The Court of Appeal recently handed down judgment in Kajima Construction Europe (UK) Ltd & Anr v Children’s Ark Partnership Ltd [2023] EWCA Civ 292, an important case regarding the approach to enforcing dispute resolution provisions. As well as making clear that clauses which require the parties to engage in an alternative dispute resolution procedure prior to commencing court proceedings will need to be sufficiently certain to be enforceable, the Court of Appeal has confirmed that the usual remedy for breach of such a clause will be a stay of court proceedings, rather than a strike out. The decision also makes clear the dangers of adopting clauses from a head contract into a sub-contract.
Facts
In 2004, the Brighton and Sussex University Hospital NHS Trust (the "Trust") entered into an agreement with Children's Ark Partnership Ltd (CAP) to design, build and finance the redevelopment of the Royal Alexandra Hospital for Sick Children in Brighton (the "Project Agreement"). On the same date, CAP engaged Kajima to design, construct and commission the hospital (the "Construction Contract").
The Project Agreement provided for the establishment of a "liaison committee" consisting of representatives of CAP and the Trust. Among other things, the liaison committee was intended to provide "a means of resolving disputes or disagreements between the parties amicably" pursuant to a "dispute resolution procedure" set out in Schedule 26. This provided that any decision of the liaison committee would be "final and binding unless the parties otherwise agree".
The Construction Contract referred back to the liaison committee set up under the Project Agreement and replicated Schedule 26. However, it did not provide for Kajima to have a representative on the liaison committee or entitle Kajima to inspect liaison committee minutes.
The construction works were completed in 2007 but, following the Grenfell Tower tragedy, concerns arose in respect of the cladding and fire-stopping works. In December 2021, when limitation was due to expire, CAP issued proceedings against Kajima, claiming as damages any amounts CAP would be liable to pay the Trust in respect of the defects. However, Kajima contended that, as CAP had failed to comply with the Dispute Resolution Procedure, the claim should be struck out. If the claim was struck out, it was likely any new claim would be statute barred.
Dispute resolution provisions
Clauses obliging contracting parties to engage in alternative dispute resolution procedures, or to negotiate in an effort to resolve their disputes amicably prior to issuing court proceedings (sometimes known as tiered or escalation dispute resolution clauses), are frequently encountered in commercial agreements. Such provisions can help parties to preserve ongoing relationships and avoid the time and expense of litigation. Clear words are needed, however, to oust the jurisdiction of the court, even if only temporarily, and under English law an agreement to settle a dispute amicably has traditionally been considered too uncertain to enforce.
However, in recent years, the courts have become more willing to hold parties to the terms of dispute resolution provisions, provided:
- The provision contains a sufficiently certain and unequivocal commitment to commence a dispute resolution process;
- The provision makes clear what each party must do to put the process in place; and
- The process is sufficiently clearly defined to enable the court to determine objectively what each party must do (as a minimum) to participate in the process, and when or how the process will be exhausted or properly terminable without breach.
The High Court decision
At first instance in Kajima, the High Court concluded that although the dispute resolution procedure in the Construction Contract gave rise to a condition precedent to court proceedings (meaning the procedure should have been completed before court proceedings had been commenced), it was not enforceable as it did not comply with the minimum requirements for certainty set out in the authorities. In any event, even if the procedure had been enforceable, the judge would not have exercised her discretion to do anything more than stay the proceedings. Kajima appealed.
Court of Appeal judgment
The enforceability of the dispute resolution procedure
On appeal, Kajima contended that the dispute resolution procedure in the Construction Contract was sufficiently clear to be enforceable, albeit the result could never have been binding on it because of Kajima's lack of representation on the liaison committee. Lord Justice Coulson (with whom Lord Justice Holroyde agreed) observed that if that were right, it would make no commercial sense. However, if the dispute resolution procedure did impose a final and binding decision on Kajima, made by a committee on which Kajima had no representative, whose meetings Kajima had no right to attend, to which Kajima was not entitled to make representations, and whose documents Kajima were not entitled to see, that could not possibly lead to an "amicable settlement", and suggested instead a pointless and unenforceable process. Further, it was impossible to look at the procedure and see what, if any, minimum participation was required of either party. Finally, Lord Justice Coulson observed that it was unclear when the process was to come to an end, noting that while Schedule 26 required the liaison committee to try to resolve the dispute within 10 days of referral, in the Project Agreement the liaison committee was allotted 10 days' notice before it even held a meeting, meaning on one view the process could be over before it had even begun. He therefore concluded that the first instance judge had been right to hold that the dispute resolution procedure was unenforceable.
