The Court of Appeal considered the enforceability of a contractual ADR procedure in Kajima Construction Europe (UK) Ltd and another v Children's Ark Partnership Ltd [2023] EWCA Civ 292. The court found that an ADR clause was unenforceable due to its ambiguity, and that an order for a stay was not a default remedy, but rather the usual order made where there has been a breach of an ADR clause. The case serves as a reminder of the balancing exercise that the court must carry out when considering ADR obligations, and the importance of clear and precise language when creating a bespoke ADR procedure in commercial contracts.
The Court of Appeal considered the enforceability and effect of a contractual ADR procedure. In particular, what the court should do in circumstances where one party has not activated that procedure and has instead commenced court proceedings.
Background
The Claimant (CAP) and Defendant (Kajima) had entered into a construction agreement in 2004 for the design, build and finance of the redevelopment of a hospital in Brighton. The agreement included a dispute resolution procedure (DRP) clause which provided for the appointment of a ‘Liaison Committee’ which would have various roles, including assisting the parties in amicably resolving disputes and making recommendations which the parties at their discretion could accept or reject.
A dispute arose between the parties as to alleged defects in the design and construction of the Hospital in light of cladding and fire-stopping concerns, to which CAP subsequently issued court proceedings against Kajima in 2021 to prevent the dispute from becoming statute-barred. CAP requested a stay to comply with the DRP and Kajima sought to dismiss the claim, asserting that the court did not have jurisdiction to consider the claim due to CAP’s non-compliance with the DRP and that it had a limitation defence to the claim.
The first instance
In the first instance, the judge found the DRP to be a condition precedent to the commencement of proceedings, but ultimately held that the DRP was unenforceable due to insufficiently defined obligations of the Liaison Committee. The judge granted a stay of the proceedings in her discretion for the parties to attempt to resolve the dispute, referring to the stay as a “default remedy.” The Judge also commented that even if the DRP was enforceable, she would not have ordered anything other than a stay. Kajima appealed on the grounds that the judge had not fully considered Kajima’s limitation defence, had erred in determining the DRP unenforceable and was wrong in ordering a stay.
Appeal
The Court of Appeal dismissed all grounds of appeal.
Regarding the enforceability of the DRP, Coulson LJ, who delivered the leading judgment, held that the first instance judge had made the correct decision in finding that the DRP could not be enforced. While the court was obligated to enforce the parties' agreement, it should not strain to do so and arrive at an artificial outcome. It was not appropriate for the court to attempt to isolate and salvage the components of the DRP process, even if some parts were found to be unenforceable.
Concerning the order for stay in the proceedings, the court determined that it was not a default remedy that the court would automatically grant if a party ignored a DRP clause. The appropriate remedy would always depend on the particular circumstances of the case. However, the judge had referred to it as a "default remedy" simply as a shorthand to describe the typical order that is made when legal action was initiated in breach of a DRP. Even if the court were to re-examine the discretion with the argument that Kajima was deprived of the greatest possible consideration of their limitation defence, it would not be enough to warrant striking out the claim.
Popplewell LJ, whilst agreeing that the appeal should be dismissed, commented that it was clear that Kajima and CAP intended the DRP to apply to disputes between them, even though the proper application of the DRP was considered “commercially absurd.” It was also considered whether the commencement of DRP, rather than the completion, encompassed the condition precedent to legal proceedings, however, this point was not appealed and as such this argument was not available to Kajima.
Practical considerations
Contracts
When considering the use of DRP clauses in commercial contracts, it is important to carefully weigh the risks and benefits of creating a bespoke procedure. Where possible, it may be preferable to use an established ADR procedure such as the Model Mediation Procedure of CEDR, or a simpler process such as friendly discussions.
It is important to consider whether any third parties may become involved in the dispute and whether the ADR process can sufficiently accommodate their participation. The terms must accurately reflect the rights and obligations the third party has in respect of the ADR process.
Further, choosing the right words to create a binding condition precedent can create more certainty for the ADR process and enforceability, such as “shall” and “must.”
The important thing to bear in mind here is that, if the contract seeks to create a unique ADR procedure, the wording of the terms and conditions must be clear and precise as to how and when that procedure can be triggered by the parties, the nature of that procedure, and the implication of that procedure on the parties’ overarching right to commence legal proceedings.
Dispute resolution
If urgency is not a concern, it may be better to ensure compliance with a contractual ADR process to avoid disputes regarding enforceability. It is also worth noting that in certain construction contracts, parties have the right to refer disputes to adjudication "at any time," and the courts will not limit that right by requiring compliance with any ADR clause.
Where limitation is a factor, for the benefit of saving the costs of court proceedings, the parties may also wish to consider entering into a standstill agreement to allow an ADR procedure to be undertaken without the shadow of limitation hanging over them.
Finally, the costs of litigation must always be considered. The dispute between Kajima and CAP ultimately settled, but not before going all the way to the Court of Appeal on a satellite point outside of the substantive dispute. This serves as a reminder of the potential expense and uncertainty involved in pursuing litigation, and the benefits of exploring ADR mechanisms as early as possible.
Written by Jovana Radulovic, Trainee Solicitor
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