Marie Devereux and Roberta Downey | Vinson & Elkins
Contracts in the construction industry often include multi-tiered dispute resolution clauses. These are clauses which set out in an escalating sequence the stages of dispute avoidance and/or alternative dispute resolution (“ADR”) processes that parties would need to go through or follow before referring a dispute to litigation or arbitration. For example, the preceding stages of the Engineer consulting before making a fair determination of a claim and the use of dispute boards set out in the FIDIC suite of contracts before arbitration may be commenced.
When contemplating the use of bespoke dispute resolution provisions or modified versions of standard form clauses, it is important to ensure that the clause, and the process prescribed by the clause, is sufficiently certain to be enforceable. This article considers the use of multi-tiered dispute resolution clauses and their enforceability against the backdrop of the recent case of Kajima Construction Europe (UK) Ltd and another v Children’s Ark Partnership Ltd [2023] EWCA Civ 292.
Multi-tiered Dispute Resolution Clauses
A clear advantage of multi-tiered dispute resolution clauses is that they impose upon the parties contractual opportunities to cool off and reassess how they might reach a compromise. Such clauses are particularly useful in preventing small disputes from snowballing, saving the parties time and costs, as well as helping them to preserve their commercial relationship.
The trouble arises where one or both of the parties fails to adhere to each of the steps laid out in the clause, and where there is a lack of clarity as to the steps needed to be taken or the mandatory or permissive nature of these steps. There are three common questions: whether the preceding steps are mandatory or optional, the effect of non-compliance and whether or not the clause is enforceable. This article will focus on the third question.
Failing at the Hurdle of Certainty
Historically, the English courts have treated agreements to negotiate or to resolve a claim by friendly discussions with suspicion. An agreement to the effect that parties shall “strive to settle [disputes] amicably” or that parties must first be “unable [to] reach amicable settlement” before referring a dispute to arbitration was held not to be a legally enforceable obligation (See, Itex Shipping v China Ocean Shipping [1989] 2 Lloyds Rep 522 and Paul Smith v H&S International Holding [1991] 2 Lloyds Rep 127). The House of Lords in Walford v Miles [1992] 2 AC 128 confirmed that a bare agreement to negotiate was too uncertain to be enforceable and likened such a clause to an agreement to agree.
The introduction of pre-action protocols with Lord Woolf’s reforms to the Civil Procedure Rules in 1999 (“CPR”), heralded increasing intervention by the Courts in forcing parties to consider mediation and go through a cooling-off process in which they must set out their positions clearly and meet before running off to court (See, CPR 1.4).
Against this backdrop, courts have expressly recognized the public interest benefit of giving effect to multi-tiered dispute resolution clauses: first, as a reflection of the commercial arrangement struck by the parties when they entered into the contract, and second, because such clauses provide well-timed opportunities for the parties to resolve a dispute in a cheaper, quicker and less antagonistic way.
In Cable & Wireless Plc v IBM United Kingdom Ltd [2002] EWHC 2059 (Comm), the Court found that a provision requiring parties to participate in an ADR procedure recommended by the Centre for Effective Dispute Resolution (“CEDR”) before commencing litigation was an enforceable obligation. Colman J said the clause was certain enough to be enforceable because it did not merely prescribe a good faith attempt to negotiate a settlement; it also identified a particular procedure the parties needed to follow.
Nevertheless, in keeping with the fundamental rules of contract interpretation, clarity and certainty remain key. Where Courts have found that provisions have simply been too uncertain to create an unenforceable obligation, they have not hesitated to make such a finding:
- The Court of Appeal found that an obligation for the parties to “seek to have the dispute resolved amicably by mediation” was unenforceable for lack of certainty as no provision had been made as to the process by which this mediation was to be undertaken (See, Sulamérica CIA Nacional de Seguros SA v Enesa Engenharia SA [2012] EWCA Civ 638 at [36]). The parties had not defined the mediation process which was to apply, nor referred to the procedure of any specific mediation provider to be applied.
- The High Court considered a multi-tiered dispute resolution provision that required (a) any dispute which had arisen to be referred to a specific person (the Chief Executive) “with a view to him attempting amicably to resolve that dispute (…) by amicable conciliation of an informal nature” within one month, after which (b) the dispute was to be referred to a three-person panel for another month before arbitration could be commenced. The High Court found that this provision was unenforceable for lack of certainty (See, Tang Chung Wah & Anor v. Grant Thornton International Ltd [2012] EWHC 3198 (Ch)) because it did not provide:
- (i) the form that the process of conciliation with the Chief Executive or dispute resolution under the panel should take;
- (ii) who should be involved and what their role would be in the process (for example the extent to which the parties to the dispute should participate); and
- (iii) what would suffice in terms of an “attempt to resolve” the dispute on the panel’s or the Chief Executive’s part.
