General Contract Clauses: Alternative Dispute Resolution (Multi

Resource ID: w-008-4072

This Standard Clause requires the parties to resolve their disputes

by alternative dispute resolution (ADR) under Tennessee law,

including a period of negotiation and then mediation before

submitting the dispute to litigation or arbitration. This type of clause

is sometimes referred to as an escalation clause. This Standard

Clause has integrated notes with important explanations and

drafting tips.

SCOPE OF STANDARD CLAUSE

Contract parties sometimes include a

multi-tiered alternative dispute resolution

(ADR) clause, also known as an escalation

clause, that either requires or permits the

parties to pursue some form of non-binding

ADR mechanism, such as mediation, before

embarking on the binding mechanism

(arbitration or litigation) they have chosen.

These clauses usually require the parties to:

 Negotiate among themselves at the

operations level to resolve any dispute.

 Submit the dispute to negotiations at the

designated senior executive level if the

parties cannot resolve the dispute at the

operations level.

 Submit the dispute to mediation if the

parties cannot amicably resolve the

dispute by negotiations.

 Submit the dispute to either litigation or

arbitration if the parties:

z

choose to continue the dispute; and

z

cannot resolve the dispute by

mediation.

ADVANTAGES AND DISADVANTAGES

OF MULTI-TIERED DISPUTE

RESOLUTION CLAUSES

There are potential advantages and

disadvantages in including a multi-tiered

dispute resolution clause in a commercial

contract. A properly drafted multi-tiered

ADR clause can:

 Provide the parties with the opportunity

to resolve disputes first in a forum that is:

z

private; and

z

less adversarial than arbitration or

litigation.

 Preserve ongoing commercial

relationships.

 Save significant amounts of time and

expense if the parties reach an amicable

settlement to avoid the cost, expense, and

negative publicity of litigation or arbitration.

However, a multi-tiered ADR clause can also:

 Allow contract parties to defer their

obligations by delaying the ultimate

binding resolution of the dispute.

DRAFTING NOTE: READ THIS BEFORE USING DOCUMENT

PRACTICAL LAW COMMERCIAL TRANSACTIONS, WITH MATTHEW MULQUEEN AND NICK

MARGELLO, BAKER, DONELSON, BEARMAN, CALDWELL & BERKOWITZ, PC

General Contract Clauses: Alternative

Dispute Resolution (Multi-Tiered) (TN)

Search the Resource ID numbers in blue on Westlaw for more.

General Contract Clauses: Alternative Dispute Resolution (Multi-Tiered) (TN)

 Increase the cost of resolving the dispute

if the mediation does not result in a

settlement because the parties incur

attorneys’ and mediation fees.

ENFORCEABILITY AND DRAFTING

CONSIDERATIONS

While there is not a lot of case law on this

point, including in Tennessee, most courts

in the US generally enforce multi-tiered

ADR clauses if they clearly express the

preliminary negotiations and mediation

as conditions precedent to the right to

escalate the dispute to litigation (see RCR

Bldg. Corp. v. Pinnacle Hospitality Partners,

2012 WL 5830587, at *13 (Tenn. Ct. App.

Nov. 15, 2013) (relying on a party’s failure

to satisfy the condition precedent as a

bar to recovery)). Where the final stage is

arbitration, rather than litigation, courts

generally refer the issue of satisfaction

of the condition precedent to arbitrators

(see Restatement (Third) of U.S. Law of

Int’l Comm. Arb. § 2-18 TD No 4 (2015)

(discussing US law)).

In the absence of clear language, Tennessee

courts generally disfavor conditions

precedent (see Harlan v. Hardaway, 796

S.W.2d 953, 957-58 (Tenn. Ct. App. 1990)).

For example, if the court examines a clause

and determines that there is another

reasonable interpretation, it views the clause

as a covenant, not a condition precedent,

to avoid any forfeiture (Law v. Bioheart, Inc.,

2009 WL 693149, at *14 (W.D. Tenn. Mar.

13, 2009) (citing Harlan, 796 S.W.2d at

957-58)).

Although no particular language is

mandatory, Tennessee courts look to the

terms of the clause to see if the parties used

conditional terms, such as:

 ”If.”

 ”Provided that.”

 ”When”.”

 ”After.”

 ”As soon as.”

 ”Subject to.”

(Harlan, 796 S.W. 2d at 958.)

When drafting a multi-tiered ADR procedure

clause, the parties should:

 State that they intend for the negotiation

and mediation steps to be preconditions

to litigation or arbitration. Without

express language, a party risks that the

other party may successfully attempt to

commence arbitration or litigation without

taking the preliminary steps.

