Multi-tiered Dispute Resolution Clauses


1. What are the current challenges to enforcement of multi-tiered dispute resolution clauses?

Russian legislation requires some types of disputes to be negotiated on a mandatory basis before they can be referred to the state courts, notwithstanding the agreement on this by the parties (disputes on termination of the contracts, carrier’s disputes, etc.). For avoidance of the doubt, the following article does not cover these types of disputes and contains information about non-regulated types of disputes.

MTDR clauses in the contracts in Russia can be divided into two basic groups:

  • Simple clauses containing a basic agreement “to negotiate” all disputes;
  • Complicated clauses with a description of several stages of dispute resolution. 

Simple clauses in most cases are deemed by Russian courts as non mandatory. However, there is no unanimity on this issue between judges; therefore, enforceability of such clauses is usually decided on a case-by-case basis.

Complicated clauses, if properly drafted, can be enforceable. Exceptions are unilateral option clauses which are declared void by Russian courts. The Supreme Court of the Russian Federation has recently offered amendments into Russian procedural law requiring as mandatory 30-day period for settlement of a dispute prior to filing a complaint with the court, unless the parties agree otherwise. Currently these amendments have not been implemented.

1.1. Court decisions on simple clauses.

Simple MTDR clauses usually state that the parties agree to negotiate all disputes and refer disputes to the court only in case where negotiations were unsuccessful. The Supreme Court of the Russian Federation has not provided its opinion on the enforceability of such clauses. State courts interpret such clauses differently. In most cases courts find such clauses non-mandatory.  

For example, Federal Arbitrazh Court of Moscow Region in its ruling dated 19 November 2009 case number KG-A41/11910-091 provided the following reasoning: “the argument of the cassator about non-performance by the claimant of the negotiations’ procedure should be rejected, because negotiations’ procedure can be deemed set up only in case the agreement contains certain requirements to the form of the request for negotiations and also procedure and terms of sending and considering such request. Other pre-trial procedure can be deemed set up, if the agreement contains precise information about this procedure. Reference to negotiations to settle disputes cannot be deemed as mandatory pre-trial procedure of settling disputes”. [Free translation from Russian language.]

The same reasoning can be found in rulings of the Federal Arbitrazh Court of Moscow Region dated 11 January 2010 case number KG-A41/14299-092, Federal Arbitrazh Court of North-West Region dated 25 March 2010 case number A56-20175/20093, Federal Arbitrazh Court of NorthWest Region dated 22 January 2013 case number A56-72260/20114.

However, in some cases similar clauses are interpreted by courts as mandatory (see, for example, rulings of the Federal Arbitrazh Court of Volgo-Vyatskiy region dated 23 September 2009 case number А29-10718/20085, Federal Arbitrazh Court of East-Siberian Region dated 19 March 2012 case number A58-2092/20116).

Accordingly, enforceability of simple MTDR clauses depends a lot on the opinion of the particular judge and can not be foreseen with certainty. Therefore, even when the clause appears to be non-mandatory it is recommended to try to settle the dispute by negotiations.

It is worth mentioning that Russian courts also interpret differently what pre-trial actions will be deemed sufficient prerequisite to filing a claim with the court where the agreement lacks precise procedures and contains the basic principle “to negotiate disputes”.

Analysis of the court precedents allows us to provide the following recommendations:

(i) The request for negotiations should be in writing;
(ii) The request for negotiations should contain (a) facts of a dispute, (b) specific demands, (c) legal grounds of such demands, (d) reference to a particular agreement (especially if there are several agreements between the parties), (e) calculation of the claim, (d) other information necessary for the effective settlement of a dispute;
(iii) There must be a proof of receipt of the request for negotiations by the empowered person.

1.2. Court decisions on complicated clauses.

Complicated MTDR clauses, if properly drafted and not related to disputes under the special jurisdiction of Russian state courts, are valid and binding under Russian law based on the principle of freedom of contract (article 421 of the Civil code of the Russian Federation). Exceptions to the general rule are clauses which provide a different amount of rights to the parties of the contract, so called “unilateral option clauses”.

