The Court of Appeal recently delivered an important decision regarding the enforceability and effect of contractual dispute resolution provisions that oblige parties to engage in an ADR process before commencing proceedings. Of particular interest is the court’s discussion of what remedy is appropriate where such a clause is enforceable and has been breached by a claimant starting litigation before engaging in the process: Kajima Construction Europe (UK) Ltd v Children’s Ark Partnership Ltd [2023] EWCA Civ 292.
It is well established that such clauses can be enforced by the court, but only where the nominated ADR process is specified in enough detail to provide certainty as to the parties’ obligations. In this case the process, which had been imported into a construction subcontract from the head contract, was found to be not workable in that context and unenforceable for uncertainty. To that extent, the decision is a reminder of the importance of such clauses being carefully tailored to the specific contract. It also suggests that a court will not readily be persuaded to ‘salvage’ and enforce particular elements of a proposed ADR process that is otherwise unenforceable (although the minority judgment here would have been prepared to do so).
As to the appropriate remedy where such a clause is enforceable, the Court of Appeal confirmed that a stay of the proceedings is not an automatic or inevitable response, and that the appropriate remedy will always depend on the situation. However, it accepted that a stay is the “usual” order. On the facts here, it agreed that that was the appropriate response – even if this effectively deprived the defendant of a limitation defence it would otherwise have. As is the case for other discretionary decisions (such as where there has been an abuse of process), deprivation of a limitation defence will be an important factor in the balancing exercise, but it will not be decisive.
The court’s reasoning suggests that a key factor in this context will be the reasonableness of the claimant’s conduct. The majority was clearly influenced by the fact that this was not a case where the claimant had simply ignored the ADR process, or where the limitation pressure had arisen due simply to its failure to pursue the claim earlier with no good reason. Rather, the claimant’s approach in the particular circumstances was “entirely sensible”. However, the judgments leave scope for another court to exercise its discretion differently, and strike out a claim, where that is not the case.
As a practical matter, it remains the case that prospective claimants who find themselves under pressure between a looming limitation deadline and a mandatory contractual ADR obligation will in most cases be best advised to try to engage with the ADR process to the extent possible, and to seek a limitation standstill agreement – but if that is not possible, to commence the proceedings before the deadline (and then seek a stay for ADR if appropriate).
Background
The dispute arose in connection with an NHS Trust’s engagement of the respondent (CAP) to redevelop a hospital (the head contract), and CAP’s engagement of a construction company (Kajima) to undertake the works (the subcontract).
Under the head contract, the Trust and CAP had established a Liaison Committee comprising representatives of each, to deal with issues arising throughout the project, including resolving any disputes amicably. It also included dispute resolution provisions (DRPs) agreeing that all disputes “shall first be referred to the Liaison Committee for resolution. Any decision of the Liaison Committee shall be final and binding unless the parties otherwise agree”. The DRPs provided that disputes would be referred to the High Court “to the extent not finally resolved pursuant to that procedure” (or any further agreed ADR process such as mediation).
The subcontract between CAP and Kajima imported those DRPs in substantially identical form.
Ten years after the works were completed, fire safety concerns were raised following the 2017 Grenfell fire and it was agreed that Kajima would undertake certain remedial works, without admission of liability. As a contractual limitation period of 12 years would expire while those works were ongoing, CAP and Kajima agreed a succession of limitation standstill agreements.
When Kajima indicated it would not agree to a further standstill, CAP commenced the proceedings, and then sought a stay until the parties had engaged with the Liaison Committee. Kajima applied to strike out the claim on the grounds that it had been commenced in breach of the DRPs. In particular, it argued that any new proceedings would now be statute barred and that any remedy short of a strike out would wrongly deprive it of a limitation defence to the entire claim.
The High Court accepted that, properly construed, the DRPs made completion of the Liaison Committee process a condition precedent to litigation – ie they obliged each party to engage in the process before it commenced any proceedings. However, it held that:
- the provisions were unenforceable for uncertainty in a number of respects;
- even if they were enforceable, the court would not have exercised its discretion to do more than stay the proceedings until the DRPs were complied with. The judge described a stay as “the default remedy” where the court was being asked not to exercise its jurisdiction due to a breach of a dispute resolution agreement.
Kajima appealed both those findings.
Decision
The Court of Appeal dismissed the appeal. Coulson LJ gave the lead judgment, with which Holroyde LJ agreed. Popplewell LJ agreed with the ruling but on narrower grounds.