 Consider to which person within their

respective organizations the dispute

should be referred, because negotiations

are most likely to be successful when the

individuals in question:

z

are familiar with and have responsibility

for the products or services that are the

subject of the dispute; and

z

have sufficient authority within the

organization to make the decisions

necessary to resolve or escalate the

matter or dispute.

 Set a timetable for the informal phases of

the procedure to prevent the parties from

deliberately delaying any resolution.

 Clearly state the scope, application,

and terms of any dispute resolution

mechanism.

 Consider whether:

z

the dispute resolution clause should

apply to all disputes or whether any

carve-outs are needed;

z

the dispute resolution clause should

apply when a claim arises under a

separate contract between the same

parties related to a similar subject; and

z

the provisions relating to the timing

of negotiations and mediation are

realistic.

 Consider including terms tolling the

running of any statute of limitations for

the disputed claim during the pre-suit

negotiation or meditation process.

Tennessee Alternative Dispute Resolution

Statutes and Rules

In Tennessee, ADR is governed by:

 The Rules of the Supreme Court,

specifically Rule 31 (TN R S CT Rule 31, § 1).

This rule:

z

authorizes judges to order the parties of

many types of civil actions to participate

in ADR, including mediation and non-

binding arbitration; and

General Contract Clauses: Alternative Dispute Resolution (Multi-Tiered) (TN)

z

generally only applies to court-ordered

ADR proceedings and does not govern

private, contractually agreed-upon

provisions for arbitration (Glassman,

Edwards, Wyatt, Tuttle & Cox, P.C. v. Wade,

404 S.W.3d 464, 468 (Tenn. 2013)).

 The Tennessee Uniform Arbitration

Act (TUAA) (T.C.A. § 29-5-301 et seq.),

which covers most private arbitration

agreements. The TUAA:

z

is comprehensive, addressing most

issues concerning an arbitration,

including venue selection, enforcing

agreements, hearings, awards,

judgments, and appeals; and

z

provides that arbitration agreements

are generally enforceable unless

grounds for their revocation exist

in equity or in contract law (see

Buraczynski v. Eyring, 919 S.W.2d

314, 318 (Tenn. 1996); also see T.C.A.

§29-5-302(a)).

For application of the overlap between the

Federal Arbitration Act (FAA) and state

arbitration law, see Practice Notes:

 Understanding US Arbitration Law: State

Arbitration Law (4-500-4468).

 Arbitration Procedures and Practice in

the United States: Overview: Applicable

Legislation (0-502-1714).

ASSUMPTIONS USED IN THE

STANDARD CLAUSE

This Standard Clause assumes that:

 The agreement contains a separate

provision relating to litigation or

arbitration. This Standard Clause creates

the framework for alternative dispute

resolution methods the parties must

employ before they resort to litigation

or arbitration under a separate provision

referred to in Section 4 of this Standard

Clause.

 The parties have selected either

arbitration or litigation as a means to

resolve their disputes if the negotiations

and mediation do not result in a

settlement. Arbitration can either be

ad hoc arbitration or administered

arbitration. For an analysis of the

advantages and disadvantages of ad

hoc versus institutional arbitration,

see Practice Note, Ad hoc Arbitrations

Without Institutional Support

(8-204-1373). Many ADR organizations,

such as the American Arbitration

Association (AAA), recommend that the

parties use the organization’s alternative

dispute resolution provision if the parties

want to try to settle disputes by mediation

and/or arbitration administered by those

organizations.

 The parties to the agreement are US

entities and the transaction takes place

in the US. If any party is organized or

operates in, or any part of the transaction

takes place in a foreign jurisdiction, these

terms may have to be modified to comply

with applicable laws in the relevant

foreign jurisdiction.

 The agreement is governed by

Tennessee law. If the law of another

state applies, these terms may have to be

modified to comply with the laws of the

applicable jurisdiction.

 These terms are being used in a

business-to-business transaction. This

Standard Clause should not be used in

a consumer contract, which may involve

legal and regulatory requirements and

practical considerations that are beyond

the scope of this resource.

 These terms are not industry-specific.

This Standard Clause does not account

for any industry-specific laws, rules, or

regulations that may apply to certain

transactions, products, or services.

 Capitalized terms are defined elsewhere

in the agreement. Certain terms are

capitalized but not defined in this

Standard Clause because they are defined

elsewhere in the agreement (for example,

Agreement).

BRACKETED ITEMS

Bracketed items in ALL CAPS should be

completed with the facts of the transaction.

Bracketed items in sentence case are either

optional provisions or include alternative

language choices to be selected, added, or

deleted at the drafter’s discretion.

