Court considers requirements for a condition precedent to litigation in Local Authority application
In Lancashire Schools SPC Phase 2 Ltd v Lendlease Construction (Europe) Ltd [2024] EWHC 37 (TCC) a local authority failed in its application to have the claim against it stayed or struck out on the basis of non-compliance with a contractual dispute resolution mechanism. The relevant building contract (the Contract) provided for adjudication before proceedings, a process which wasn't followed by the parties. This adjudication provision was accepted by the Court as a condition precedent to litigation. However, the Court exercised its discretion and declined to allow the application.
Background
The fourth defendant, Lancashire County Council (the Authority), made an application to set aside or, alternatively, strike out the claim against it by the Claimant, Lancashire Schools SPC Phase 2 Limited (Project Co), on the basis that the Court had no jurisdiction to hear the claim as the Contract contained a requirement that all disputes must be adjudicated first before litigation (the ADR Clause).
Briefly, the Authority had hired Project Co to undertake building work at schools in Lancashire. Project Co started litigation against the other defendants alleging defects in the building works in breach of contract. The Authority was joined in respect of Phase 2 due to financial deductions Project Co claimed it had no authority to withhold.
The Application
Clause 68 of the Contract contained the ADR Clause. The parties accepted that an adjudication before litigation had not taken place. This was the basis of the Authority's application for a stay or strike out.
Under CPR11, defendants who wish to dispute the court's jurisdiction to hear the claim or argue the court should not exercise its jurisdiction:
"may apply to the court for an order declaring it has no such jurisdiction or should not exercise any jurisdiction which it may have."
Any such order may make further provision including:
"(a) setting aside the claim form; (b) setting aside service of the claim form; (c) discharging any order made before the claim was commenced or before the claim form was served; and (d) staying the proceedings."
Under CPR3.4, the court may strike out a statement of case if it:
"(a)…discloses no reasonable grounds for bringing or defending the claim; (b)…is an abuse of the court's process or is otherwise likely to obstruct the just disposal of the proceedings".
The Court therefore had to consider:
- The applicable legal authorities.
- Whether, under the ADR Clause, adjudication must take place before litigation? If not, is the ADR Clause mandatory and enforceable?
- How the Court should exercise its discretion under CPR11.
- Whether the Court should strike out the claim under CPR3.4.
- What order should be made?
Legal authorities
[GWZR1][ZWCR2]Ohpen Operations UK Limited v Invesco Fund Managers Limited [2019] EWHC 2246 (TCC) set out principles to follow for a stay of proceedings due to an ADR provision, namely:
- An enforceable obligation
- A condition precedent
- A clear process
- Public policy interest for the Court to consider when exercising its discretion to stay proceedings.
Children's Ark Partnerships Limited v Kajima Construction Europe (UK) Limited & Kajima Europe Limited [2022] EWHC 1595 (TCC) decided an ADR provision need only be mandatory and enforceable, not a condition precedent.
Channel Tunnel Group Ltd v Balfour Beatty Construction [1993] AC 334[ZWCR3] concluded the Court could stay any proceedings whether or not another agreement was in place to decide disputes in another way. The parties could not just decide to depart from it later having decided it was not suitable.
DGT Steel and Cladding Limited v Cubitt Building and Interiors Limited [2007] EWHC 1584 (TCC) held that the party opposing the stay needs a good reason for it not to be allowed – as in Ohpen there is a public policy interest in aiding parties to resolve their disputes in line with their commercial agreements. In that case, the main issues were better suited to a quantity surveyor adjudicator.
The Children's Ark appeal, Kajima Construction Europe (UK) Limited & Kajima Europe Limited v Children's Ark Partnership Limited [2023] EWCA Civ 292, showed the usual order is a stay if parties are in breach of a mandatory contractual dispute resolution clause but, in this instance, the ADR process could have been undertaken alongside court proceedings.
Sir Kim Lewison shares the above views in his paragraph on ADR provisions in The Interpretation of Contracts 7th edition, Chapter 18.
Ealing Care Alliance Limited v The Council of the London Borough of Ealing [2018] EWHC 2630 (TCC) is a case in which the Court would have gone against the grain but for distinguishable reasons. It was held the ADR provision did not apply but if it had, a stay would not have been granted because it flew in the face of common sense and proportionality let alone delay and likelihood of it ending up in the court in any event.
The Court may also decide that making parties negotiate may not bear fruit in the event that negotiating had been ongoing as in Halifax Financial Services Ltd v Intuitive Systems Ltd [1999] 1 All ER (Comm) 303[ZWCR4] but the courts will look at the facts of each case.
Enforceability of the ADR Clause
The parties agreed that Lukeoil Asia Pacific PTE Limited v Ocean Tankers (PTE) Limited [2018] EWHC 163 (Comm) sufficiently summarised the principles on how to construe a contract. Essentially, the test is one of reasonableness and business common sense.
The parties contractually agreed to adjudicate (in good faith) "any dispute arising in relation to" their agreement (with a set process) save for one aspect, the Code, which would be resolved in accordance with a separate schedule (Clause 68.1). Following completion, either party could refer the matter to the English courts. It was this element of the ADR Clause which the Authority complained should have been followed.
