Escalation Clauses Before Arbitration: A Case For Wider Adoption In Commercial Contracts

Introduction

A surprising number of disputes that end up in arbitration are not, at their root, legal disputes at all. They are communication failures, project-management failures, governance failures, or breakdown in trust between people who once worked well together. The legal characterisation such as breach of contract, variation claim, or indemnity dispute, is often just the form the disagreement takes by the time lawyers are involved, not a description of what went wrong.

Yet, in a striking number of commercial contracts, arbitration is the first formal mechanism available to the parties once a disagreement crystallises. There is no structured pause or mandated attempt at commercial resolution. The contract moves the parties from disagreement to adjudication in a single step.

This raises a question that deserves more attention than it typically receives in contract drafting: are commercial contracts being designed to ‘resolve’ disputes, or merely to ‘adjudicate’ them? In a time where businesses increasingly prize commercial continuity, relationship preservation, and capital efficiency, should arbitration remain the default first formal response to a dispute, or should contracts require parties to attempt structured escalation first?

This article argues for the latter, but not for the reason usually given. The conventional case for escalation clauses is a cost-saving argument: ‘mediation is cheaper than arbitration, so try it first.’ While that argument is true, it is thin, and it undersells what a well-designed escalation clause does.

The stronger thesis is this: escalation clauses should be increasingly standard in commercial contracts not primarily because they save money, but because they function as strategic risk-management instruments, that preserve commercial value, improve the quality of dispute outcomes, and align contract design with the global shift from dispute adjudication toward dispute avoidance.

1. Reframing Escalation Clauses: From ADR Tool to Corporate Governance Tool

The conventional framing treats escalation clauses like negotiation, mediation, or expert-determination, as a category of Alternative Dispute Resolution. That framing is too narrow, and it undersells their function in long-term commercial relationships.

In long-duration contracts such as energy projects, infrastructure concessions, joint ventures, long-term supply agreements, technology and outsourcing arrangements, an escalation clause is better understood as four things simultaneously:

• A governance mechanism. It creates a defined forum in which deteriorating performance, scope disagreements, or payment friction must be surfaced to decision-makers before they harden into formal claims.
• A risk-management device. It builds an early-warning system into the contract itself, comparable in function to a covenant trigger in a financing agreement.
• A relationship-preservation tool. It gives the parties a structured, dignified route back to commercial dialogue before legal positioning makes that dialogue impossible.
• A project-continuity mechanism. On a live construction site, an operating energy asset, or an active joint venture, the ability to keep the underlying project moving while a dispute is being managed is often worth more than the dispute itself.

This last point deserves emphasis, because it is the crux of the matter, many commercial relationships are worth substantially more than the dispute that has arisen within them. The parties' continued ability to work together is frequently the larger commercial asset, and arbitration, by its adversarial design, is not built to protect that asset. Escalation clauses are.

2. Why Arbitration Is Sometimes Too Late

By the time a Notice of Arbitration is served, several things have usually already happened, and none of them are reversible by the tribunal:

• Positions have hardened into pleadings, and pleadings are not designed to be walked back from.
• The executives who understand the commercial relationship, and who could authorise a pragmatic compromise, have typically disengaged, having handed the matter to legal and external counsel.
• The legal team, quite properly performing its function, now frames the dispute in terms of liability, causation, and quantum rather than in terms of the underlying commercial relationship.
• Whatever trust still existed between the parties' operational teams has usually deteriorated further during the period in which the claim was being prepared.

The uncomfortable question for any senior practitioner is this: once arbitration has commenced, can the dispute still be commercially salvaged at all, or has it become irreversibly legal? In many cases, the honest answer is that the dispute could have been salvaged, but only earlier, and only by people other than the lawyers who are now running it. This is not an argument against arbitration. It is an argument that arbitration, properly understood, is a last-resort adjudicative mechanism, and contracts that route every disagreement straight into it are forfeiting the window in which commercial salvage was still possible.

3. The Rise of "Dispute Avoidance" in International Commercial Practice

What is emerging across infrastructure, energy, and major projects practice is better described as a dispute avoidance discipline rather than dispute resolution:

• Dispute Boards, now standard in major FIDIC-based infrastructure contracts, sit alongside the project on a standing basis and issue real-time decisions or recommendations while the works continue, rather than waiting for a claim to be fully formed.
• Standing neutrals are appointed at the outset of long-term relationships such as energy joint ventures and major outsourcing deals in particular, so that, if friction arises, there is already a trusted, informed third party in place rather than someone who must be selected and briefed from scratch under pressure.
• Early neutral evaluation gives parties a candid, non-binding assessment of likely outcome before either side has spent heavily on building a case, often recalibrating expectations enough to make settlement realistic.
• Executive negotiation clauses require the dispute to go to a defined level of senior management; sometimes named by title, sometimes by function, before lawyers are formally instructed, restoring the people most likely to value the relationship to the centre of the conversation.
• Mediation windows, often built around a fixed and short timeframe, create a deliberate pause between escalation and arbitration during which a trained neutral can work the dispute commercially.