General Contract Clauses: Alternative Dispute Resolution (Multi-Tiered) (TN)

1. Exclusive Dispute Resolution Mechanism. The parties shall resolve any dispute, controversy, or

claim arising out of or relating to this Agreement, or the breach, termination, or invalidity hereof

(each, a “Dispute”), under the provisions of Sections [NUMBER] through [NUMBER]. The procedures

set forth in Sections [NUMBER] through [NUMBER] shall be the exclusive mechanism for resolving

any Dispute that may arise from time to time, and Section[s] [NUMBER][ through [NUMBER]] [is an/

are] express condition[s] precedent to [litigation/binding arbitration] of the Dispute.

2. Negotiations. A party shall send written notice to the other party of any Dispute (”Dispute

Notice”). The parties shall first attempt in good faith to resolve any Dispute set forth in the

Dispute Notice by negotiation and consultation between themselves, including without limitation

not fewer than [NUMBER] negotiation sessions [attended by the [TITLE/ROLE] for [NAME OF

PARTY] and by the [TITLE/ROLE] for the [NAME OF OTHER PARTY]]. In the event that such

Dispute is not resolved on an informal basis within [NUMBER] Business Days after one party

delivers the Dispute Notice to the other party, whether the negotiation sessions take place or

not, either party may, by written notice to the other party (”Escalation to Executive Notice”),

refer such Dispute to the executives of each party set out below (or to such other person of

equivalent or superior position designated by such party in a written notice to the other party)

(”Executive(s)”).

Executive of [NAME OF PARTY]: [EXECUTIVE NAME], [TITLE]

[ADDRESS]

[Email: [EMAIL ADDRESS]]

Executive of [NAME OF OTHER PARTY]: [EXECUTIVE NAME], [TITLE]

[ADDRESS]

[Email: [EMAIL ADDRESS]]

This provision encourages the resolution

of potential disputes without litigation

or arbitration by requiring the parties to

engage in the exclusive ADR mechanism set

out in this Standard Clause before resorting

to a binding mechanism like arbitration or

litigation. As the exclusive dispute resolution

mechanism, the parties must take these

steps to resolve any dispute in the following

order, as described below in Sections 2, 3,

and 4:

 Party-to-party negotiation. The parties

must first attempt to resolve the dispute

at the operational level before escalating

the dispute to the executive level.

 Escalation to executive level

negotiation. If operational level

negotiations do not result in a resolution,

the parties can escalate the negotiations

to executives who may be:

z

better positioned to evaluate the

dispute within the bigger picture of the

parties’ overall business arrangement;

and

z

more removed and therefore more

objective about the incident triggering

the dispute.

 Escalation to mediation. If executive level

negotiations do not result in a resolution,

the parties can escalate the dispute to

mediation under Section 3.

 Escalation to litigation or arbitration.

If the mediation does not result in a

resolution, the parties can submit the

dispute to litigation or arbitration. This

Standard Clause mandates an exclusive

dispute resolution sequence so the parties

cannot commence a lawsuit or arbitration

until they have attempted to resolve the

dispute by negotiations and mediation.

DRAFTING NOTE: EXCLUSIVE DISPUTE RESOLUTION MECHANISM

General Contract Clauses: Alternative Dispute Resolution (Multi-Tiered) (TN)

For purposes of clarification, the party sending the Dispute Notice and the Escalation to Executive

Notice shall send such notices in compliance with this Agreement’s notice provisions (Section

[NUMBER]), provided that the party sending an Escalation to Executive Notice shall also send a

copy of such notice to the executives designated above.

If the Executives cannot resolve any Dispute during the time period ending [NUMBER] [days/

Business Days] after the date of the Escalation to Executive Notice (the last day of such time

period, the “Escalation to Mediation Date”), either party may initiate mediation under Section 3.

This provision requires that the parties

attempt in good faith to resolve any dispute

by negotiation and consultation between

themselves. While Tennessee courts have

not directly addressed this issue, some

courts only enforce agreements to negotiate

in “good faith” or using “best efforts” where

the agreement provides definite, objective

guidelines for determining whether a

sufficient negotiation took place (see, for

example, Jillcy Film Enterprises, Inc. v. Home

Box Office, Inc., 593 F. Supp. 515, 520-21

(S.D.N.Y. 1984)).

Tennessee courts have not directly

addressed the precise contours of an

agreement to negotiate in “good faith”

or using “best efforts.” Nevertheless,

definitive, objective guidelines should be

used to provide clarity regarding the parties

obligations (see Wholesale Tape & Supply

Co. v. iCode, Inc., 2005 WL 3535148, at *2-3

(E.D. Tenn. Dec. 22, 2005); see also Kendel

v. Ctr. for Urological Treatment & Research,

P.C., 2002 WL 598567, at *5 (Tenn. Ct. App.