Project Co, meanwhile, argued that operation of Clause 68.3, which said the parties "may" provide notice to each other in respect of adjudication, did not form an obligation for either of them to do so before commencing litigation. Project Co also argued that the jurisdiction clause (clause 86), enabled the parties to adjudicate as well as proceed through the courts – it did not in itself create a mandatory obligation for the parties to follow adjudication first. The Court disagreed. Given that the jurisdiction clause referred to it being "subject to" the ADR Clause, an exception to the norm, the Court was bound by the ADR Clause.
The Court placed significant weight on the word "shall" in clause 68.1 – that any dispute "shall be resolved" by adjudication first, which was the approach taken in Children's Ark. Clause 68.2 contained a mandatory requirement for the parties to follow a consultation process in the first instance.
Interpreting the language used in clause 68.3 meant that, although adjudication was not mandatory following the consultation process, this did not mean it was not mandatory before commencing litigation. The adjudication process followed in the remaining clauses after clause 68.3. This included a time limit for an adjudicator's binding decision and challenge in the courts if not accepted (clause 68.8) by providing notice (clause 68.14). There is no alternative access to the courts other than by clause 68.14. The Court agreed with the approach taken in Children's Ark that a "mere requirement" for ADR would not be sufficient to be a condition precedent but reiterated that recourse to the courts is "subject to" the ADR Clause with a timely notice and an adjudicator's decision (or failure to provide one) as set out in clause 68.14 and so, with no other path to the courts, adjudication was found to be a necessary precursor to litigation as both clear a condition precedent and mandatory procedure with a process.
The Court agreed that clauses seeking to exclude the Court's jurisdiction need to be clear.
The Court's discretion under CPR 11
Parties to an ADR provision must have good reason to depart from them (Channel Tunnel). In this case, Project Co needed to show why a stay should not be granted (DGT Steel). The Authority did not want to be drawn into any arguments between Project Co and any co-defendants regarding technical issues on alleged defects – it argued the matter was one of contractual interpretation only.
The Authority's agreement with Project Co allowed for the co-defendants to make submissions in the adjudication as well as provisions between the other parties which provided for an adjudication process between the Authority and Project Co. Given that parties usually follow adjudicator's decisions, the Authority argued this would keep a claim out of the courts. However, in the Court's opinion, the matter was so complex the parties would need to extend what would otherwise be a sensible timescale making it likely to be more expensive. Project Co made the point that disputes in the context of other phases of the underlying building project would likely be joined to the proceedings and the Authority should be involved in resolution of those disputes. The Court agreed and declined to stay/strike out the proceedings. Whilst the Court commented that the case wasn't pleaded as well as it could have been, it thought the areas which overlapped between the co-defendants needed to be tested.
The Court surmised that the co-defendants would be brought into the adjudication due to clauses 68.16 (similar disputes) and 68.17 (jurisdiction over sub-contractors) and they wouldn't be able to recover the costs they incurred. If they did not take part in the adjudication, this may cause further adjudications between Project Co and the co-defendants.
The Court also reflected on the fact that the co-defendants did not choose to adjudicate first and that any stay for adjudication between the Authority and Project Co would lead to disparity between the stages of proceedings in relation to other phases causing yet further delay whilst other claims were brought into line.
Another comment was that the Authority's unknown outstanding claim for deductions would make it difficult for Project Co and its supply chain to settle – the Court therefore decided adjudication between Project Co and the Authority on just one point would not be beneficial.
The Court therefore confirmed that the application failed in respect of CPR 11.
Strike out under CPR 3.4
As an alternative to a stay under CPR 11, the Court was asked to strike out the claim under CPR 3.4 due to either a lack of prospects of success; because the mechanism to start a claim wasn't present; or an abuse of process such as for CPR 11 above.
Although the Court was satisfied that the ADR Clause was a condition precedent to litigation, it could not find that Project Co had no reasonable grounds. It considered the inability of the Authority to adjudicate the matter first to be a temporary deprivation not worthy of the basis to strike out the claim. The Court pointed towards Children's Ark in which the point of a stay versus strike out was considered. A stay of proceedings in breach of contract did not lead to strike out when the ADR Clause was considered.
No submissions were made in respect of strike out due to abuse of process and in any event, the Court did not consider proceeding with a claim as opposed to adjudicating first as such. Due to the reasons given and the overriding objective, even if it were an abuse of process, the Court commented that it would not strike out under CPR 3.4 in any event.
What order is appropriate?
The application was dismissed.
Key takeaways
- The Court would usually support use of a valid condition precedent to litigation as this is the bargain struck by the parties to the contract.
- The parties to a contract are not necessarily required to follow an ADR provision, even if it is a condition precedent or expressed to be mandatory, because the Court will assess the surrounding circumstances in making its decision and in the exercise of its discretion. However, a party that does not adhere to an ADR provision in a contract runs the risk that a Court may order a stay or strike out the claim.
- The Court will look at the specific wording of any ADR provisions in making its decision as to whether they should be followed.The wording of ADR provisions therefore needs to be very clear.
If you have any further questions, please contact Alex Anderson and Zack Gould-Wilson.