Escalation clauses (or multi-tier dispute resolution clauses) are commonly found in commercial contracts. These clauses may spell out different preconditions and procedures when seeking to resolve disputes.[1]
Typically, the parties are required to attempt, within a specific time period, an amicable settlement or to enter into negotiations in order to avoid arbitration or litigation. Sometimes the parties need to participate in conciliation or mediation proceedings prior to submitting any dispute to arbitration. Hence, these clauses may combine different preconditions and levels of dispute resolution, with arbitration being the ultimate “tier” that may be reached as the last resort.[2]
Recently, the English High Court refused to set aside a partial arbitral award on the basis that the claimant in the arbitration proceeding had allegedly failed to comply with one precondition to the arbitration agreement in an escalation clause. In Republic of Sierra Leone v. SL Mining Ltd [2021] EWHC 286 (Comm), the High Court of London understood that the alleged non-fulfilment of the precondition in the arbitration agreement was a question of admissibility of the parties’ claim as opposed to a question pertaining to the arbitrators’ jurisdiction.
Jurisdiction and Admissibility in International Arbitration
Before analysing the case at hand, it is relevant to make the distinction between jurisdiction and admissibility. Put simply, jurisdiction refers to the power of the arbitral tribunal to adjudicate a case, while admissibility may refer to the appropriateness of the claim for the arbitral tribunal to exercise its jurisdiction.[3]
It is true that a decision of inadmissibility may resemble a decision on lack of jurisdiction. If the claim is inadmissible, the tribunal will not rule on the merits, at least temporarily, even if it has jurisdiction.
The consequences of a decision on admissibility and a ruling on jurisdiction are drastically different, however. A ruling on admissibility, in most instances, will not prevent the arbitral tribunal from rehearing the case once the flaw has been redressed or the precondition has been fulfilled. Often, the arbitral tribunal will stay proceedings until the parties satisfy the precondition(s) to initiate arbitration. On the other hand, if the tribunal lacks jurisdiction, it shall not hear the case, since it has no authority to adjudicate the parties’ dispute.
Another important distinction arising out of the issue of jurisdiction and admissibility in the context of international arbitration is the involvement of national courts. While admissibility issues are only for arbitral tribunals to resolve, decisions on jurisdiction may be reviewed by national courts in set aside or enforcement proceedings. Therefore, state courts may second-guess a tribunal’s ruling on jurisdiction, but not a decision on admissibility.[4]
That said, the proper classification of issues pertaining to jurisdiction or admissibility is crucial, particularly in the context of escalation clauses in arbitration proceedings.
The English Approach to Questions Involving Preconditions in Escalation Clauses in Arbitration
The English High Court in a recent decision clarified its approach regarding the fulfilment of certain preconditions to arbitration in escalation clauses. In Republic of Sierra Leone v. SL Mining Ltd, a dispute arose out of the cancelation of a mining licence agreement (“MLA”) containing a clause requiring the parties to “endeavour to reach an amicable settlement” in case of dispute. More specifically, the MLA provided:
6.9 Interpretation and Arbitration
[…]
b) The parties shall in good faith endeavour to reach an amicable settlement of all differences of opinion or disputes which may arise between them in respect to the execution performance and interpretation or termination of this [MLA], and in respect of the rights and obligations of the parties deriving therefrom.
c) In the event that the parties shall be unable to reach an amicable settlement within a period of 3 (three) months from a written notice by one party to the other specifying the nature of the dispute and seeking an amicable settlement, either party may submit the matter to the exclusive jurisdiction of a Board of 3 (three) Arbitrators who shall be appointed to carry out their mission in accordance with the International Rules of Conciliation and Arbitration of the… ICC.
Following a dispute with the government of Sierra Leone, SL Mining Ltd sent a notice of dispute on 14 July 2019. Shortly after, SL Mining Ltd filed an application to an ICC Emergency Arbitrator and obtained the relief it was seeking. A request for arbitration was then served on 30 August 2019. (On a side note, under the ICC Arbitration Rules (Appendix V: Emergency Arbitrator Rules, Article 1(6)), the parties are required to serve the request for arbitration within 10 days of the emergency relief application. Although SL Mining Ltd sought to await the three months required by clause 6.9 of the MLA, Sierra Leone did not consent to this offer, arguing that the request for arbitration should be filed in accordance with the provisions of the ICC Arbitration Rules.)
Once SL Mining Ltd commenced arbitration, Sierra Leone challenged the arbitral tribunal’s jurisdiction, arguing that SL Mining Ltd should have waited three months from the date of the notice of dispute has been sent (i.e., 14 July 2019), prior to commencing arbitration proceedings.
The arbitral tribunal issued a partial award on 6 March 2020 upholding jurisdiction over SL Mining Ltd’s claims.
Sierra Leone then filed a challenge before the High Court of Justice in London, under Section 67 of the English Arbitration Act 1996 (the “Act”), on the basis that the arbitral tribunal lacked jurisdiction to issue the partial award.
In its decision, the High Court addressed the following questions:[5]
1. Is the prematurity of the request for arbitration a question of jurisdiction to be dealt under Section 67 of the Act?
2. Subsidiarily, did Sierra Leone waive the precondition by insisting on the filing of the request for arbitration in accordance with Appendix V of the ICC Arbitration Rules?