Apr. 17, 2002) (noting the lack of clarity

regarding the enforcement of agreements

to “negotiate in good faith” and concluding

that Tennessee courts would recognize a

cause of action based on such a provision,

the defendants did not breached their duty)).

Therefore, this provision specifies the

required number of negotiation sessions and

the limited duration of the initial negotiation.

This provision also contemplates that the

parties send two notices, including:

 A dispute notice to initiate operational

level negotiations.

 A special notice to escalate the

negotiations to the executive level.

The parties should ensure that there are no

notice-related requirements set out in this

Standard Clause that are inconsistent with the

contract’s general notice provision regarding:

 The effective dates of notices dispatched

under the agreement, for example,

whether notice is effective on dispatch or

receipt.

 The method of notice, whether by

US mail, email, or other method. For

example, the parties should ensure that

the types of addresses set out in the table

above are consistent with the types set

out in the notice provision.

 What constitutes the delivery or receipt of

a notice.

For a sample notice provision, see Standard

Clause, General Contract Clauses: Notice

(6-533-1025).

The parties should avoid naming individuals

in this provision if possible. It is better

to refer to their function (for example,

purchasing manager) in case the individual

concerned leaves the company.

This provision sets a deadline (the escalation

to mediation date) to resolve the dispute by

executive negotiations to set a clear point of

transition to allow the parties to:

 Mediate under Section 3.

 Commence formal binding proceedings

under either litigation or ad hoc

arbitration under Section 4 if mediation is

unsuccessful.

For additional information on the key dates

and time periods related to a multi-tiered

alternative dispute resolution clause,

see Alternative Dispute Resolution: Key

Escalation Dates Timeline (6-568-6587).

The parties may wish to specify the

personnel expected to attend the sessions

and to provide for how many negotiation

sessions must be had before a party

may escalate to mediation, including the

minimum number of negotiation sessions

for the Executives.

DRAFTING NOTE: NEGOTIATIONS

General Contract Clauses: Alternative Dispute Resolution (Multi-Tiered) (TN)

3. Mediation.

3.1 Subject to Section 2, the parties may, at any time after the Escalation to Mediation Date,

submit the Dispute to any mutually agreed to mediation service for mediation by providing

to the mediation service a joint, written request for mediation, setting forth the subject of the

dispute and the relief requested. The parties shall cooperate with one another in selecting

a mediation service, and shall cooperate with the mediation service and with one another

in selecting a neutral mediator and in scheduling the mediation proceedings. The parties

covenant that they will use commercially reasonable efforts in participating in the mediation.

The parties agree that the mediator’s fees and expenses and the costs incidental to the

mediation will be shared equally between the parties.

Mediation is a flexible, non-binding form of

ADR in which a neutral third party helps the

parties work toward a negotiated settlement

of their dispute. The neutral third party

conducts discussions among the disputing

parties to help them reach a mutually

acceptable agreement among themselves

on all or any part of the issues in dispute

(TN R S CT Rule 31, § 2(j); see also Ledbetter

v. Ledbetter, 163 S.W.3d 681, 685 (Tenn.

2005)).

If the parties agree to settle the dispute,

they usually enter into a settlement

agreement to:

 Memorialize the terms for resolving

the dispute, including setting out the

consideration for the settlement, such

as by the exchange of money, goods, or

services.

 Release each party from further liability

related to the dispute.

 Require that the parties take action to

withdraw or dismiss any claims or court

filings related to the dispute. While

under certain circumstances the plaintiff

may voluntarily dismiss a case after

settlement, generally the settlement

agreement should specify that the parties

will file a stipulation of dismissal (signed

by all affected parties) with the court,

which specifies whether the dismissal

is with or without prejudice. The parties

should also review the procedural rules,

the court’s local rules, and governing

statutes to determine if any additional

steps are necessary to voluntarily dismiss

the case.

For a sample settlement agreement, see

Standard Document, Settlement Agreement

and Release (2-503-1929). For more

information about mediation, see Mediation

Toolkit (1-505-0918).

DRAFTING NOTE: MEDIATION

3.2 The parties further agree that all offers, promises, conduct, and statements, whether oral

or written, made in the course of the mediation by any of the parties, their agents, employees,

experts, and attorneys, and by the mediator and any employees of the mediation service, are

confidential, privileged, and inadmissible for any purpose, including impeachment, in any

litigation, arbitration, or other proceeding involving the parties, provided that evidence that is

otherwise admissible or discoverable shall not be rendered inadmissible or non-discoverable as

a result of its use in the mediation.

