England’s Court of Appeal rules on enforceability of contractual dispute resolution procedure

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Authored by: KK Cheung

Children’s Ark Partnerships Ltd v (1) Kajima Construction Europe (UK) Ltd & (2) Kajima Europe Ltd [2022] EWHC 1595(TCC), concerned the enforceability and effect of a contractual dispute resolution procedure (DRP) and what the court should do in circumstances where one party has not activated that procedure and has commenced court proceedings instead. The 1^st and 2^nd Defendants (Kajima) had applied to strike out or set aside proceedings on the grounds of failure to comply with the DRP, said by Kajima to be a condition precedent to the commencement of proceedings. England’s Technology and Construction Court (TCC) dismissed the application. Although it found that, properly interpreted, the DRP was a condition precedent to the commencement of court proceedings, it found it to be unenforceable, because it was not sufficiently clear and certain. The Court of Appeal ([2023] EWCA Civ 292) has dismissed Kajima’s appeal against the TCC decision.

Background

For the background to this case and TCC decision, please refer to our previous article.

Court of Appeal Decision

Was the DRP enforceable?

The Court of Appeal referred to the general principles applicable to determining whether a DRP is enforceable, namely:

• Wherever possible, the court should endeavour to uphold the agreement reached by the parties and if the agreement is susceptible of an interpretation which will make it enforceable and effective, the court will prefer that interpretation to any interpretation which will result in it being void.

• However, in cases where there is a dispute about the enforceability of an alternative or bespoke dispute resolution provision, which is being relied on to defeat or delay court proceedings, the court will not shy away from concluding that such provision may not be enforceable. 

• Clear words are needed to oust the court’s jurisdiction, even if only on a temporary basis.

The Court of Appeal agreed with the TCC that the DRP was not sufficiently clear and certain and was therefore unenforceable, for the following reasons:

• The DRP provided that disputes were initially to be referred to a Liaison Committee for resolution and that any decision of the Committee was final and binding, unless the parties otherwise agreed. However, Kajima had no representative on the Committee and was not entitled to attend its meetings, make submissions or see its documents.  Accordingly, the Committee was, for the purposes of the construction contract, a fundamentally flawed body, which could neither resolve a dispute involving Kajima “amicably”, nor fairly provide a decision binding on Kajima in any event. That suggested an unenforceable process.

• 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.

• When there is a contractual DRP, one party cannot commence court proceedings until the process has been concluded. Here, it was unclear when the DRP could be said to have come to an end and it was not clear when the condition precedent might be satisfied and when court proceedings could therefore be commenced.

• The authorities talk about the need for a binding contractual process to contain a definable minimum duty of participation, but it was impossible to look at the DRP and see what, if any, minimum participation was required of either party, and Kajima did not even have the right to attend the Liaison Committee to make representations, so how could it participate? 

Appropriate remedy – stay or strike out?

The court also considered what the appropriate remedy is where a party ignores a contractual dispute resolution procedure and commences court proceedings instead – should the court proceedings be struck out or stayed? Kajima had argued that a strike out was appropriate or else it would be deprived of a limitation defence if the action was stayed. The Court of Appeal acknowledged that deprivation of a limitation defence is an important element of the balancing exercise, but said that it cannot alone be decisive. 

The Court of Appeal said that although a stay of proceedings is not the “default remedy” in the sense of it being automatic or inevitable relief which the court will grant to a party when the other party ignores a contractual dispute resolution procedure, it is the usual remedy, although the right remedy, it said, will always turn on the facts of the case.

In the present case, the Court of Appeal held that had the DRP been found enforceable, a stay of proceedings would have been the appropriate remedy, rather than a striking out of the proceedings.

Comment 

In this case, the requirement in the contract that on one hand, the Liaison Committee had to resolve the parties’ dispute amicably without the participation of one party and on the other hand, that its decision shall be final and binding on the parties was fatal to the enforceability of the DRP. In some standard forms of contracts, the decision of the architect/main contractor is final and binding and has to be sought before the main contractor/sub-contractor (as the case may be) can proceed to the next tier of dispute resolution procedure. Such provision is likely to be enforceable, since it does not require the architect/main contractor to resolve the dispute amicably.

Key Contacts

Kwok Kit (KK) Cheung

Partner | Litigation and Dispute Resolution

Email or call +852 2825 9427