreme Court ruled that such failure leads to stay of the arbitral proceedings until the agreed pre-arbitral step has been taken. The ruling was a significant statement as the Swiss lex arbitri (law of the place where arbitration shall take place) was silent on this issue.
The Swiss Supreme Court also stated that the consequences of failing to take an agreed pre-arbitral step should be procedural and not lead to an order for damages for breach of contract. The decision was also pragmatic – a statement of claim shall not be rejected because it would increase both the costs and the duration of the procedure and potentially also lead to loss of the right of action due to lapse of time. The arbitral tribunal shall have the right to rule on the terms and duration of the stay.
If litigation is the agreed final step in the multi-tier dispute resolution clause, the question arises, can a claimant commence litigation without having performed all the preceding steps? Access to justice, the right to have one’s claim examined by a court of law, is a constitutional right and it supports a notion that the claimant should have a right to bring his claim to the court even when an agreed pre-trial step has been ignored. On the other hand, the agreed pre-trial steps only prevent the access to trial temporarily until the agreed pre-trial step has been taken. The right to have one’s claim examined by a court of law is not a direct constitutional right. Consequently, agreement on a pre-trial step in a multi-tier dispute resolution clause can be seen as legitimate exercise of party autonomy and thus binding.
The Supreme Court of Finland has touched upon the above-referenced matter in its precedent KKO 1995:81. A developer had sued a contractor for breach of contract. The Supreme Court dismissed the claim as premature because a final inspection, as prescribed by the General Conditions for Building Contracts, had not been performed. Finnish legal scholars have interpreted that the final inspection in fact formed an agreed first step of a multi-tier dispute resolution clause and, consequently, ignoring it led to the rejection of the claim as premature. Accordingly, it can be argued that litigation cannot be commenced before all agreed pre-trial steps have been taken.
The situation is somewhat different, however, if arbitration has been agreed as the final step. Judges exercise public authority. By contrast, arbitrators derive their authority from the arbitration agreement. The parties themselves determine the limits of the jurisdiction of the arbitrators in the arbitration agreement. Finnish legal scholars have argued that, if an agreed pre-arbitral step has not been taken, the arbitration agreement has not yet become effective. According to this view, arbitrators lack jurisdiction until all agreed pre-arbitral steps have been performed. Pursuant to Section 41 of the Finnish Arbitration Act, an arbitral award can be set aside if arbitrators have exceeded their jurisdiction.
Although the Finnish Arbitration Act is silent on the issue of stay of arbitration proceedings, it does prescribe on a general level that arbitrators have the authority to decide on the procedure. Consequently, and because arbitration as a form of “private” administration of justice should not have a better position than public administration of justice by the courts, it has been argued that an arbitral tribunal should order a stay of the proceedings until all agreed pre-arbitration steps have been taken.
It is not always clear whether the pre-trial or pre-arbitration steps prescribed by a multi-tier dispute resolution clause bind the contracting parties. When determining this, one should consider, in addition to the above-referenced differences between litigation and arbitration, whether the agreed steps were intended as mandatory and whether the party who invokes that they are mandatory is in good faith.
The wording of multi-tier dispute resolution clauses can be very broad like “the parties endeavor to solve disputes by way of negotiations” and, accordingly, only reflect the common intent of the parties in a non-binding way. The wording can also be very precise. For example, a multi-tier dispute resolution clause can provide that the parties shall negotiate or mediate for a certain period of time or until a certain event has occurred. The wording of the multi-tier dispute resolution clause is important when interpreting whether it is binding in all respects, but there is room for interpretation as the used wordings and their meanings are not entirely established.
If a mandatory agreed pre-trial or pre-arbitration step has not been taken, it may be necessary to examine, whether the party who invokes that the step was mandatory is in good faith. Whether a party who is in bad faith can use multi-tier dispute resolution clauses as a dilatory tactic to delay the procedure is an interesting question. To our knowledge, this question has not yet been addressed by Finnish courts. The Swiss Supreme Court has in many of its decisions stated that a party who is in bad faith cannot effectively invoke the failure to perform even a mandatory agreed pre-arbitration step. As protection of good faith is a fundamental legal principle also in the Finnish legal system, Finnish courts are, in our view, likely to draw similar conclusions.
Just like all dispute resolution clauses, multi-tier dispute resolution clauses should be drafted carefully. They may significantly affect, for example, the timing of a trial or arbitration. The parties should clearly prescribe in the multi-tier dispute resolution clause whether they intend the pre-trial or pre-arbitration steps to be mandatory or optional. We also recommend that the parties clearly prescribe time limit for the performance of the pre-trial or pre-arbitration steps as well as an exact point in time when arbitration or litigation proceedings can be initiated.