Is an Alternative Dispute Resolution (ADR) clause a condition precedent? And even if it is, is it always enforceable?
The Case of Children's Ark Partnerships Ltd v Kajima Construction (Europe) UK Ltd and another [2022] EWHC 1595 (TCC) considers ADR clauses in more detail and highlights the importance of ensuring there is sufficient detail regarding the ADR process within the contract, failing which may result in serious consequences including challenges to the court's jurisdiction and a stay of proceedings.
ADR
Over recent years there has been a significant increase in popularity of ADR. Courts are becoming increasingly pro-ADR, which is supported by the CPR and various authorities. Although the Courts cannot compel parties to enter into ADR , under CPR 1.4 the Courts are encouraged to further the overriding objective and actively manage cases which may include directing the parties to engage in ADR. Unreasonably refusing to do so, may result in cost consequences.
Condition precedent
A condition precedent is a condition of a contract which must be fulfilled for either the contract to be valid or certain contractual obligations to come into effect.
So, what is the dispute in the Children's Ark Partnership Ltd case all about?
In June 2004, the Claimant (Children's Ark Partnerships Limited) entered into a construction contract with the First Defendant ( Kajima Construction Europe (UK) Limited), whereby the First Defendant was contracted to design, construct and commission the Royal Alexandra Hospital for Sick Children in Brighton Hospital.
In October 2013, the Claimant entered into a deed of guarantee with the Second Defendant (Kajima Europe).
The Practical Completion Date of the Hospital was 2 April 2007.
Following concerns around cladding and fire-stopping, the First Defendant agreed to carry out remedial works which began in December 2018. Due to these works, limitation was extended by a number of standstill agreements, the last of which expired on 29 December 2021.
The contract contained a Dispute Resolution Procedure ("DRP") which stated that all disputes were to first be referred to the Liaison Committee for resolution and the Liaison committee's decision should be final and binding. The contract also stated that parties 'may' refer a dispute to Mediation and Adjudication before dealing with Court proceedings.
On 30 November 2021, the First Defendant wrote to the Claimant advising that it would refuse any further extension to the Standstill Agreement and, on 10 December 2021, reserved its position as to any failure on the part of the Claimant to take "the necessary pre-action steps" in advance of the issue of proceedings.
Proceedings were initiated on 21 December 2021. Following which the Claimant issued an application seeking a stay of proceedings in order to pursue the DRP.
What was the issue for the court to decide?
On the same date as the Claimant's application to stay proceedings, the Defendants made an application under CPR 111 to strike out or set aside the Claimant's Claim Form on the grounds of failure to comply with a contractual ADR provision which the Defendants argued was a condition precedent. The Defendants argued the Court's jurisdiction had not been successfully invoked and/or the Court should decline to exercise its discretion.
Alternatively, they put forward arguments under CPR 3.4(2)(a) and or CPR3.4(2)(b) (no reasonable grounds for bringing the claim and that it was an abuse of the Court's process).2
In short, the key issues for the Court to decide were:
1. Whether the DRP gave rise to a condition precedent or whether it was a mandatory jurisdictional provision.
2. Whether the provisions of the DRP were enforceable.
3. If enforceable, whether the provisions of the DRP were complied with by the Claimant in advance of issuing proceedings.
4. Whether CPR 11(1)(a) or (b) were engaged.
5. If CPR 11(a) (b) are engaged, how should the court exercise its discretion.
What is the relevant law?
Ohpen Operations UK Ltd v Invesco Fund Managers Ltd [2019]
The Court considered the case of Ohpen which outlined circumstances in which the court may stay proceedings where a party seeks to enforce an alternative dispute resolution provision, amongst which it states:
- The obligation must be expressed clearly as a condition precedent to court proceedings.
- The DRP must be clear and certain by reference to objective criteria.
- The court has discretion to stay proceedings which were commenced in breach of an enforceable dispute resolution agreement, furthering the overriding objective in assisting the Parties to resolve their disputes.