3. What is the proper construction of clause 6.9(c) of the MLA?
4. Based on the proper construction, did SL Mining Ltd breach clause 6.9 of the MLA?
With respect to question No. 1: the High Court found that the prematurity of SL Mining Ltd’s request for arbitration was an issue pertaining to the admissibility of the claim, rather than jurisdiction.
In particular, the court pointed out that it was a common ground that there is a distinction “between a challenge that a claim was not admissible before Arbitrators (admissibility) and a challenge that the Arbitrators had no jurisdiction to hear a claim (jurisdiction). Only the latter challenge is available to a party under s 67, and interference by a court is thus limited and discouraged by s 1(c) of the 1996 Act”.[6]
Further, the court referred to several commentators noting that “the international authorities are plainly overwhelmingly in support of a case that a challenge such as the present does not go to jurisdiction”.[7]
As a matter of English law, the High Court sought to answer whether the alleged prematurity of SL Mining Ltd’s request for arbitration was a question pertaining to the substantive jurisdiction of the arbitral tribunal, as provided in Section 30(1)(c) of the Act. In doing so, the court dismissed Sierra Leona’s argument that the analysis would depend on the words of the clause in question:[8]
I do not see that there would be any difference between ‘No arbitration shall be brought unless X’ and ‘In the event of X the parties may arbitrate’. As [Sierra Leone] submitted, s 30 (1) (a) and (b) give a binary choice, and on the face of it (c) does not. The subsection could have said ‘whether [or not] the matters have been submitted to arbitration’, which might have given more support for his argument.
In conclusion, the court drew a clear distinction between issues related to admissibility as opposed to issues related to jurisdiction. In particular, the court held that “if the issue relates to whether a claim could not be brought to arbitration, the issue is ordinarily one of jurisdiction and subject to further recourse under s 67 of the 1996 Act, whereas if it relates to whether a claim should not be heard by the arbitrators at all, or at least not yet, the issue is ordinarily one of admissibility, the tribunal decision is final and s 30 (1) (c) does not apply.”[9]
With respect to question No. 2: the court accepted SL Mining Ltd’s argument that Sierra Leone had consented to filing the request for arbitration before the three-month period set forth in clause 6.9 of the MLA:[10]
With or without a stay, I am satisfied that [Sierra Leone], by insisting on service of the RFA on 30 August, consented to such service, and thereby the commencement of the Arbitration, and consequently waived the effect of the three month period (if it otherwise applied).
Therefore, even if the precondition were a question of jurisdiction, Sierra Leone’s challenge under Section 67 of the Act would have been dismissed because it had consented to the commencement of the arbitration (see Section 73 of the Act; see also Rule 40 of the ICC Arbitration Rules).
With respect to question No. 3: the court understood that clause 6.9(c) of the MLA was not “a simple time bar” to bringing proceedings.[11] Instead, the court construed the three-month period as “a window during which the parties can explore settlement, but always subject […] to earlier proceedings if the objective of amicable settlement could not be achieved.”[12]
Thus, in the court’s view, the three-month period of clause 6.9(c) was subsidiary and subject to the parties’ efforts to reach an amicable settlement:[13]
As to the difficulty of resolving the issue of inability to settle, that is what the parties have specified, and it is an issue best resolved by Arbitrators rather than by the Court (in accordance with the decision I have already reached above). It is in my judgment significant that the time scale in clause 6.9 (c) is subsidiary to the obligation to attempt an amicable settlement, set out first, in (b). I agree with the Arbitrators’ conclusion in paragraph 114 of the Award.
With respect to question No. 4: the High Court observed that, as a matter of admissibility, it was for the arbitral tribunal to decide whether the dispute could have been settled within three months, and not the court. However, it noted that based on the documents submitted by the parties, “there was not a cat’s chance in hell of an amicable settlement by 14 October”.[14]
Therefore, SL Mining Ltd did not fail to comply with clause 6.9 of the MLA.
[1] A. Jolles, Consequences of Multi-tier Arbitration Clauses: Issues of Enforcement, The International Journal of Arbitration, Mediation and Dispute Management (Vol. 72, Issue 4), p. 329.
[2] K. Berger, Law and Practice of Escalation Clauses, in W. Park (ed) Arbitration International (2006), p. 1.
[3] T. Obamuroh, Jurisdiction and admissibility: a case study, in W. Park (ed) Arbitration International (2020), p. 378.
[4] F. Santacroce, Navigating the troubled waters between jurisdiction and admissibility: an analysis of which law should govern characterization of preliminary issues in international arbitration, in W. Park (ed), Arbitration International (2017), pp. 540-541.
[5] Republic of Sierra Leone v. SL Mining Ltd [2021] EWHC 286 (Comm), para. 6.
[6] Ibid, para. 8.
[7] Ibid, para. 16.
[8] Ibid, para. 16 (emphasis added).
[9] Ibid, para. 18 (emphases added).
[10] Ibid, para. 28 (emphasis added).
[11] Ibid, para. 32.
[12] Ibid, para. 32 (emphasis added).
[13] Ibid, para. 32 (emphasis added).
[14] Ibid, para. 36.