General Contract Clauses: Alternative Dispute Resolution (Multi-Tiered) (TN)

4. Litigation or Arbitration as a Final Resort. If the Parties cannot resolve any Dispute for any

reason, including, but not limited to, the failure of either party to agree to enter into mediation or

agree to any settlement proposed by the mediator, within [NUMBER] [days/Business Days] after

the Escalation to Mediation Date, either Party may [file suit in a court of competent jurisdiction/

commence binding arbitration] in accordance with the provisions of [CHOICE OF FORUM

PROVISION/ARBITRATION PROVISION].

Sometimes, the need for transparency

during mediation may lead a party

to voluntarily reveal confidential

communications or documents to the

mediator and the other mediating party

that otherwise would be protected by the

attorney-client privilege, work product

doctrine, or some other recognized privilege

or protection.

Tennessee, like many states, has recognized

the need for mediation privilege. For

example, conduct and statements made

(with certain exceptions) during the

course of any court-ordered ADR are

inadmissible (TN R S CT Rule 31, § 7).

Additionally, neutrals in all court-ordered

ADR proceedings are bound by certain

confidentiality restrictions (TN R S CT Rule

31, § 10(d)). The TUAA, however, which

covers most private arbitration agreements,

does not contain a mediation privilege.

The only other provision under Tennessee

law applicable to commercial contract

proceedings is found in the Rules of

Evidence, which generally prohibits or

otherwise limits the discoverability or

admissibility of statements made during

compromise negotiations (which presumably

includes mediation proceedings) (Tenn. R.

Evid. 408; see also Ledbetter, 163 S.W.3d at

686).

The parties can include Section 3.2 to

clearly evidence their intention to protect

communications and disclosure of

documents made during mediation.

Because mediation is a non-binding dispute

resolution method, neither the mediator nor

any party can force any other party to:

 Agree to any settlement proposed by the

mediator.

 Enter into mediation in the first place. A

court, however, has the authority to order

the parties to certain ADR proceedings

(TN R S CT Rule 31, § 1).

Therefore, Section 4 allows the parties to

escalate the dispute by filing a lawsuit or

commencing ad hoc arbitration if the parties

fail to resolve the dispute by the specified

deadline, whether the failure is caused by:

 Any party refusing or otherwise failing

to participate in negotiations or the

mediation.

 The mediation otherwise failing to

produce a resolution to the dispute.

If a party files suit before complying with the

ADR requirements under the agreement,

that party may waive the right to later invoke

the ADR procedures under the agreement

(see S. Sys., Inc. v. Torrid Oven Ltd., 105

F. Supp. 2d 848, 854 (W.D. Tenn. 2000)

(discussing waiver of the right to arbitration

for failure to follow procedures set out in a

contract)).

For a sample choice of forum clause, see

Standard Clause, General Contract Clauses:

Choice of Forum (TN) (W-000-2783). For

an overview of the choice of law and choice

of forum issues the parties should consider

when drafting contracts, see Practice

DRAFTING NOTE: MEDIATION CONFIDENTIALITY

DRAFTING NOTE: LITIGATION OR ARBITRATION AS A FINAL RESORT

General Contract Clauses: Alternative Dispute Resolution (Multi-Tiered) (TN)

ABOUT PRACTICAL LAW

Practical Law provides legal know-how that gives lawyers a better starting

point. Our expert team of attorney editors creates and maintains thousands of

up-to-date, practical resources across all major practice areas. We go beyond

primary law and traditional legal research to give you the resources needed to

practice more efﬁciently, improve client service and add more value.

If you are not currently a subscriber, we invite you to take a trial of our online

services at legalsolutions.com/practical-law. For more information or to

schedule training, call 1-800-733-2889 or e-mail referenceattorneys@tr.com.

and Privacy Policy (https://a.next.westlaw.com/Privacy).

02-18

Note, Choice of Law and Choice of Forum:

Key Issues (7-509-6876) and Drafting

Contractual Dispute Provisions Toolkit (TN)

(W-012-2401).

If the parties wish to select arbitration,

they should include an arbitration clause

in their agreement instead of a choice of

forum clause. For more information about

arbitration clauses, see:

 US Arbitration Toolkit (5-503-6770).

 Practice Note, Drafting Arbitration

Agreements Calling for Arbitration in the

US (2-500-4624).

 Clauses for the AAA, ICDR, ICC, and

UNCITRAL Arbitration (6-502-3569).

 US: ad hoc Arbitration Clause

(5-519-2015).

For a comparison between arbitration versus

litigation, see Practice Note, Arbitration vs.

Litigation in the US (W-006-5897).