Channel Tunnel v Balfour Beatty Ltd [1993]
There was a presumption that "those who make agreements for the resolution of disputes must show good reasons for departing from them". However, there was no suggestion that the clause created a contractual condition precedent. This case reflected that the presence of a mandatory ADR provision does not deprive the court of jurisdiction.
DGT Steel and Cladding Ltd v Cubitt Building and Interiors Ltd [2008]
This case reiterated the court's jurisdiction to stay proceedings brought in breach of a contractually agreed dispute resolution procedure. It is not suggested that the clause need be a condition precedent to exercise its discretion to stay the proceedings.
Tang v Grant Thornton International Ltd [2013]
The dispute here turned on whether the provision was sufficiently precise or certain to be contractually binding. The court stating it must be "astute to consider each case on it own terms".
What was the Court's decision?
The Court concluded that the commencement of proceedings neither "merits a stay of the proceedings" nor a refusal to exercise jurisdiction under CPR 11(1)(b).
The judge found that complying with the DRP was a condition precedent with the clauses providing for a sequence which must be followed before legal proceedings can be commenced. However, the Judge disagreed with the finding in Ohpen that the obligation must be expressed clearly as a condition precedent before the court will stay proceedings. This finding supports the proposition that the Court has an inherent jurisdiction to stay proceedings for the enforcement of an alternative dispute resolution provision where the "…clause creates a mandatory obligation and where it is enforceable".
Nevertheless, it was held that the DRP in this case was unenforceable as it was neither clear nor certain. Various reasons were listed, including:
- There was no meaningful description of the process to be followed.
- There was no unequivocal commitment to engage in any particular ADR procedure. The Court asked, if the Defendant was not obliged to take part in the process, how was the process able to "provide a means of resolving disputes or disagreements between the parties amicably"? This reflected a lack of certainty and was unclear how a court was to decide which party was in compliance or breach.
- The Contractual provision did not define "Liaison Committee".
- The Liaison Committee was to comprise only of representatives from Brighton and Sussex University Hospital NHS Trust and from the Claimant, with a provision for others to be invited to attend. The Defendants had no representation on the committee. Therefore, the process would have no final or binding effect on the Defendant and so was "rendered pointless".
- It was unclear when the condition precedent is satisfied and when the process was intended to come to an end.
Accordingly, the judge concluded that the obligation to refer disputes to the liaison committee was not "defined with sufficient clarity and certainty".
Had the DRP been enforceable, the Judge stated that on the facts before her:
- The dispute had not been referred to the Liaison Committee prior to the issue of proceedings.
- CPR 11(1)(a) was not engaged, stating that a Scott v Avery3 clause does not have the effect of ousting the court's jurisdiction.
- Given her finding that the DRP was a condition precedent to litigation, this gave rise to a jurisdictional issue. She saw no reason why an enforceable ADR provision expressed as a condition precedent should not engage 11(1)(b). However, had the DRP been enforceable, she would not have exercised her discretion under CPR 11(1)(b) and 11(6) to do anything more than stay the proceedings.
The strike out and abuse of process applications failed.
Thoughts
In principle, ADR clauses can create a condition precedent to the commencement of proceedings. However, if the ADR provisions are not drafted carefully and are not sufficiently clear and certain, then these may not be enforceable.
When drafting a multi-tiered dispute resolution procedure clause, the terms need to be clear, precise and unambiguous, with the process referring to objective criteria. If they are, then this case reflects a willingness by the Court's to uphold them.
Where claims are commenced in breach of a mandatory jurisdiction provision, the default remedy under CPR 11(6) is a stay, "with the remedy of setting aside a claim form being reserved for cases where proceedings have not been validly served". However, the Judge went on to state that she saw no reason why, "in a case which engages CPR 11(1)(b), the court could not determine that a different form of relief was appropriate having regard to the particular facts".
Given this decision, it would be sensible for companies to review their existing contracts to consider whether they contain suitable wording that is sufficiently certain to maximise the chances of them being enforceable.
The Full Judgment can be found here.
2CPR 3.4(2)(a) and CPR 3.4 (2) (b) can be found here
3Scott v Avery (1855) 5 HL Cas 811