Out-Law News 3 min. read

“Sufficiently clear” tiered ADR clauses are critical to ensure enforceability

A recent ruling by the Court of Appeal in England has confirmed that even where an obligation to refer a dispute to an alternative dispute resolution (ADR) procedure is expressed as a condition precedent within a ‘tiered’ disputes clause, the clause must be clear and sensible to ensure that it is enforceable.

If there is uncertainty as to how and when the procedures within a tiered ADR clause should be completed, the conditions precedent will be too uncertain to be enforceable. ADR clauses must provide a clear and detailed contractual process – particularly in relation to timing and participation - to ensure enforceability, even where the obligation to refer an ADR process is expressed as a condition precedent.

Disputes expert Helen Waddell of Pinsent Masons said: “The decision shows that whilst the English court is mindful of the need to enforce the parties’ agreement whenever possible, if an obligation to follow a tiered ADR procedure is not clear - particularly regarding when each tier will commence, who the participants are and crucially, how and when it is to be concluded - it is highly unlikely that the condition precedent will be enforceable.”

The case before the court concerned an appeal by Kajima Construction (Kajima) against the High Court’s dismissal of its application to strike out a claim form issued by the Children’s Ark Partnership (CAP), after CAP purportedly failed to comply with the tiered dispute resolution provisions set out in the construction contract between the parties. CAP had contracted Kajima to design and carry out the redevelopment of a children’s hospital for the Brighton and Sussex University Hospital Trust.

Under the terms of the contract, the parties were obliged to refer any disputes to a “liaison committee”, made up of representatives of CAP and the Trust, before raising court proceedings. This was a mandatory part of the dispute resolution process which had been agreed between the parties.

The High Court held that the requirement to refer a dispute to the liaison committee was a condition precedent because it set out a “clear chronological sequence” that the parties had to follow when a dispute arose and before commencing court proceedings. However, the court dismissed Kajima’s application, concluding that the clause was ultimately unenforceable because it lacked detail and did not provide a “meaningful description” of the steps that the parties had to take in the ADR process.

The Court of Appeal upheld the High Court’s findings and emphasised that where one party cannot commence court proceedings until a particular process is concluded, the contract drafting needs to be sufficiently clear as to how that process is to be concluded for it to be enforceable. 

Helen Waddell pointed out that in practice it is vital for the contractual provisions to clearly specify how and by whom a particular dispute resolution procedure is commenced; the process to be followed once a procedure has commenced; and when a particular procedure is deemed to have been satisfied.

However, she added: “Alongside clarity, tiered ADR clauses must be commercially sensible and parties should be careful to agree an approach that they can realistically and practically follow down the line.”

The Court of Appeal made it clear in this case that they will consider the intentions of the parties to the agreement. All three judges agreed that it would be “commercially absurd” for Kajima to be bound by a decision of the liaison committee in circumstances where it had no representative on the liaison committee; it was not entitled to attend a liaison committee meeting; it was not entitled to make representations at a liaison committee meeting; and it was not entitled to see liaison committee documents.

A final and binding decision from the liaison committee in such circumstances could not result in an “amicable settlement”, which was identified as another outcome of the tiered ADR clause in the contract and hence the conclusion by the Court of Appeal that the ADR clause in question set out a “pointless and an unenforceable process”.

Kajima attempted to challenge the High Court’s decision on two further grounds regarding the court’s discretion to enforce a stay or strike out of proceedings. The Court of Appeal dismissed both grounds of appeal and confirmed that the usual remedy in similar cases is a stay of proceedings rather than a strike out.

 “The case also reiterates that where there are enforceable contractual dispute resolution mechanisms in a contract, which have not been fulfilled, courts will generally stay proceedings to allow mandatory provisions to be fulfilled as opposed to striking out proceedings,” said Waddell. “As always, how the court will exercise its discretion will ultimately rest of the facts of the case.”

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