Court finds ADR clause too uncertain to be enforceable

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Authored by: KK Cheung

In Children’s Ark Partnerships Ltd v (1) Kajima Construction Europe (UK) Ltd & (2) Kajima Europe Ltd [2022] EWHC 1595(TCC), the 1^st and 2^nd Defendants (Kajima) applied to strike out or set aside proceedings on the grounds of failure to comply with a contractual ADR provision, said by Kajima to be a condition precedent to the commencement of proceedings. The court dismissed the application. Although, it found that, properly interpreted, the ADR provision was a condition precedent to the commencement of court proceedings, it found it to be unenforceable, because it was not sufficiently clear and certain.

Background

Children’s Ark Partnerships Ltd (CAP) and the 1^st Defendant, Kajima Construction (Europe) UK Ltd, entered into a Construction Contract for the construction of a hospital. CAP and the 2^nd Defendant (the parent company of the 1^st Defendant) entered into a guarantee, under which the 2^nd Defendant guaranteed the due and punctual performance by the 1^st Defendant of its obligations to CAP under the Construction Contract. Disputes arose and CAP commenced court proceedings, which Kajima applied to strike out, on the basis that the court did not have jurisdiction because CAP had failed to comply with the Dispute Resolution Procedure (DRP) in the Construction Contract.

Dispute Resolution Procedure

The Construction Contract contained agreed contractual machinery for the resolution of disputes. Clause 56 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)”. It was Kajima’s case that, properly interpreted, this machinery gave rise to a condition precedent to the right to bring an action; in other words, there could be no right to commence proceedings (and thus no jurisdiction to hear the proceedings) unless the parties to the Construction Contract had operated and concluded the DRP. The DRP provided that disputes were initially to be referred to a Liaison Committee for resolution and that any decision of the Liaison Committee shall be final and binding unless the parties otherwise agreed. Schedule 26 then provided that the parties “may” refer a dispute to mediation and adjudication before “Court Proceedings”, providing that all disputes, to the extent not finally resolved pursuant to the procedures set out in the foregoing provisions of the Schedule, shall be referred to the High Court of Justice in England by either party for resolution.

Issues

The two main issues before the court were:

1. The effect of the alleged failure to comply with the DRP and, in particular, whether such failure had the effect of ousting the court’s jurisdiction;
   
   
2. Whether, even if the court had jurisdiction, it should nevertheless decline to exercise it in the circumstances of this case.

The court said that these issues required consideration of the following questions:

(i) whether the DRP gave rise to a condition precedent, as Kajima contended, or whether it was a mandatory jurisdiction provision, as CAP contended;

(ii) whether the provisions of the DRP were enforceable;

(iii) whether, if enforceable, the provisions of the DRP were complied with by CAP in advance of the issue of proceedings;

Did the DRP give rise to a condition precedent?

The court held that the DRP, properly interpreted, was a condition precedent to the commencement of litigation. It said that when viewed together with the other provisions, the obvious purpose of the relevant provisions in the DRP (objectively construed) was to require the mandatory referral of disputes to the Liaison Committee for resolution before the parties became entitled to institute proceedings.

The court found that the key provisions supporting this interpretation and which evidenced a clear chronological sequence in the operation of the contractual machinery were: (i) paragraph 2 of Schedule 26, which appeared to anticipate the existence of pre-conditions to the commencement of proceedings by reason of the creation of express exceptions; (ii) paragraph 3.1 of Schedule 26, which expressly provided that “all Disputes shall first be referred to the Liaison Committee for resolution; (iii) paragraph 3.2 of Schedule 26, which envisaged that in the case of a Construction Dispute, the Liaison Committee would convene and seek to resolve the dispute within 10 days of referral; and (iv) paragraph 7.1 of Schedule 26, which expressly provided that all disputes shall be referred to the High Court “to the extent not finally resolved pursuant to the [DRP in Schedule 26]”.

The various clauses provided for disputes “first” to be referred to the Liaison Committee and then “to the extent not finally resolved” to the High Court. The clauses, the court said, provided for a sequence which must be followed before legal proceedings could be commenced.

Was the Dispute Resolution Procedure enforceable?

It was common ground that, if it was to be enforceable, the DRP must be sufficiently clear and certain by reference to objective criteria. The court held that the DRP was not sufficiently clear because, amongst other things, there was no meaningful description of the process to be followed and it was therefore unclear how the Liaison Committee would “seek to resolve the Dispute” and it was unclear when the condition precedent was satisfied. It seemed unlikely, the court said, that referral on its own could satisfy the condition precedent, but it was otherwise unclear whether a resolution or decision was required before litigation may ensue.

The court said that although it should be slow to deny enforceability, the test is not whether a clause is a valid provision for a recognised process of ADR: it is whether the obligations and/or negative instructions it imposes are sufficiently clear and certain to be given legal effect. In all the circumstances, the relevant provisions in this case were not apt, it said, to create an enforceable obligation to commence or participate in a dispute resolution process designed amicably to resolve the dispute between the parties to the Construction Contract.

The court found that the DRP was neither clear nor certain. It did not include a sufficiently defined mutual obligation upon the parties in respect of the referral to the Liaison Committee and the process that would then ensue and it therefore created an obvious difficulty in determining whether either CAP or Kajima had acted in breach.

In the circumstances, the court found that, although expressed as a condition precedent, the obligation to refer disputes to the Liaison Committee was not defined with sufficient clarity and certainty. The court said there was no meaningful description of the process to be followed regarding the DRP and no unequivocal commitment to engage in any particular ADR procedure and it was unclear when the condition precedent was satisfied and when the process was intended to come to an end. It also said that the Liaison Committee was to comprise of only representatives from Brighton and Sussex University Trust (the Employer in the project) and from CAP and as there was no representation on the Committee from Kajima, the process would not have a final/binding effect. It was unclear what impact any decision of the Liaison Committee would have on Kajima. The Construction Contract provided that “Any decision of the Liaison Committee shall be final and binding unless the parties agree otherwise agree”. If the reference here to “parties” meant the Trust and CAP, then the process had no final and binding effect on Kajima.

Accordingly, the DRP procedure could not constitute a legally effective precondition to the commencement of proceedings and the commencement by CAP of legal proceedings did not merit a stay of the proceedings.

Comment

The Court of Appeal has granted the Defendants leave to appeal the decision. The Defendants may probably argue that the details of the DRP can be left to the Liaison Committee to decide once it is constituted. We will report the Court of Appeal decision when it is published.

Key Contacts

Kwok Kit (KK) Cheung

Partner | Litigation and Dispute Resolution

Email or call +852 2825 9427