THE EFFECTIVE USE OF STEP-UP CLAUSES PRIOR TO ARBITRATION

THE EFFECTIVE USE OF STEP-UP CLAUSES PRIOR TO ARBITRATION

Arbitration is becoming increasingly established as a dispute resolution mechanism in the Honduran business world due to its flexibility, efficiency, confidentiality, and agility. Considering these benefits, we are seeing more and more companies incorporating arbitration agreements into their contracts. However, in many cases, a series of tiered mechanisms are used to resolve disputes, which is what is known as "step clauses." Step clauses are simply dispute resolution agreements that establish different stages or procedures with the aim of obtaining a settlement or transaction prior to the initiation of arbitration. Step clauses have some advantages since, in many cases, disputes are resolved through these prior means without the need to initiate arbitration. However, the use of step clauses also entails challenges that will be addressed in this article to provide recommendations for readers.Commonly used scaling mechanisms:The mechanisms to be used in a contract are subject to the will and creativity of the parties, unless they decide to use a model clause from an institution that administers dispute resolution processes such as the International Chamber of Commerce (ICC).[1]The following are the classifications of mechanisms and examples of those commonly used by the parties:

(i)Self-composing mechanisms:These are those in which the parties, exercising their free will, resolve their disputes either directly or through the assistance of neutral third parties who facilitate dialogue. For example:

• • The direct arrangement between the parties, in which internal negotiation bodies or levels are usually established between executives of both parties.
  • Mediation.
  • Conciliation.

(ii)Heterocompositive mechanisms:These are those in which the parties submit the resolution of their disputes to third parties who are responsible for resolving them independently of the parties' independent will. For example:

• • Arbitration.
  • The dispute resolution tables orDispute Boards.

Advantages of tiered clauses:

(i)Step clauses promote efficiency by encouraging parties to engage in informal dispute resolution mechanisms before initiating arbitration. This efficiency is reflected in the prompt resolution of disputes and the avoidance of costs and delays associated with arbitration. This advantage is particularly beneficial for companies with limited resources.

(ii)Escalation clauses allow for the preservation of business relationships in an amicable manner. This prevents the deterioration of commercial ties, unlike what often occurs as a result of arbitration proceedings.

(iii)Tiered clauses provide greater flexibility in the design of the dispute resolution process. Under this premise, parties can adapt the procedure to their specific needs, selecting the appropriate mechanisms for each level or stage. This adaptability ensures that the process is aligned with the nature and complexity of the dispute, fostering more effective outcomes.

Challenges of step clauses:

(i)The choice of stepped mechanismsSelecting the most appropriate mechanisms for each level can be challenging. Parties must consider the nature of the dispute, the parties' willingness to engage in negotiation or mediation, and the potential need for expert opinions. Therefore, it is recommended that the drafting of the escalation clause be carefully considered to ensure its effectiveness.

(ii)The drafting of the tiered mechanismsThis is often the most significant challenge, as poor drafting can lead to excessive delays in the progress of the adopted escalation clauses. Likewise, poor drafting can lead to errors when exhausting a escalation clause, which will render an arbitral award invalid. For example, a simple word like "may" instead of "must" can make a significant difference in the effectiveness of a escalation clause.[2]Faced with this major challenge, it's important to always strive for clarity and confidence in your writing to fully understand when each stage begins and ends, along with its effects.

(iii)The criteria for the applicability of the staggered clauses according to the Applicable Law and Venue.The enforceability of multi-tiered clauses varies in some jurisdictions. For example, many legal systems, like ours, readily accept these provisions as long as they are clearly defined; while others may consider them a precondition, triggering access to arbitration without having exhausted the provisions. Therefore, to address this challenge, it is recommended that the parties, prior to signing the contract, carefully analyze the laws applicable to the contract, and should consider seeking legal advice to ensure the enforceability of their tiered clauses.

In conclusion, escalation clauses provide multiple advantages for companies when resolving disputes more efficiently and effectively. However, drafting a escalation clause should not be taken lightly; on the contrary, it should be considered an important negotiable element when analyzing the signing of a contract, along with the nature of the main obligation and the business nature of the companies involved. The more detailed, strict, and meticulous the clause's drafting, the greater the likelihood of compliance with its content, thus avoiding interpretation problems or conflicts regarding its meaning and effects. At Lexincorp, we have a team of expert advisors on the subject to advise you on drafting escalation clauses and on exhausting each mechanism for the effective management of the dispute resolution process.[1]For example, Model Clause D of the ICC Mediation Rules, which establishes the obligation to exhaust a mediation process and, subsequently, arbitration.[2]Award issued on ICC Case No. 10256 of August 12, 2000. In this award, the word "may" appeared in the mechanisms agreed upon prior to the arbitration, and the Arbitral Tribunal therefore determined that they were not binding. Written by: Alejandro José Cáceres Lagos