The through line across all these mechanisms is the same; commercial actors are increasingly investing in preventing disputes from maturing into adjudication, rather than simply trying to adjudicate them more efficiently once they have matured.

4. Escalation Clauses as a Condition Precedent: Are Businesses Leaving Value on the Table?

A typical multi-tier clause moves through negotiation, then mediation, then arbitration, often coupled with an executive-escalation requirement and a good-faith negotiation obligation at the first tier. The strategic question is whether parties are, in practice, using these tiers as genuine opportunities for commercial settlement, or simply treating them as procedural boxes to tick on the way to the tribunal.

Nigerian jurisprudence offers an instructive and cautionary illustration. In Sakamori Construction (Nig.) Ltd v Lagos State Water Corporation (2022) 5 NWLR (Pt. 1822) 339; [2021] LPELR-56606 (SC), the underlying contract contained a classic tiered structure: disputes were to be referred first to the project Engineer, who had ninety days to issue a written decision, before any recourse to arbitration. When the dispute eventually reached the courts, the Supreme Court engaged closely with the parties' agreed sequencing and with the procedural consequences of bypassing it, including the question of whether taking certain steps in court proceedings amounted to a waiver of the right to insist on the agreed process. The Court ultimately also held that an admitted, undisputed debt is not a "dispute" capable of being referred to arbitration at all, regardless of what the dispute clause says.

Read together, Sakamori illustrates two things at once. First, Nigerian courts will take seriously a contractually agreed sequence of escalation, and will scrutinise whether the parties (particularly the party resisting arbitration) actually followed it or waived it. Second, and more subtly, it shows how often the underlying commercial reality (a debt that nobody seriously disputed) gets routed into formal proceedings anyway, consuming years and significant cost, when an earlier, structured commercial conversation might have resolved it long before institutional positions calcified. That is the value being left on the table: not the cost of the arbitration itself, but the years of relationship and liquidity tied up in a dispute that, on the facts, may not have needed adjudicating at all.

5. The Enforcement Question: When Will Courts and Tribunals Respect Escalation Clauses?

None of the strategic cases for escalation clauses matters if the clauses are not enforced. This is where drafting precision becomes decisive, and where the comparative law has converged on a remarkably consistent answer.

The composite picture is a strong international consensus: courts across leading arbitration jurisdictions will enforce escalation clauses that are clearly mandatory and procedurally precise, and the modern trend is to leave compliance disputes to the tribunal rather than the supervisory courts. The clauses that fail are, almost without exception, the ones that were drafted loosely.

6. The New Nigerian Mediation Framework Changes the Conversation

Much of the older scepticism toward escalation clauses in Nigeria rested on a fair concern: mediated settlements were commercially attractive in theory but legally soft in practice, lacking a clear enforcement pathway comparable to an arbitral award. The Arbitration and Mediation Act 2023 substantially addresses that concern, and any current analysis of escalation clauses in Nigeria has to account for it.

Part II of the AMA (sections 67-87) provides, for the first time in Nigerian legislation, a comprehensive statutory framework for commercial mediation, modelled on the UNCITRAL Model Law on International Commercial Mediation 2018. Three features matter most for contract drafters:

• Enforceable settlement agreements. Under section 82(2), a settlement agreement reached through mediation is binding on the parties and can be enforced by a court as a contract, a consent award, or a consent judgment. This converts a mediated outcome from a fragile gentlemen's agreement into an instrument with real enforcement teeth.
• Confidentiality with bite. Section 77(1) renders communications made during mediation inadmissible in subsequent court or arbitral proceedings, protecting the candour that makes mediation work without fear that a concession made in the room will resurface as an admission at trial.
• Cross-border recognition. Section 87 extends recognition to the Singapore Convention on Mediation for international settlement agreements reached outside Nigeria, where the relevant state is also a party to the Convention, tying Nigerian practice directly into the emerging global enforcement architecture for mediated outcomes.

The strategic implication is significant. Mediation in Nigeria is no longer a purely reputational or relationship-based exercise with no formal teeth if a party later reneges. It now sits on a statutory foundation comparable, in enforcement terms, to arbitration itself. That changes the calculus for any business weighing whether a mandatory mediation tier is worth including before arbitration.

7. Are Escalation Clauses More Valuable in Certain Sectors?

Not every commercial relationship benefits equally from a structured escalation tier, and a sophisticated drafter should resist a one-size-fits-all approach.

• Long-duration projects accumulate disputes (over variations, force majeure and tariff adjustments) across decades of operation. The relationship between sponsor, offtaker, and lender typically has to survive any individual dispute, making escalation clauses close to indispensable.
• Construction and infrastructure. Claims over variations and extensions of time are frequently capable of commercial resolution if caught early, before the parties have built fully reasoned, mutually exclusive narratives about who caused the delay. Dispute boards and engineer-determination tiers exist precisely because this sector generates a high volume of disputes that are genuinely resolvable short of arbitration.
• Banking and finance. Here the relationship itself and not any single transaction, is often the more valuable asset. A bank rarely wants to litigate its way out of a long-standing corporate relationship if a covenant breach or a documentation dispute can be worked through commercially instead.
• Joint ventures. By definition, the parties will likely need each other again after the dispute resolves, whether for the next licensing round, the next phase of development, or simply because they remain co-owners of the underlying asset. Escalation clauses protect the only thing that genuinely outlasts the dispute; which is the ongoing structure of the venture itself.

