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Perhaps one of the most important aspects of a commercial contract is a dispute resolution clause that ensures that parties to a contract have an overview regarding how any dispute that arises pursuant to that contract will be settled. To a very large extent, the way and manner in which a dispute resolution clause is drafted may determine the future commercial relationship of the contracting parties, hence the need for careful attention. A multi-tier dispute resolution clause requires parties to follow a sequence of detailed dispute resolution mechanisms before resorting to other final adjudicatory processes. The clause has not only become increasingly common in commercial agreements in Nigeria but also lauded for pragmatism in promoting amicable settlement between parties and reducing the cost and time associated with a formal dispute resolution process.
Despite its practical appeal, it has its own attendant challenges. In this piece, we shall be exhaustively discussing this clause, examining its enforceability in Nigeria by analysing the judicial and statutory approaches. We shall also explore some of the practical challenges in implementation and, in conclusion, make recommendations for drafting enforceable and effective multi-tier clauses in Nigeria.
Concept and Nature of Multi-Tier Dispute Resolution Clauses
The Multi-Tiered Dispute Resolution Clause provides for a graduated process in that it is a clause that moves from the party-controlled and party-determined mechanism to one that gives a third party the power to impose a final decision on the disputants.[1] It is often called the escalation Clause because disputants often begin with an informal process to resolve their dispute and gradually progress to a more formal process until the dispute is finally resolved. It provides for negotiation, mediation, and then a binding dispute resolution process, either in arbitration or litigation.
The clause provides parties the opportunity to amicably resolve their dispute before commencing a formal and more binding dispute resolution process. Parties are able to protect their commercial relationship prior to involving a third party. Usually, the amicable resolution process involves representatives of each party coming together to negotiate and find a common ground for resolution; the failure of which could result in a third party being involved in a non-binding mediation. If parties exhaust the above means and are still unable to resolve their dispute, the matter will proceed to either arbitration or litigation.
As these clauses are contractual in nature, their enforceability depends on the principles of contract law, particularly the intention of the parties and the certainty of terms. If drafted unequivocally, they impose a binding obligation; otherwise, they may be unenforceable and thus not binding on the parties.
Enforceability of Multi-Tier Dispute Resolution Clauses in Nigeria
In Nigeria, multi-tier dispute resolution clauses are legally recognised on the principles of contract law and the provisions of the Arbitration and Mediation Act (AMA), 2023. Under the Act, an agreement to arbitrate is legally recognised as binding on parties in Nigeria[2]. Even the Rules of Professional Conduct 2023 provide that a lawyer must not fail or neglect to inform their client of the option of alternative dispute resolution mechanisms before resorting to or continuing litigation on behalf of their client.[3] This implies that even if a commercial contract does not include a multi-tier dispute resolution clause, a lawyer is duty-bound to exhaust all amicable dispute resolution mechanisms on behalf of his client before commencing litigation.
The binding nature of the multi-tier dispute resolution clause was given judicial recognition in the case of Sakamori Construction (Nig) Ltd. v. Lagos State Water Corporation, where Okoro, J.C.A., in his lead judgment held:
“…I think the parties ought to take advantage of that arrangement before approaching the court. If that method fails to produce an amicable settlement, then they can come to the court. I need to add that a referral of this matter to arbitration is a condition precedent for the activation of the jurisdiction of the court below. I have said this because I know that no arbitration clause in any agreement can be made to oust the jurisdiction of the High Court granted under section 272(1) of the Constitution of the Federal Republic of Nigeria, 1999. Thus, where an arbitration fails to produce an amicable settlement of the dispute, either party is at liberty to approach the court for the determination of the dispute.”
The above position of the Court emphasizes the binding nature of this clause when contained in an agreement, and a party cannot pursue litigation until the steps provided for in the agreement are fully complied with.
Practical Challenges in Implementing Multi-Tier Dispute Resolution Clauses in Nigeria
Though the multi-tier dispute resolution clause offers apparent benefits, including its ability to help parties preserve existing commercial relationships, it is also fraught with several challenges that affect its efficacy in Nigeria:
i. Uncertainty of Terms: Vague and open-ended clauses often pose great difficulty in compliance and enforcement. One of the core principles of contract law is that for a contract to be valid and enforceable, it must contain clear and certain terms. Often, this clause is drafted in a manner that gives complexity to each stage of amicable resolution, including details like time limit, practical steps, etc and it culminates in its unenforceability, therefore rendering it void.
ii. Delay and Tactical Abuse: Some parties often exploit the clause to delay dispute resolution even when it is obvious that amicable settlement has broken down or is completely unattainable. This undermines the clause’s efficiency.
iii. No explicit statutory provisions: Our Arbitration Act in Nigeria does not explicitly address these clauses, thereby leaving the interpretation entirely to the courts.
iv. Possible cost-inefficiency: Parties would have to bear the cost of each stage of the settlement, and where the dispute lingers unresolved, the parties would get to spend more money.
Recommendations and Conclusion
To enhance the enforceability and practical utility of this clause in commercial arrangements, parties must ensure that this clause in the agreement is drafted with clarity and specificity, ensuring that each stage of resolution is clearly outlined and defined with specific timelines. Also, a Scott v. Avery clause[4] could be included to prevent any recourse to arbitration or litigation until the non-contentious process has been undertaken and failed to yield any positive outcome. Parties should also ensure that the clause is drafted in such a manner as to indicate a binding obligation on both sides.
In conclusion, multi-tier dispute resolution clauses embody a progressive shift towards amicable settlement of commercial disputes in Nigeria. They offer to preserve business and commercial relationships and aim for the protection of the interests of the parties. However, certain practical challenges still plague its use in Nigeria, including poor drafting, tactical abuse, and even the possibility of cost-inefficiency. Ultimately, the effectiveness and enforceability of such clauses depend on ensuring contractual certainty, adherence to agreed procedures, and the commitment of parties to the spirit of alternative dispute resolution.
[1] Funmi Roberts, ‘Drafting the Dispute Resolution Clause: The Midnight Clause’ https://nigerianlawguru.com/wp-content/uploads/2024/06/DRAFTING-THE-DISPUTE-RESOLUTION-CLAUSE.pdf accessed on November 1, 2025.
[2] Section 1(3) of the Arbitration and Mediation Act, 2023
[3] Rule 15(3)(d) of the Rules of Professional Conduct, 2023
[4] Named after the English case of Scott v. Avery (1856) 5 HLC 811
Written by Chinasa Eneh for The Trusted Advisors
Email us: info@cms.trustedadvisorslaw.com