Latest Guidance from the Court of Appeal
In the recent case of Children’s Ark Partnerships Ltd v Kajima Construction Europe (UK) Limited, at first instance (See, [2022] EWHC 1595 (TCC)), Joanna Smith J emphasized that the overarching requirement for a dispute resolution procedure to be enforceable is that the provision must be “sufficiently clear and certain by reference to objective criteria” (See, [59]). The Court considered the requirements identified in earlier authorities, namely:
- The process must be sufficiently certain that there should not be the need for an agreement at any stage before matters can proceed (g., prescribing how a party can unequivocally commence the dispute resolution process);
- The process or at least a model of the process should be set out so that the detail of the process is sufficiently certain (g., what each party must do to put the process into place at each stage, and if relevant, the administrative process for selecting a party to resolve the dispute and to pay that person); and
- The process must be sufficiently clearly defined to enable the Court to determine objectively (a) what is the minimum required of the parties in terms of their participation in the process; and (b) when or how the process will be exhausted or can be properly terminated without breach of the provision.
On the facts, Children’s Ark Partnership (“CAP”) entered into an agreement with a hospital trust to redevelop a children’s hospital, and on the same day, entered into a construction contract with Kajima for the design, construction and commissioning of the hospital (the “Contract”). The Contract adopted the following dispute resolution procedure (“DRP”) provision:
- any dispute arising out of or in connection with the Contract had to first be referred to a Liaison Committee (made up of representatives from the hospital trust and CAP) for resolution and any decision by the Liaison Committee would be final and binding unless the parties otherwise agreed;
- the Liaison Committee could adopt the procedures and practices that it considered appropriate from time to time;
- the Liaison Committee was to convene and seek to resolve a construction dispute within 10 business days of referral; and
- all disputes, to the extent not finally resolved pursuant to the procedures set out in the DRP, shall be referred to the Courts of England and Wales.
CAP issued an application to stay court proceedings so that it could carry out the DRP before its limitation period to bring claims expired. Kajima applied to strike out or set aside that application arguing the DRP provision was a condition precedent to commencing court proceedings.
Joanna Smith J agreed with Kajima: she found that the obligation to refer disputes to the Liaison Committee was not defined with sufficient clarity and certainty, such that it could constitute a legally effective precondition to the commencement of proceedings.
On appeal (See, [2023] EWCA Civ 292), the Court of Appeal agreed the DRP was simply too uncertain to be enforceable. Coulson LJ gave the leading judgment, finding it was salient that:
- There was no contractual commitment to engage in any particular procedure, either with respect to the referral, or the process to be followed once the dispute had been referred. The DRP contained no meaningful description of how a dispute was to be referred or what procedures would be applied after referral: instead, the Liaison Committee could come up with its own rules and procedures. How this would be done was also undefined.
- There was no binding contractual process with a definable minimum duty of participation. It was not clear what, if any, level of participation was required by either party to comply with the DRP. On the facts this was further complicated because Kajima had no express right to attend or appear before the Liaison Committee.
- There was no certainty as to the procedure to be followed after referral. After a dispute had been referred to the Liaison Committee, the Committee had to “try and resolve the dispute within 10 days” but there was no clear procedure to be followed, nor any method of identifying a procedure (g., by recommendation of the CEDR). Everything after the referral would require the parties to reach further agreements to progress the DRP. Further, the fact that the Liaison Committee had a 10-day notice period and a 10-day deadline to “try and resolve” the dispute upon referral meant that the process could theoretically be over before it even began.
- There was no clarity as to when the DRP process concluded and when a party could issue proceedings. Since no procedure had been identified, the parties would need to come to an agreement as to when the process concluded, so that one or both parties could commence court proceedings without breaching the Contract.
There was an additional judgment from Popplewell LJ, which agreed with the unenforceability of the DRP but on a much narrower basis. He said that the only aspect of the DRP rendering it unenforceable was the uncertainty as to how and when the DRP process was complete. Popplewell LJ’s dicta emphasized the weight which Courts place on contractual autonomy and noted that Courts are reluctant to hold that an agreement is void for uncertainty and will only do so as “a last resort”. He considered that there was a sufficiently certain process in place, which depended not on further agreement between CAP and Kajima, but upon the procedure the Committee decided to adopt.
What does this mean for multi-tiered dispute resolution clauses?
While there is no established test as to what makes a multi-tiered dispute resolution provision enforceable and each case will depend on the facts, Kajima Construction Europe (UK) Ltd v Children’s Ark Partnership has helpfully identified and distilled key principles, which contract-drafters would do well to bear in mind:
- Overall the dispute resolution procedure should be sufficiently certain that there should not be any need for the parties to reach an agreement at any stage.
- There should be a description or model of the process.
- Define the minimum duty of participation such that it is possible to determine objectively whether the parties have done enough to comply with the procedure, or if they are in breach.
- The process should be sufficiently clear that it is possible to determine objectively whether or not the process has been exhausted such that the parties can commence proceedings in court or in arbitration.
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