As an alternative, Kajima contended that CAP was only obliged to refer the dispute to the liaison committee, not for the dispute resolution procedure to have concluded. However, the first instance decision was that completion of the dispute resolution procedure was a condition precedent, and there had been no appeal from that finding. In any event, Lord Justice Coulson considered that the dispute resolution procedure had to be considered as a whole to see if it was enforceable. He added that if the process was just about making a referral to the liaison committee then it was pointless, since CAP would be able to start court proceedings immediately after making its referral. Further, if CAP's failure to utilise a pointless dispute resolution procedure now prevented them from pursuing proceedings against Kajima, that would be to elevate form over substance.
Lord Justice Popplewell took a different view, concluding that the dispute resolution procedure in the Construction Contract could be construed as a non-binding mediatory process to be conducted by the liaison committee. However, given the uncertainty as to how and when that process would be complete, he agreed that if completion (rather than commencement) of the dispute resolution procedure was a condition precedent to commencing proceedings, the provision was too uncertain to be enforceable.
What is the appropriate remedy for breach of a dispute resolution procedure?
If, however, the dispute resolution procedure had been enforceable, the Court of Appeal was asked to consider the appropriate remedy, bearing in mind that if the proceedings were stayed rather than struck out, then it was likely Kajima would have been deprived of a limitation defence.
As Lord Justice Coulson noted, there is a good deal of authority that the court has an inherent power to stay proceedings which have been brought in breach of a contractual dispute resolution clause, while there appeared to be no reported case where such proceedings had been struck out. Kajima nevertheless contended that the first instance judge had been wrong to suggest a stay is the 'default remedy'. Lord Justice Coulson agreed that a stay will not be the automatic or inevitable result and that the appropriate remedy will always turn on the facts of the case. However, in his view, it was plainly right that it will be the usual order where proceedings are started in breach of a dispute resolution procedure, and in this case, the judge had been entitled to exercise her discretion in the way she did to order a stay. Even if Lord Justice Coulson had been obliged to exercise the discretion afresh, he would have taken into consideration the fact that CAP had acted reasonably at all times and, even giving the greatest possible weight to the deprivation of a limitation defence, he would still have held it would be more proportionate to order a stay than a strike out.
Again, Lord Justice Popplewell thought otherwise, commenting that if the dispute resolution procedure had been enforceable, then staying rather than striking out the claim would permit CAP to rely on its breach to deprive Kajima of a limitation defence.
Conclusion
The Court of Appeal emphasised that, wherever possible, the court should endeavour to uphold the agreement reached by the parties. However, as this decision demonstrates, if a dispute resolution provision lacks certainty, the court will not "overstrain" to do so, ignoring utility or elevating form over substance. Binding dispute resolution provisions can be an effective means of maintaining control and saving costs, whilst tiered dispute resolution provisions can help to preserve commercial relationships, but in order to be enforceable, careful thought will need to be given to how they are drafted. Parties should also be aware that, even if such provisions are considered enforceable, and proceedings are brought in breach, it is likely (but not guaranteed) that the court will grant a stay to allow the parties to complete the dispute resolution procedure first, rather than striking out the proceedings entirely. Given this lack of guarantee, in circumstances where there is a potential limitation issue, but a dispute resolution procedure has yet to be completed, a Standstill Agreement should always be sought and in good time to negotiate the terms before the limitation period lapses. Even if that Standstill Agreement is denied or terminated, seeking it will also be evidence to the court of reasonable behaviour and therefore bolster any argument for a stay rather than strike out.
The decision in Kajima is also a warning on the adoption of clauses from a head contract to a sub-contract. In this case, the dispute resolution provision in the Project Agreement was consciously adopted into the Construction Contract, but because the parties to each agreement differed, the effect was very different.