In commercial agreements, disputes are sometimes inevitable. Whether caused by differing interpretations of contract terms, delays, or breaches, a dispute can disrupt business operations and damage relationships. One important tool to manage this risk is a pre-arbitration clause — a provision in a contract that requires the parties to attempt certain dispute resolution steps before proceeding to arbitration.
Our article will explain what a pre-arbitration clause is, how to draft it, and why it is essential for commercial contracts.
1. What is a Pre-Arbitration Clause?
A pre-arbitration clause (also called a “multi-tier” or “escalation” dispute resolution clause) sets out a process the parties must follow before commencing formal arbitration proceedings.
These steps often include:
a. Negotiation – Representatives from each party meet to discuss and try to resolve the dispute amicably.
b. Mediation – An independent mediator assists the parties in finding a mutually acceptable solution.
c. Time Limits – A fixed period (e.g., 30–60 days) for each stage to avoid unnecessary delays.
Only if these steps fail may the parties proceed to arbitration.
2. Importance of a Pre-Arbitration Clause
Including a pre-arbitration clause in a commercial contract offers several advantages:
a. Preserves Business Relationships
Negotiation or mediation encourages open communication and allows the parties to resolve disputes without the adversarial nature of arbitration. This is especially important where the parties have ongoing business dealings.
b. Saves Time and Costs
Arbitration, while faster than court litigation, can still be costly. Pre-arbitration steps may lead to an early settlement, avoiding the need for lengthy proceedings.
c. Creates a Clear Dispute Resolution Path
Having a defined, contractual roadmap reduces uncertainty and prevents premature arbitration filings.
d. Strengthens Enforceability of Arbitration
Many jurisdictions require that procedural steps agreed in the contract are followed before arbitration. Failing to do so can result in delays or challenges to the arbitral award.
3. Key Elements in Drafting a Pre-Arbitration Clause
When drafting, the clause should be clear, enforceable, and practical. Consider including:
a. Scope of Disputes Covered
Define whether the clause applies to all disputes arising from the contract or only certain types.
b. Stages and Procedures
- Negotiation: Specify who will represent each party and the timeframe (e.g., 30 days) to reach an amicable settlement.
- Mediation: Identify whether mediation will be ad hoc or institutional (e.g., under the rules of the Singapore Mediation Centre or ICC Mediation Rules).
c. Timeframes
Include deadlines for each stage to prevent delays.
d. Institution and Rules for Arbitration
If pre-arbitration steps fail, clearly identify:
- The arbitration institution (e.g., SIAC, ICC, BIAMC, BANI)
- Seat/place of arbitration
- Language of proceedings
- Applicable law
d. Compliance Requirement
State that compliance with pre-arbitration steps is a condition precedent to commencing arbitration.
4. Sample Pre-Arbitration Clause
“In the event of any dispute, controversy, or claim arising out of or in connection with this Agreement, the Parties shall first attempt to resolve the matter amicably through good faith negotiations between their respective senior representatives. If the dispute is not resolved within thirty (30) days from the commencement of such negotiations, the Parties agree to submit the dispute to mediation under the Bali International Mediation and Arbitration Center (“BIAMC”) Rules, which rules are deemed incorporated by reference into this clause. If the dispute is not resolved by mediation within forty-five (45) days from its commencement, the dispute shall be finally settled by arbitration in accordance with the BIAMC Rules, by [one/three] arbitrator(s) appointed in accordance with those Rules. The seat of arbitration shall be [Bali, Indonesia], the language of arbitration shall be [English], and the governing law of the contract shall be [Indonesia]. Compliance with the negotiation and mediation steps under this clause shall be a condition precedent to the commencement of arbitration.”
5. How Pre-Arbitration Clauses are Treated Under Indonesian Law
In Indonesia, arbitration is governed by Law No. 30 of 1999 on Arbitration and Alternative Dispute Resolution. The law recognises and supports multi-tier dispute resolution clauses, including pre-arbitration steps such as negotiation and mediation, as long as they are clearly stated in writing and agreed by both parties.
Key points under Indonesian law:
a. Mandatory Fulfilment of Agreed Steps
- If the contract specifies that negotiation or mediation is a condition precedent to arbitration, Indonesian arbitral tribunals may require proof that these steps have been attempted before accepting jurisdiction.
- Failing to comply could result in procedural objections or dismissal of the arbitration until the steps are completed.
b. Alignment with Law No. 30 of 1999
- Article 6 of the law encourages parties to attempt settlement through consultation or mediation before arbitration.
- This reflects the principle that arbitration is a “last resort” once amicable settlement methods fail.
c. Flexibility in Process
- Indonesian law does not impose a rigid format for pre-arbitration procedures. Parties are free to choose the method, institution, time limits, and scope, as long as it does not contradict mandatory legal provisions.
d. Judicial Respect for Multi-Tier Clauses
- Indonesian courts generally uphold valid multi-tier clauses. However, if the pre-arbitration process is ambiguous or lacks clear timelines, it may be argued that the requirement is non-binding, potentially allowing a party to proceed directly to arbitration or litigation.
e. Best Practice in Indonesia
- Clearly specify the stages, timeframes, and institutions in the clause.
- Keep records of negotiation or mediation attempts (e.g., meeting minutes, mediator’s statement) as evidence of compliance.
A well-drafted pre-arbitration clause can significantly reduce the likelihood of lengthy and expensive disputes. By requiring negotiation or mediation before arbitration, businesses can preserve commercial relationships, control costs, and ensure a smoother dispute resolution process. In Indonesia, such clauses are not only enforceable but also aligned with the legislative intent under Law No. 30 of 1999, which promotes amicable settlement before arbitration. However, clarity in drafting is critical — vague clauses can create loopholes, delay resolution, or weaken enforceability. Seeking experienced legal counsel is strongly recommended to ensure your pre-arbitration clause is both practical and legally sound in the Indonesian context.
If you, a prospective client, have further inquiries about the topic discussed above, Schinder Law Firm is one of many corporate law firms in Indonesia that has handled numerous similar matters, with many experienced and professional corporate and commercial dispute lawyers, making it one of the top consulting firms in Indonesia. Feel free to contact us at info@schinderlawfirm.com for further consultation.
Author:
Budhi Satya Makmur