A recent decision reminds parties about the need to draft dispute resolution clauses that are tailored to the parties’ agreement.
The Court of Appeal recently ruled that an alternative dispute resolution (ADR) clause in a contract was unenforceable due to lack of clarity. The ruling signals to contracting parties that they should draft ADR clauses carefully, outlining the process to be followed with sufficient detail and clarity so that the clause can be enforced.
In Kajima Construction Europe (UK) Ltd v. Children’s Ark Partnership Ltd, the claimant initiated court proceedings one week before the expiry of a contractual limitation period without first complying with a contractual ADR process. The defendant argued that the proceedings should therefore be struck out for non-compliance with a condition precedent. The Court of Appeal upheld the first instance decision of Joanne Smith J (the Judge), finding that the relevant dispute resolution provision (the Clause) was in fact unenforceable for lack of clarity, such that the court proceedings could continue.
The claimant, Children’s Ark Partnerships Ltd (CAP), entered into a project agreement with Brighton and Sussex University Hospital Trust (the Trust) to redevelop a children’s hospital. CAP subsequently engaged the defendant, Kajima Construction Europe (UK) Ltd (Kajima), under a contract to construct the hospital.
The contract between CAP and the Trust included a clause stating that: (a) all disputes would first be referred to a “Liaison Committee” for resolution; (b) any decision of the “Liaison Committee” would be final and binding unless the parties agreed otherwise; and (c) the courts of England & Wales had exclusive jurisdiction over all disputes, to the extent not finally resolved by the “Liaison Committee”. The contract between CAP and Kajima adopted a materially identical provision: the Clause. The “Liaison Committee” comprised representatives of CAP and the Trust (but not Kajima).
Following the Grenfell Tower fire in 2017, CAP raised concerns relating to fire safety and it was agreed that Kajima would carry out remedial works, but a dispute arose as to whether the works were complete. CAP commenced court proceedings against Kajima shortly before expiry of a relevant contractual limitation period, and then applied for a stay of the proceedings to comply with the requirements of the Clause. Kajima applied for the proceedings to be struck out on the grounds that CAP had breached the contract by failing to comply with the Clause (because it had commenced court proceedings before going through the “Liaison Committee” process), and that any new claim would now be time-barred.
At first instance, the Judge accepted that the “Liaison Committee” process was a condition precedent to commencing court proceedings. However, the Judge held that: (a) the obligation to refer disputes under the Clause had not been defined with “sufficient clarify and certainty” to allow it to be considered enforceable; and (b) even if the Clause had been enforceable, she would not have exercised her discretion to do anything more than stay the court proceedings that CAP commenced. Kajima appealed.
The Court of Appeal dismissed the appeal, holding that the Clause was unenforceable for the following reasons:
- The Clause provided no “meaningful description” of the process to be followed.
- The Clause offered no “unequivocal commitment” to engage in any particular ADR procedure. In particular, it was unclear how the process could provide a means of resolving the dispute amicably or fairly in circumstances where Kajima was not obliged, and had no right, to participate in the process due to the constitution of the “Liaison Committee”.
- The Clause was not sufficiently clear on how a dispute should be referred to the “Liaison Committee”.
- The Clause was unclear on whether a decision of the “Liaison Committee” would be final and binding on Kajima in circumstances where it was not a party to such proceedings.
- The Clause was unclear on when the process of referral to the “Liaison Committee” could be said to have come to an end, such that the court could determine with sufficient clarity when the Clause had been complied with and proceedings could therefore be commenced.
Remedy — Stay or Strike-Out and Discretion
Kajima argued that a strike-out was the appropriate remedy, as a stay of proceedings would deprive Kajima of a limitation defence. The Court of Appeal noted that deprivation of a limitation defence is an “important element of the balancing exercise” but is not in itself decisive when considering the issues in this matter.
The Court of Appeal confirmed that if the Clause had been enforceable, a stay of proceedings would have been the appropriate remedy, as opposed to striking out the claim. Coulson LJ noted that a stay was not the “default remedy” in terms of being inevitable relief if a party commences proceedings without complying with an ADR provision. However, a stay of proceedings would be the “usual” order in such cases (subject to the specific facts).
The only case where deprivation of a limitation defence resulted in the proceedings being struck out involved a claimant that had acted unreasonably. However, in this case, CAP acted reasonably throughout. Accordingly, the appeal was dismissed.
The decision confirms that:
- ADR mechanisms must be drafted with clarity and certainty in order to be enforceable;
- a stay of proceedings is the “usual” but not “default” remedy if a claimant commenced court proceedings without complying with an ADR clause; and
- when the court applies its discretion on whether to stay proceedings, depriving the defendant of a limitation defence will be an important but not decisive factor; the court will also consider whether the claimant has acted reasonably in the circumstances.
The specific facts of this case highlight the dangers of adopting either template dispute resolution clauses, or adopting such clauses from a head contract into a sub-contract, without tailoring them appropriately to a particular agreement or set of circumstances.
The court will generally seek to uphold commercial agreements between parties but will not imply meaning into ADR clauses to rescue an otherwise unenforceable provision. Accordingly, parties should draft ADR clauses carefully, including sufficient detail such that the proposed process is certain. Specifically, the drafting should set out how to initiate the process, and when it will be deemed to have concluded, such that the claimant can commence court proceedings.
Further, when the court exercises discretion on whether to stay or strike out proceedings, it will consider if the claimant has acted reasonably in the circumstances. For example, if a claimant does not have a good reason to commence proceedings so close to the end of a limitation period, or has simply disregarded an ADR clause, a judge would likely not exercise discretion in its favour.
In any case, potential claimants facing imminent expiry of a limitation period should strongly consider engaging in any mandatory ADR processes before commencing proceedings. To the extent possible, it is advisable to enter into a standstill agreement to stop the limitation period from running whilst engaging and complying with the relevant contract.
This post was prepared with the assistance of Anna Diab in the London office of Latham & Watkins.
  EWCA Civ 292
 Snookes v. Jani-King (GB) Ltd  EWHC 289