Resolving dispute resolution disputes: when will ADR provisions be unenforceable?

Executive summary

In order to ensure a contractually agreed dispute resolution procedure is enforceable, the procedure should be as unambiguous and precise as possible, and clearly state:

1. A minimum level of participation required from all parties in order to comply with the procedure; and
    
2. How to initiate the procedure, what process is to be followed thereafter, and how and when the procedure is to conclude.

If the procedure requires a form of third party adjudication, careful consideration should be had to ensure that the parties to a potential dispute are able to be represented and to participate in that adjudication fairly.    

If a party issues proceedings in breach of a dispute resolution procedure, the usual approach is for the Court to stay the claim.  However, this will turn upon the facts of each case.

Any contracting party seeking to agree a bespoke dispute resolution procedure should consider carefully (a) what it wants that procedure to be, and (b) whether that desired procedure is adequately described as a matter of contractual drafting.  When drafting significant contracts or contractual arrangements involving more than two parties, parties should take advice from dispute resolution counsel as part of their use of external counsel.

Once in a dispute, a party should consider carefully any bespoke dispute resolution provisions, and take advice on how to make best use of those provisions in order to resolve the dispute.

Facts

In 2004, Brighton and Sussex University Hospital NHS Trust (the "Trust") engaged Children’s Ark Partnership Limited ("CAP") to redevelop one of its hospitals (the "Head Contract").  CAP subcontracted with Kajima Construction Europe (UK) Limited ("Kajima") (the "Sub-Contract"). Kajima Europe Limited guaranteed Kajima's obligations under the Sub-Contract.

The Head Contract established a Liaison Committee with representatives from the Trust and CAP.  The dispute resolution procedure (the "DRP") in the Head Contract stated that:

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";
    
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";
    
3. As to other forms of dispute resolution, the DRP provided that the parties "may" refer a dispute to mediation or adjudication; and
    
4. As to Court proceedings in particular, "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".

CAP and Kajima imported the material terms of the DRP into their Sub-Contract.

Following the Grenfell disaster in 2017, a dispute arose between CAP and Kajima as to certain remedial works needed to the hospital.  CAP and Kajima agreed a standstill agreement and series of extensions for Kajima to perform the work.  When Kajima refused to agree a further extension, CAP issued proceedings on the basis that there was not sufficient time to engage the Liaison Committee pursuant to the DRP before the limitation period ran out.

CAP applied to stay the proceedings, pending compliance with DRP.  Kajima applied to strike out the proceedings, on the basis that they had been issued in breach of the DRP.

The Judge at first instance ruled, amongst other things, that the DRP was unenforceable.  Even if it was enforceable, the Judge would have ordered the proceedings be stayed, not struck-out. Kajima appealed.

Appeal

Unenforceability of the DRP

In his judgment, Lord Justice Coulson ruled that the DRP was unenforceable for uncertainty for the following reasons:

1. The DRP was flawed. Kajima did not have a representative in the Liaison Committee.It therefore could not contribute or be privy to documents or meetings, yet the decision of the Liaison Committee was "final and binding" on Kajima. The Liaison Committee (consisting of the representatives of the Trust and CAP) was inherently biased against Kajima. The DRP could not possibly lead to an "amicable settlement", which was identified as one of its aims; and
     
2. The DRP was ambiguous:
   1. There was "no minimum definable duty of participation” i.e. it was not clear what level of participation would comply with the DRP;
       
   2. There was no contractual commitment to engage in any particular procedure either covering the referral, or the process to be followed once the dispute had been referred;
       
   3. What happened after the DRP process was initiated depended on further agreements between the parties;
       
   4. It was not clear when the DRP was concluded and a party was free to issue proceedings. The Liaison Committee would merely "seek to resolve" a dispute within 10 business days if it was a "Construction Dispute"; and
       
   5. The DRP could, theoretically, be over before it began due to the stipulated notice periods and resolution times therein.

Lord Justice Popplewell, also presiding over the case, agreed with Lord Justice Coulson that the DRP was unenforceable, but stated that the DRP was only unenforceable because the DRP did not state when the process was concluded, and that he was prepared to overlook the other issues that arose from the "clumsy" adoption of the DRP into the Sub-Contract.   He was also inclined to agree with Kajima's alternative argument that only commencing the DRP was a prerequisite to litigation (and not participation in the process thereafter) and that such a requirement was enforceable. However, this argument was not admissible in the appeal and so it was not open for Kajima to argue it.

The remaining Court of Appeal Judge presiding over the proceedings, Lord Justice Holroyde, agreed with Lord Justice Coulson's reasoning.

Stay

The Court of Appeal ruled that a stay will be the usual remedy that the Court will grant in these circumstances, although each case will depend on the facts.  Based on the relevant authorities a stay was the correct remedy in this case, even though it would deprive Kajima of a limitation defence.  

Lord Justice Popplewell agreed, but clarified that if the condition precedent to litigation under the DRP was only to initiate the DRP (had that argument been open to Kajima, as above), then it would be appropriate to strike-out the claim.