In a recent decision, the High Court held that a dispute resolution clause in a project agreement created a binding obligation on the parties to refer any disputes to an out-of-court adjudication process, as a pre-condition to commencing litigation. However, exercising its discretion, it refused to order a stay of proceedings that had been commenced in breach of the clause. Because the litigation involved other parties and wider issues regarding the project, the court considered that an adjudication involving only two parties would be of little utility and that a stay would unjustifiably disrupt the proceedings: Lancashire Schools SPC Phase 2 Ltd v Lendlease Construction (Europe) Ltd and others [2024] EWHC 37 (TCC).
The question of how the courts should respond where a party has failed to comply with a valid contractual ADR obligation was recently considered by the Court of Appeal in Children’s Ark Partnerships Ltd v Kajima Construction Europe (UK) Ltd [2023] EWCA Civ 292 (discussed here). Its review of the limited authorities on the question confirmed that, while the courts have generally resisted striking out claims on this basis, the usual order is to grant a stay for the ADR process to be undertaken – including in cases where it was a mandatory obligation but not a condition precedent to litigation.
The recent decision is therefore something of an outlier in refusing to grant even a stay in a case where the clause did constitute a condition precedent (and where, unusually for such cases, there was no complaint that the ADR process was unworkable or too vague).
While the result here may be unusual, the way the judge went about deciding whether or not to grant a stay is broadly consistent with the approach adopted in the other authorities. Judges hearing such applications have consistently reiterated the importance of encouraging out-of-court resolution and of keeping parties to their contractual bargains. However, their decision-making process has tended to focus heavily on case management considerations in the particular proceedings – weighing the potential impact of a proposed order on the conduct of the litigation. As this decision demonstrates, such case management considerations may be particularly important in complex, multi-party litigation.
Background
The dispute arose in the context of a private finance initiative (PFI) contract between a governmental educational authority and a private consortium, for the construction and management of serviced accommodations in a school. As is typical in such PFI structures, the authority entered into a head Project Agreement with a special purpose vehicle (Project Co), which separately entered into downstream contracts with a construction contractor and a facilities management company to provide the works and services respectively. The project constituted one of several concurrent ‘phases’ within a wider initiative by the authority.
The Project Agreement between the authority and Project Co contained a dispute resolution clause which, in essence, provided for any disputes to be referred to an adjudication process outlined in the clause.
After a dispute arose regarding alleged defects, Project Co commenced High Court proceedings against the downstream contractors as well as the authority, without attempting to follow the adjudication process. The authority applied to the court seeking an order:
- under CPR 11(1)(b) – that the court decline to exercise its jurisdiction to hear the proceedings (and grant either a strike out or a stay); and/or
- under CPR 3.4(2) – that the claim be struck out as disclosing no reasonable grounds and/or as an abuse of the court’s process.
Project Co argued that the adjudication provisions were not a pre-condition to commencing proceedings and that, in any event, it would be inappropriate for the court to enforce them here because it would adversely impact the resolution of the wider issues involved in the litigation.
The decision
Mr Alexander Nissen KC sitting as a Deputy Judge observed that the adjudication process outlined in the clause was clear and certain by reference to objective criteria, and that none of the parties had challenged it as being unenforceable for uncertainty.
He was “wholly satisfied” that, on a proper construction of the agreement, the adjudication provisions were not only a mandatory obligation but a condition precedent to litigation:
“(T)he parties have clearly agreed that … before one party may start legal proceedings against the other, it must first have adjudicated the dispute”.
That conclusion was based on the combined effect of:
(i) the clause’s wording that any dispute “shall be resolved in accordance with this clause” and
(ii) the fact that, in the contract’s separate Governing Law and Jurisdiction clause, the agreement to confer exclusive jurisdiction on the English courts was expressed to be “subject to” the dispute resolution clause.
Exercise of the Part 11 discretion
Accordingly, Project Co’s non-compliance with the adjudication provision gave rise to a discretion to order a stay of the proceedings or other relief under Part 11.
The Deputy Judge noted several key principles regarding the exercise of that discretion, including:
- There is a presumption that those who make agreements for the resolution of disputes must show good reasons for departing from them, particularly where the parties are experienced commercial entities (Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] AC 334). The burden is on the party resisting a stay to demonstrate why it should not be granted (DGT Steel and Cladding Ltd v Cubitt Building and Interiors Ltd [2007] EWHC 1584).
- In exercising its discretion, the court will have regard to the public policy interest in upholding the parties’ commercial agreement and in furthering the overriding objective in assisting the parties to resolve their disputes (Ohpen Operations UK Ltd v Invesco Fund Managers Ltd [2019] EWHC 2246 (TCC)).
- The court’s usual order when proceedings are started in breach of a mandatory contractual dispute resolution mechanism is a stay of proceedings (Coulson LJ in Children’s Ark).
- The Deputy Judge also noted comments in Children’s Ark regarding the utility and practical value of the proposed ADR process, which he considered also to be valid considerations in the exercise of the court’s discretion.
While acknowledging that the burden was on Project Co to show why a stay (at least) should not be granted, the Deputy Judge concluded that it would be inappropriate to either stay or strike out the proceedings. His principal reasons were:
- The dispute was essentially a multi-party one. It was very doubtful that a bilateral adjudication between Project Co and the authority would satisfactorily resolve matters all matters between them, even allowing for the fact that the adjudication process included provision for the downstream contractors to have some input into the process. The less satisfactory the adjudication, the more likely it was that one of the parties would subsequently exercise its right to refer the dispute to the court for a fresh determination.
- The claim could not be considered in isolation from separate litigation underway in respect of another phase of the programme. Even if the two sets of proceedings were not consolidated (as they could well be), a stay pending adjudication was likely to interfere with the orderly progress of both sets of proceedings and delay their disposal, contrary to the overriding objective.
- The potential for the wider dispute to be resolved by a multi-party mediation could be affected by sending the dispute between Project Co and the authority down a different track.
As to the authority’s application to strike out the claim under CPR 3.4:
- the failure to follow the dispute resolution provision did not go to the substance of Project Co’s claim, and was therefore not a basis to assert that there were no reasonable grounds for the claim; and
- for the same reasons as in respect of the Part 11 discretion, the court did not consider it an abuse of process to have started proceedings without first adjudicating and, even if it were, the court would not exercise its discretion to strike out the claim.
For further information, please contact:
Jan O’Neill, Herbert Smith Freehills
jan.oneill@hsf.com