In the Sony Ericson case the Supreme Commercial Court of the Russian Federation analyzed a clause that stipulated that disputes between the parties were to be settled by the ICC and at the same time one of the parties had a right to refer disputes to the national courts (ruling dated 19 June 2012 case number 1831/127).

As a result of such analysis, the Supreme Commercial Court formulated the following rule:

“Based on common principles of protection of civil rights, dispute resolution agreement can not grant the right to file a complaint to a competent state court only to one party (seller) and can not deprive the other party of such right. In case of conclusion of such agreement, it is void as violating of the balance of rights of the parties. Therefore, the party who’s right is violated by such dispute resolution agreement, also has a right to file a complaint to a competent state court, performing guaranteed right for court defense in conditions equal with its counteragent’ ” [Free translation from Russian language.]

Legal authors have different views on this precedent; some of them criticized the position of the Supreme Commercial Court finding the clause completely void. However, if the contract involves a Russian party, it is better not to implement a unilateral option clause.

1.3. Proposed amendments to procedural legislation.

The Supreme Court of the Russian Federation has proposed amendments to procedural law under which, unless it is stipulated by the law or by agreement by the parties, all disputes (excluding some specific disputes, corporate disputes and class actions) would be subject to mandatory negotiation before being referred to a court (draft law number 638178-6). The obligatory negotiation period is 30 days.

Though these amendments have not been implemented so far, it is worth taking them into account.

2. What drafting might increase the chances of enforcement in your jurisdiction?

Most litigation lawyers in Russia consider that MTDR clauses usually do not help resolve disputes, but rather create obstacles for filing claims with the court. If parties are ready to use mediation or conciliation, it is not necessary to have obligatory clauses in the contract. If one of the parties does not intend to resolve a dispute quickly, MTDR clauses provide an opportunity to make dispute resolution more complicated and longer.

However, if including MTDR clause is inevitable, the general rule for drafting a MTDR clause is to make the procedure as clear and concise as possible. Recommendations can be the following:
(i) To make the MTDR clause in writing and in one contract;
(ii) To specify that prior stages are “conditions precedent” to litigation or arbitration;
(iii) To use mandatory language (e.g., “shall” or “must” negotiate or mediate) as opposed to discretionary language (“may” or “should”);
(iv) To specify deadlines and time limits for each of the prior stages (not forgetting to take into account short statutory limitations periods);
(v) To specify, if necessary, a particular dispute resolution institution;
(vi) To specify consequences for failure to undertake the prior stages;
(vii) To specify what actions constitute “bad faith” behavior of the other party granting the claimant the right to skip the next procedures and file a claim to the court.

3. If your courts have enforced such clauses, how have they done so?

If Russian courts find MTDR clauses binding, they leave the claim without consideration with no limitation on the claimant’s right to file a claim again after fulfilling the MTDR clause requirements under the contract (article 148 of Arbitration procedural Code of the Russian Federation, article 222 of Civil procedural code of the Russian Federation).

The decision of the court to leave the claim without consideration can be crucial in cases when a statutory limitation period is close to expiration; therefore, it is better to negotiate, at least formally, all disputes.

Russian law does not provide other remedies for breaching an agreement to negotiate and the party cannot recover damages which occur because of such a breach. However, if the court leaves the claim without consideration, the respondent is entitled to recover its attorney fees, though the amount of such fees covered is at the discretion of the judge and is still rather low.

4. Please give an example of a clause that has been found to be, and remains, enforceable in your jurisdiction.

The most simple, but enforceable clause can be the following: “All disputes arising out of or in connection with this agreement, including any question regarding its existence, validity or termination (‘Dispute’), shall be resolved in accordance with the procedure specified below. The parties shall endeavor to resolve any Dispute amicably by negotiation. In case of Dispute, the party must send to the other party a written request for negotiation [by means of postal office/courier/fax]. Any Dispute not resolved by negotiation within [30] days after either party requested in writing negotiation shall be settled by [Arbitrazh court of Moscow]”.

Author: Anna Grishchenkova, KIAP Moscow.

Full IBA Report

Originally published on the web site of the International Bar Association

Back to the list