Most businesses prefer to avoid the expense of litigation and the Courts are a last resort, so they often include a dispute resolution process in their contracts.
In the case of Kajima Construction Europe (UK) Ltd & Anor v Children’s Ark Partnership Ltd [2023] EWCA Civ 292 (17 March 2023) the Court of Appeal dealt with a case where a party to a PFI contract had issued court proceedings without following the dispute resolution procedure in the contract first, which the Court found was a condition precedent to issuing proceedings. If the appellant succeeded in arguing that the dispute resolution procedure should have been used, which required the parties to mediate, the claim would have been statute-barred so the Claimant would have lost their case. Normally, as the Court pointed out, in this situation it would simply stay the case until the procedure had been followed, but not in this case.
Even though, ironically perhaps, the parties had actually settled and resolved their dispute, which was in the Technology and Construction Court, the Court of Appeal still handed down its decision as it was a matter of interest.
The contract dispute resolution procedure stated that:
Clause 56, which provided that: “Except where expressly provided otherwise in this Contract, any dispute arising out of or in connection with this Contract shall be resolved in accordance with the procedure set out in Schedule 26 (Dispute Resolution Procedure)”.
(b) Clause 68, which provided that:
“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”.
Schedule 26 to the Project Agreement set out the Dispute Resolution Procedure (“DRP”). Its scope was set out in paragraphs 1 and 2 as follows:
“The procedure set out in this Schedule (the Dispute Resolution Procedure) shall apply to any dispute, claim or difference arising out of or relating to this Contract (Dispute) except where it has been excluded from this procedure by an express term of this Contract.
This Dispute Resolution Procedure shall not impose any precondition on any party or otherwise prevent or delay any party from commencing proceedings in any court of competent jurisdiction to obtain either:
an order (whether interlocutory, interim or final) restraining the other party from doing any act or compelling the other party to do
any act; or
summary judgment pursuant to the Civil Procedure Rules 1998, Part 24 for a liquidated sum.”
Schedule 26 provided for the referral of disputes under the Project Agreement to a Liaison Committee in the following terms:
“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.
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”.
‘Construction Dispute’ was defined in the Project Agreement by reference to the Housing Grants (Construction and Regeneration) Act 1996 (“the 1996 Act”).
As to other forms of dispute resolution, paragraphs 4, 5, and 6 of Schedule 26 provided that the parties “may” refer a dispute to mediation or adjudication. Court proceedings were dealt with at paragraph 7.1 as follows:
“7.1 All Disputes, to the extent not finally resolved pursuant to the procedures set out in the foregoing provisions of this Schedule, shall be referred to the High Court of Justice in England by either party for resolution. The parties agree that where the nature of the Dispute so allows, the Dispute shall be tried by a Judge of the Technology and Construction Court. To avoid doubt, this paragraph shall not preclude either party from commencing court proceedings to enforce any decisions of the Liaison Committee or the Adjudicator or to enforce any agreement reached under the mediation procedure.
The Court of Appeal considered whether, if the dispute resolution procedure was a pre condition to starting proceedings, it was actually enforceable. It found that it wasn’t and that the Court should not shy away from ruling this to be the case:
“However, it should be noted that, in cases where there is a dispute about the enforceability of alternative or bespoke dispute resolution provisions which are being relied on to defeat or delay court proceedings, the courts have not shied away from concluding that such provisions may not be enforceable. This may be because clear words are needed to oust the jurisdiction of the court, even if only on a temporary basis. Examples of cases where contractual ADR provisions have been found to be unenforceable include Sulamerica Cia Nacional de Seguros SA v Enesa Engenharia SA [2012] EWCA Civ 638 (“Sulamerica“), upholding Cooke J’s decision at first instance, and Tang and Another v Grant Thornton International Limited and others [2012] EWHC 3198 (Ch); [2013] 1 All ER (Comm) 1226 (“Tang“).”