Enforceability
Although mindful of the need to enforce parties’ agreements whenever possible, the majority considered the DRPs in the construction contract unenforceable because:
- Given that Kajima was not represented on the Liaison Committee, and had no entitlement to participate in it, it was not clear how it could fairly provide any adjudication that would be binding on Kajima, or facilitate an amicable settlement involving Kajima. It was therefore fundamentally flawed as a dispute resolution mechanism for the subcontract
- While there might have been sufficient certainty as to the initial obligation to refer the dispute to the Committee, everything after that would depend on further agreements between the parties. The majority of the court rejected a submission by Kajima that the condition precedent to litigation was actually limited to that initial referral, rather than completion of the process:
“Whilst the court will endeavour to enforce the agreement between the parties, it should not overstrain to do so, so as to arrive at an artificial result. I do not consider that it is appropriate for the court to try and tease out of the contractual process one element that may be capable of being salvaged, even if other parts are plainly unenforceable“.
- There was ambiguity as to when the process could be treated as having come to an end, so that proceedings could be commenced.
Disagreeing, Popplewell LJ regarded the last point as the only factor that rendered the provisions unenforceable. Although they were “a clumsy adoption” from the head contract, he would have construed them in this context as an agreement that the Committee conduct a mediation-like process (rather than an adjudication), including deciding the relevant procedure. That would leave no aspects to be agreed between the parties and could be enforced.
Further, Popplewell LJ would have been prepared to accept Kajima’s argument that only the commencement of the Committee process was a condition precedent to litigation and that that was enforceable – if not for his view that it was not open to Kajima to argue that in the appeal.
Stay versus strike out
Coulson J opened his judgment by commenting that the application to strike out the claim “would ordinarily seem like overkill: in all the relevant authorities, save one, a stay of the proceedings was regarded as sufficient”. However he noted the complications in this case arising from (i) the fact that the DRPs were not just mandatory but a condition precedent to litigation and (ii) the limitation issue.
In Coulson LJ’s view, a stay of proceedings was not the “default remedy” in the sense of an automatic or inevitable relief when a party ignores a contractual dispute resolution procedure. The right remedy would always turn on the facts of the case. However, to the extent that the expression was simply shorthand to describe the usual order made in such cases, he thought that that was plainly right, based on his review of the (limited) authorities where a court has considered such a breach. He noted that, although most of those authorities were cases where the ADR process was mandatory but not expressed as a condition precedent to litigation, at least one was of the latter type.
Even if the High Court had overstated the wide applicability of stays, that had not affected the exercise of its discretion here, and if the Court of Appeal had needed to re-exercise the discretion it would come to the same conclusion.
That was so even if it was accepted that doing so would deprive Kajima of a limitation defence. The majority considered that deprivation of a limitation defence “is an important element of the balancing exercise but it cannot alone be decisive”. It observed that, in the only identified case where the proceedings had been struck out for breach of a dispute resolution clause (as to forum rather than an ADR obligation), the limitation factor was only decisive because it was balanced against the judge’s finding of unreasonableness on the part of the claimant (Snookes v Jani-King (GB) Ltd [2006] EWHC 289). In contrast, the majority agreed with the High Court that CAP had acted entirely reasonably in the circumstances here. In particular, this was not a case where the limitation pressure arose “because of indolence or a failure to get on with the underlying dispute”. Rather, it was a situation where a national tragedy had prompted the identification of significant fire-safety issues and where both sides, and the NHS Trust, were trying to co-operate and work out an acceptable solution.
On the issue of remedy, Popplewell LJ considered that a stay is not the default remedy in the sense of there being any presumption in favour of it – but also not in the sense of “it being the usual remedy, in the present context”. In his view, if a party has commenced proceedings in breach of contract, and a stay rather than strike out will deprive the other party of a limitation defence, both those factors “were important considerations in favour of striking out rather than staying the claim”.
Popplewell LJ “would strongly incline to the view” that the appropriate remedy here was to strike out the claim if the condition precedent were just the commencement of the Committee process (as he would have accepted if that argument was open to Kajima). To do otherwise would be to permit CAP to rely on its breach to deprive Kajima of a limitation defence, in circumstances where CAP could have easily complied with the obligation before commencing the litigation. However, on the basis that the condition precedent had been held to be the completion of the process, he agreed with Coulson LJ that there were no grounds for interfering with the judge’s exercise of her discretion to limit the remedy to a stay of proceedings.
For further information, please contact:
Jan O’Neill, Herbert Smith Freehills
jan.oneill@hsf.com
