By James Piercy
In the realm of international business, disputes have the potential to escalate into costly legal battles. One way to prevent such escalation is to incorporate a mediation clause into your contracts. Further exposition on the merits of mediation by a judge, general counsel and a practising lawyer can be found in this article.
At times, you may want the added finality of arbitration or litigation, necessitating a tiered mediation clause. Such a clause was the subject of a Singapore High Court decision earlier this year. This article draws insights from the recent Maxx Engineering v PQ Builders case, in which the Singapore courts have shown support for the enforceability of tiered dispute resolution clauses by ordering specific performance of a mediation clause for the first time.
We will explore the legal lessons learned and advocate for tailored tiered mediation clauses, as proactive solutions for efficient dispute resolution.
What is a tiered mediation clause?
Most dispute resolution clauses used in multinational corporations can be summarised like this: “In the event of a dispute, parties agree to go to arbitration at the [name of arbitral institution].” This type of singular clause has the benefit of being very simple and incontrovertible, and thus easily enforceable.
Meanwhile, a tiered dispute clause takes the form of a chain, with each link needing to be completed before moving onto the next one. This can include reference to any dispute resolution procedure in as many steps as one wants before culminating in either arbitration or litigation, for example “informal negotiation-mediation-arbitration”.
As you shall see, the Maxx Engineering decision does have some caveats to bear in mind when writing your clause.
Maxx Engineering
The Maxx Engineering[1] case represents a key finding demonstrating the enforceability of tiered dispute resolution clauses. Historically, there has been uncertainty as to how enforceable such clauses are, considering that some lawyers argue that they represent “agreements to agree” and are thus unenforceable.
This was the case in the UK until 2014 where Emirate Trading Agency LLC v Prime Mineral Exports[2] flung the doors wide open by interpreting a clause, which stated that arbitration had to be preceded by “friendly discussion” for four weeks, as enforceable. Though the reasoning in Emirate Trading was a highly artificial one that is beyond the scope of this article, the Singapore case of Maxx Engineering provides a more stable authority that a multi-tiered mediation clause is a safe and enforceable way to cut the costs of a legal dispute being adjudicated in Singapore. This must be caveated with the fact that the clause’s wording needs to be carefully chosen to make use of this new authority.
In Maxx Engineering, the Singapore High Court considered a tiered dispute resolution clause that said the first step was “negotiations” before including the words “shall refer the dispute…to mediation” and then referring to arbitration.
The main issue surrounded the words “…prior reference of the dispute to mediation under this clause shall not be a condition precedent for its reference to arbitration by either party nor shall it affect either party’s rights to refer the dispute to arbitration…”. On the basis of this part of the clause, PQ Builders attempted to refer the dispute directly to arbitration without mediation, arguing that the latter was not a condition to proceeding with the former.
The High Court ruled that this was unlawful, that the words “shall refer” created a legal obligation to refer the dispute to mediation. The condition precedent part of the clause was construed as saying that mediation did not necessarily have to be filed or completed before arbitration, it could also be done at the same time. However, the words did not change the fact that there was a legal obligation to refer the dispute to mediation if negotiations failed.
From the court’s reasoning, we can infer an absolute requirement for an enforceable tiered mediation clause: obligatory wording. The contract’s wording must be obligatory, using words like “must” or “shall”, rather than suggestive, e.g., “shall consider” or “explore the feasibility of”. This is because the court in Maxx Engineering was keen to distinguish this case on the facts from those of Cheung Richard[3], in which the clause required that the parties “shall consider … mediation” rather than the clause in Maxx Engineering which said “shall refer”. The latter was obligatory and thus required mediation first.
When considering remedies, the court ruled in favour of specific performance rather than monetary damages on the basis of, inter alia, such a clause being non-fungible and cannot be valued in money, and also the fact that the clause offered the opportunity for the parties to settle their dispute quickly and cheaply making them both beneficiaries of it. This is a very intriguing conclusion when you consider that O. 5 r. 1 of the Singapore Rules of Court 2021 does not compel a party to use alternative dispute resolution. Parties are only under a duty to consider amicable resolution. Maxx Engineering bucks this rule due to the contractual requirement in the facts. While there will be no Singapore courts compelling ADR any time soon, this however case demonstrates that Singapore Courts, bolstered by the new Rules of Court, are increasingly supportive of the use of ADR to settle disputes outside of court.
However, one should not ignore the court’s reasoning relating to the five factors determining whether specific performance was just and equitable. In every aspect, it seems that attempting to fight an order for specific performance would have been futile on the facts. That is not to say that there could never be a fact pattern that would necessitate an award of damages over specific performance, but Maxx Engineering does show that this is a tough threshold. Thus the only guaranteed way to sidestep a mediation clause would be through drafting. From this, we can infer that a properly drafted tiered mediation clause, with obligatory language, has the potential to be fully enforceable in most cases.
In conclusion, the court not only found that the contract term was breached but also compelled the parties to mediate with each other, becoming an authority for future courts to do the same. This has the effect of strengthening tiered mediation clauses, so long as their language is obligatory and not optional.
Takeaways
Maxx Engineering, as an authoritative case, shows that Singapore courts are very willing to enforce tiered mediation clauses, and do so with specific performance. This makes the idea of tiered mediation clauses, when properly drafted, a more tempting one as such a clause in your contract would be enforced as you intended it to be. Using a tiered mediation clause ensures faster and cheaper resolutions through mediation, with the provision of arbitration or litigation in the event of no settlement. This case demonstrates a willingness by the Singapore courts to support these clauses that compel mediation.
Here is SIMC’s tiered model clause for you to adapt and use:
“The parties agree that any dispute, controversy or claim arising out of or in connection with the present contract (including any question regarding its existence, validity or termination) (the “Dispute”) shall first be referred to the Singapore International Mediation Centre for mediation in accordance with the Singapore International Mediation Centre Mediation Rules for the time being in force. If the dispute cannot be resolved through mediation within [time period – we suggest 8 weeks] after commencement of mediation at the Singapore Internatioal Mediation Centre, or within such other period as may be agreed by the parties, the parties shall submit the Dispute to … [provide other means of dispute resolution e.g. arbitration, litigation etc.]”
About the author
James Piercy is an aspiring commercial barrister. Hailing from London, United Kingdom, he has a particular interest in the field of international energy and commodities. With a stellar academic record, James graduated with first-class honors in law and explored the legal landscape through mini pupillages in several renowned UK chambers and completed an internship within the legal department of International SOS, a global leader in medical and security services. He was also awarded the prestigious Yarborough-Anderson Scholarship by Inner Temple. Currently, he is enhancing his knowledge of international commercial law and alternative dispute resolution during a stint with SIMC while simultaneously preparing for the UK Bar Exam at the Inns of Court College of Advocacy.
[1] Maxx Engineering Works Pte Ltd. v. PQ Builders Pte Ltd. [2023] SGHC 71
[2] [2014] EWHC 2104 (Comm)
[3] Cheung Teck Cheong Richard and others v LVND Investments Pte Ltd [2021] 2 SLR 890