The Court of Appeal analysed the authorities on the subject and upheld the Judge’s decision that the process laid out in the contract was insufficiently clear to make it binding:
- The starting point is that an agreement to the effect that the parties shall seek to settle their disputes amicably, and only refer the matter to arbitration in the event of being unable to settle, is not a legally enforceable obligation: see Itex Shipping Pte Limited v China Ocean Shipping Co. (“The Jing Hong Hai“) [1989] 2 Lloyd’s Rep 522 (Steyn J as he then was).
- In Cable & Wireless v IBM UK Limited [2002] EWHC 2059 (Comm), Colman J noted that, whilst there was an obvious lack of certainty in a mere undertaking to settle a dispute amicably (because the court would have insufficient objective criteria to decide whether one or both parties were in compliance or breach of such a provision), a clause which went on to prescribe the means by which an attempt to resolve the dispute should be made, was different. In that case there was an express reference to an ADR procedure as recommended to the parties by the Centre for Effective Dispute Resolution (CEDR), one of the principal providers of ADR. Colman J found that resort to CEDR and participation in its recommended procedure were engagements of sufficient certainty for a court to readily ascertain whether they had been complied with. Colman J went on to say:
- In Holloway v Chancery Mead Ltd [2007] EWHC 2495 (TCC), a dispute arose about the applicability of the NHBC dispute resolution scheme. Ramsey J said at [81]:
- In Sulamerica, Cooke J at first instance had found that there was no enforceable requirement to mediate because the relevant clause contained no unequivocal undertaking to enter into a mediation, no clear provisions for the appointment of a mediator, and no clearly defined mediation process. Essential matters therefore remained for agreement between the parties. The clause therefore gave rise to no binding legal obligations of any kind. In the Court of Appeal at [35], Moore-Bick LJ said that he had little doubt that the parties intended the condition to be enforceable; the parties thought they had achieved that objective; and the court should be slow to hold that they had failed to do so. But he reiterated at [35]-[36] that the absence of any provision for the process by which any mediation was to be undertaken meant that the conditions were too uncertain to render them capable of enforcement.
- Finally, in Tang, the dispute concerned a bespoke and detailed series of provisions involving dispute resolution, first by the Chief Executive and subsequently by a Panel of three members of the Board. There were various criticisms of this process which it was said led to the whole scheme being unenforceable. At [60] Hildyard J said:
- The judge’s detailed reasons for concluding that the dispute resolution provisions in that case did not meet his own criteria are set out between [63]–[70]. I note in particular that, at [63], the judge said this about the first stage:
- In the present case, the judge concluded that the DRP did not comply with the minimum requirements noted in the authorities to which I have referred. “
Lord Coulson found that “I consider that the Liaison Committee was, for the purposes of the Construction Contract, a fundamentally flawed body which could neither resolve a dispute involving Kajima “amicably”, nor could fairly provide a decision binding on Kajima in any event. That too suggests an unenforceable process.”
He found that “As to the process itself, the authorities (such as Cable & Wireless) talk about the need for a binding contractual process to contain a definable minimum duty of participation“ and that “When there is a contractual dispute resolution procedure, one party cannot commence court proceedings until that process has been concluded. If it is not clear when that might be, the process is not enforceable.”
Finally Lord Coulson found that “there is the related question of the status of any resolution of the dispute. In my view, it is tolerably clear that the DRP (drafted as it was for the Project Agreement) was intended to result in a resolution which would be “final and binding unless the parties otherwise agree”: see paragraph 3.1 of Schedule 26, and the reference to “finally resolved” in paragraph 7.1. These provisions anticipate a resolution of any dispute through the decision of the Liaison Committee. That makes complete sense amongst representatives from the two parties to the Project Agreement. If those representatives reached an agreed decision, then it is easy to see why it was also agreed that that would be final and binding.
“But under the Construction Contract, notwithstanding the absence of representatives of Kajima and the myriad difficulties to which I have already referred, the Liaison Committee could, on the face of it, reach a decision binding on Kajima.”
It follows from this that parties to PFI and other contracts who want to put in place an effective dispute resolution procedure to prevent the parties taking matters to Court prematurely need to make sure that the procedure is clear enough to be binding. Otherwise a party to the contract can override and ignore the dispute resolution procedure, causing increased litigation costs.