By contrast, one-off, transactional commercial contracts such as; a single supply order, a discrete M&A deal with no ongoing relationship, or a finished construction project with no further phases, derive much less strategic value from elaborate escalation safeguards. There, the traditional cost-saving rationale for ADR may be the dominant consideration, simply because there is no ongoing relationship left to protect.

8. When Escalation Clauses Become a Weapon

It would be naive to present escalation clauses as costless. In the hands of a party determined to delay, an escalation tier becomes a procedural weapon rather than a genuine off-ramp:

• Delay tactics. A respondent facing a strong claim has every incentive to insist on a lengthy negotiation or mediation tier purely to push out the date on which arbitration and any award can begin.
• Tactical non-participation. A party can attend the first session of a mandatory mediation, decline to engage substantively, and then argue that the tier has technically been satisfied, having extracted the delay without ever negotiating in good faith.
• Bad-faith "negotiation." Sending a letter that technically satisfies a notice requirement, without any genuine intention to discuss settlement, is a recognised pattern in multi-tier clause litigation, visible, for instance, in the underlying facts of C v D itself, where one party's brief letter offering escalation to senior management was found to have technically discharged an optional step.

The question every drafter should ask is: when does dispute avoidance become dispute obstruction? The answer lies entirely in drafting discipline. Tight, time-bound, objectively verifiable triggers leave very little room for weaponisation. Loose, aspirational language leaves a great deal of room.

9. Drafting Lessons for Commercial Lawyers

Avoid:

• Vague negotiation obligations ("the parties shall attempt to resolve the dispute amicably") with no defined process behind them.
• Undefined or open-ended timelines, which invite indefinite delay.
• Ambiguous triggers for moving from one tier to the next.

Include:

• A clear escalation timetable, with fixed periods for each tier and an unambiguous date on which the next tier or arbitration, becomes available.
• Named or titled representatives at each escalation level (e.g., "the Chief Executive Officers of each party, or their nominated delegate"), so there is no argument later about who was required to be involved.
• A specified mediation institution and rules, removing any need to negotiate process once a dispute has already arisen and trust is low.
• Express consequences of non-compliance, ideally framed so as to reflect the parties' intention as to whether non-compliance is an admissibility issue (for the tribunal) or a jurisdictional issue (for the courts).
• A clearly defined arbitration trigger event. The precise moment, and precise condition, at which the obligation to attempt escalation ends and the right to commence arbitration begins.

Conclusion

It is tempting to end an article like this with the familiar line that escalation clauses save time and money. They often do. However, that framing understates what is at stake.

As commercial relationships grow more complex, more capital-intensive, and more dependent on sustained cooperation between counterparties, the future of dispute resolution may not lie primarily in making arbitration itself faster or cheaper. It lies in designing contracts that prevent disputes from reaching arbitration in the first place, not by avoiding conflict, but by building the right safeguards that allow conflict to be resolved while it is still commercially salvageable.

Key Sources

Nigeria

• Arbitration and Mediation Act 2023 - s.1 (objectives and party autonomy); ss.67-87 (mediation framework, including s.77(1) confidentiality, s.82(2) enforceability of settlement agreements, and s.87 Singapore Convention recognition)
• Rules of Professional Conduct for Legal Practitioners 2023: - provisions encouraging consideration of ADR options ahead of litigation (see for instance r.15(3)(d))
• Sakamori Construction (Nig.) Ltd v Lagos State Water Corporation (2022) 5 NWLR (Pt. 1822) 339; [2021] LPELR-56606 (SC)

International instruments

• UNCITRAL Model Law on International Commercial Mediation (2018)
• United Nations Convention on International Settlement Agreements Resulting from Mediation (Singapore Convention, 2018)
• ICC ADR Rules; LCIA Mediation Rules; IBA Guidelines on Mediation

Comparative jurisprudence

• C v D [2021] HKCFI 1474; [2022] HKCA 729; [2023] HKCFA 16 (Hong Kong)
• Cable & Wireless plc v IBM United Kingdom Ltd [2002] EWHC 2059 (Comm) (England)
• Emirates Trading Agency LLC v Prime Mineral Exports Pvt Ltd [2014] EWHC 2104 (Comm) (England)
• Republic of Sierra Leone v SL Mining Ltd [2021] EWHC 286 (Comm) (England)
• International Research Corp PLC v Lufthansa Systems Asia Pacific Pte Ltd [2013] SGCA 55 (Singapore)
• BBA v BAZ [2020] SGCA 53 (Singapore)
• United Group Rail Services Ltd v Rail Corporation NSW [2009] NSWCA 177 (Australia)
• Poiré v Tripier, Cour de cassation, ch. mixte, 14 February 2003 (France)
• Medissimo v Logica, Cour de cassation, 29 April 2014, No. 12-27.004 (France)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.