Surprising outcome on the unenforceability of an ADR clause

• United Kingdom

• Construction and engineering

26-09-2022

Key point

In Children’s Ark Partnerships Limited v (1) Kajima Construction Europe (UK) Limited (2) Kajima Europe Limited ¹ the Court concluded that an “unusual and surprising” alternative dispute resolution (“ADR”) clause was not enforceable and therefore litigation commenced by Children’s Ark could continue.

ADR clauses

An ADR clause is where the parties agree to use a non-binding form of dispute resolution, such as mediation, before escalating the matter to a formal dispute resolution process, such as litigation or arbitration. Relying on an ADR clause can allow the parties to consider commercial matters privately to see if an negotiated settlement can be agreed upon. This can avoid the time and expense involved in pursuing the dispute further. However a key concern is whether the ADR clause can be relied upon as a condition precedent, to prevent the other party from formally pursuing the dispute.

The ADR clause in Children’s Ark

In the Children’s Ark case, the first Defendant entered into a construction contract with the Claimant. This contained the following ADR clause:

 “Subject to the provisions of the Dispute Resolution Procedure, both parties agree that the courts of England and Wales shall have exclusive jurisdiction to hear and settle any action, suit, proceeding or dispute in connection with this contract and irrevocably submit to the jurisdiction of those courts” ²

The Dispute Resolution Procedure referred to above included the following:

“3.1 Subject to paragraph 2 and 6 of this Schedule, all Disputes shall first be referred to the Liaison Committee for resolution. Any decision of the Liaison Committee shall be final and binding unless the parties otherwise agree.

3.2 Where a Dispute is a Construction Dispute the Liaison Committee will convene and seek to resolve the Dispute within ten (10) Business Days of the referral of the Dispute.”

The second Defendant was the parent company of the first Defendant and had provided a parent company guarantee to the Claimant. Following the issue of proceedings by the Claimant, the Defendants each issued an application seeking an order that the court did not have jurisdiction to try the claim, or alternatively that it should not exercise any jurisdiction.

Issues considered

In the recent case of Ohpen Operations UK Ltd v Invesco Fund Managers Ltd ³, O’Farrell J derived the following principles dealing with the circumstances in which the court may stay proceedings where a party seeks to enforce an ADR provision:

“(i) The Agreement must create an enforceable obligation requiring the Parties to engage in alternative dispute resolution.

(ii) The obligation must be expressed clearly as a condition precedent to court proceedings or arbitration.

(iii) The dispute resolution process to be followed does not have to be formal but must be sufficiently clear and certain by reference to objective criteria, including machinery to appoint a mediator or determine any other necessary step in the procedure without the requirement for any further agreement by the Parties.

(iv) The court has a discretion to stay proceedings commenced in breach of an enforceable dispute resolution agreement. In exercising its discretion, the court will have regard to the public policy interest in upholding the Parties’ commercial agreement and furthering the overriding objective in assisting the Parties to resolve their disputes”.

Court’s comments on the clause in Children’s Ark

From Ohpen, the Court noted that for an ADR clause to be enforceable it “must be ‘sufficiently clear and certain by reference to objective criteria…’”. In Children’s Ark the Court determined that although the ADR clause was drafted as a condition precedent it did not meet the Ohpen test because there was no meaningful description of the process to be followed. The Liaison Committee was free to make its own rules and procedures. Therefore, it was unclear how the Liaison Committee would “seek to resolve the Dispute” and there was no “unequivocal commitment to engage in any particular ADR procedure”.

The Judge concluded, “In my judgment, for the reasons I have identified, the…[ADR clause] is neither clear nor certain. It does not include a sufficiently defined mutual obligation upon the parties in respect of the referral to the Liaison Committee and the process that will then ensue and it therefore creates an obvious difficulty in determining whether either [the Claimant] or [the Second Defendant] has acted in breach.”

Other enforceable clauses

It is clear from this judgement that the enforceability of an ADR clause will depend on its drafting. In this case the ADR clause was held to be unenforceable, but there have been other instances where the courts have upheld a well drafted provision.

In Ohpen O’Farrell J accepted ⁴ that the ADR provision at issue in that case did in fact operate as a condition precedent to the commencement of legal proceedings and she stayed the proceedings to permit mediation to take place.

In Emirates Trading Agency LLC v Prime Mineral Exports Pte Ltd ⁵ Teare J upheld an obligation to engage in a “friendly discussion” as a condition precedent to the right to refer the claim to arbitration and decided it was not merely an agreement to negotiate.

Some key takeaways

Some guidance can be drawn from the Children’s Ark and Ohpen cases:

• there may be more risk involved with creating a novel bespoke procedure

• where possible, consideration should be given to using a well-established ADR procedure with detailed rules and procedure: for example mediation under the Model Mediation Procedure of CEDR

• if informality is desired then a simpler process such as the “friendly discussions” in Emirates - may be preferable

• consideration should be given to whether any third parties may become involved in a dispute to which the ADR process is intended to apply. For example, a guarantor (as was the case in Children’s Ark). Does the process operate effectively if they are to participate in it?

• terms such as “subject to” and “shall first” may give rise to a binding condition precedent in the context of an ADR process.

If there is no particular need for urgency then it may be better to ensure the claiming party takes all steps to comply with any ADR process rather than risk a costly dispute regarding the enforceability of the ADR process.

It should be noted that where the contract is a “construction contract” under the Housing Grants Construction and Regeneration Act 1996, then a party can refer a dispute to adjudication “at any time” and the Courts will not limit that right by requiring compliance with any ADR clause.

[1]  [2022] EWHC 1595 (TCC)

[2]  clause 68

[3] [2019] BLR 576

[4]  paragraphs 52-54 in the judgment

[5]  [2015] 1 WLR 1145