Out-Law News | 19 Sep 2019 | 1:32 pm | 4 min. read
The High Court ordered a stay of court proceedings while the parties attempted to resolve their dispute by way of mediation, in line with the tiered dispute resolution clause incorporated into their contract. The parties have, however, been ordered to serve pleadings on each other in advance of the mediation, in order to improve the prospects of a settlement.
Dispute resolution expert Natalie Melvill of Pinsent Masons, the law firm behind Out-Law, said: "When a dispute has arisen, it is common for parties to make reference to starting formal proceedings, or indeed engage in pre-action correspondence which might precede such proceedings, without having carefully considered the terms of their contract and, specifically, whether it contains a dispute resolution clause".
This case provides a crucial reminder of the importance of being aware of your contractual obligations when a dispute arises.
"Whilst it is easy to get caught up in the heat of a dispute, this case provides a crucial reminder of the importance of being aware of your contractual obligations when a dispute arises and the potential consequences that can befall those who do not engage in the means of alternative dispute resolution (ADR) their contract. These can include costs being wasted on commencing proceedings prematurely, and liability for the other side's costs," she said.
Invesco, an investment manager, contracted Ohpen to develop and implement a digital platform through which its retail customers could buy and sell investments. Ohpen failed to deliver in time and, on 11 October 2018, Invesco issued a notice of termination in respect of Ohpen's alleged breach of contract. Ohpen disputed liability and argued that Invesco was itself in breach for purporting to terminate the contract. The parties attended a single 'without prejudice' meeting to attempt to resolve the dispute, but were unable to reach a settlement.
Ohpen sent a letter of claim in February 2019, and initiated court proceedings in April 2019. Invesco intimated a counterclaim but applied for the claim to be stayed, pending compliance with the agreed dispute resolution procedure set out in the contract. The relevant clause contained a mandatory escalation and mediation procedure. In particular, the clause required a period of negotiations, followed by reference to contract managers, then escalation to the parties' respective executive committees, followed by a Centre of Dispute Resolution (CEDR) mediation, and only if all of these steps failed to resolve the dispute could either party begin court proceedings. Here, the parties had referred the dispute to their executives and held a 'without prejudice' meeting, but had not held a mediation.
In her judgment, Mrs Justice O'Farrell reviewed a number of previous cases in which parties sought to enforce ADR provisions by means of an order staying proceedings. From these, she arrived at a number of principles: that the agreement must create an enforceable obligation requiring the parties to engage in ADR; that the obligation must be clearly expressed as a condition precedent to court proceedings or arbitration; that the dispute resolution process to be followed must be sufficiently clear and certain; and that the court has discretion to stay the proceedings, bearing in mind the public policy interest in upholding the parties' commercial agreement.
The judge found that each of these principles had been met in Invesco's case.
The judge considered an argument by Ohpen that the dispute resolution clause in question was only, on its proper interpretation, applicable during the 'development and implementation' phase of the project, and did not apply once the agreement had been terminated, as it had been here. The judge rejected this argument, finding that the clause did apply to the dispute between the parties. There was "clear intent" that the ADR procedure should apply to "all disputes" arising during the relevant part of the project regardless of termination.
"No commercial purpose would be served by curtailing the parties' right to use the dispute resolution process in respect of a dispute that had already arisen, or by halting an ongoing process, on conclusion or termination of the relevant phase," she said. "This could lead to a situation where certain disputes in relation to the development of the platform were caught by the dispute resolution procedure and others not, even where such disputes were closely connected and arose at the same time. It is very unlikely that the parties would have intended an incomplete mechanism for resolving their disputes."
In addition, the wording of the clause was sufficient to make it a 'condition precedent' to litigation, even if those words were not themselves used.
"The clear purpose of [the clause] is the mandatory requirement to operate the dispute resolution procedure … before the parties become entitled to institute proceedings. Although the term 'condition precedent' is not used, the words used are clear that the right to commence proceedings is subject to the failure of the dispute resolution procedure, including the mediation process," she said.
The judge also considered that the procedure to be followed under the ADR clause was sufficiently clear and certain to be enforceable. The CEDR rules set out a clear process for selection of a mediator and conduct of the mediation.
Considering whether she should exercise her discretion to grant a stay, the judge found that there was "a clear and strong policy in favour of enforcing alternative dispute resolution provisions and in encouraging parties to attempt to resolve disputes prior to litigation".
When parties draft contracts, disputes and processes to resolve them are usually low in their priorities.
Natalie Melvill said: "Engaging in ADR gives parties the opportunity to resolve their differences without incurring the levels of time and cost involved in litigation. Given the potential benefits, we are increasingly seeing businesses including multi-tiered dispute resolution clauses involving an ADR element in their contracts".
"The criteria emerging from this case provide helpful guidance for practitioners to consider when drafting ADR clauses, with a view to ensuring that the obligation to engage in ADR is binding on all parties to the relevant contract. With this in mind, multi-tiered dispute resolution clauses should be drafted as clearly as possible so as to create an enforceable obligation requiring ADR. Importantly, such clauses should be expressed as a condition precedent to court proceedings and be clear as to the precise procedure to be followed," she said.
Construction disputes expert Shy Jackson of Pinsent Masons said: "When parties draft contracts, disputes and processes to resolve them are usually low in their priorities. When disputes arise they are often dealt with without commercial teams referring back to their contract to check what was drafted in their agreement. This reminds us of how important clear drafting of dispute clauses is, and that parties need to follow them to avoid wasting time and costs".
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