ADR clauses following Children’s Ark Partnerships Ltd v Kajima Construction (Europe) UK Ltd

George Boddy recaps the law in relation to alternative dispute resolution (ADR) clauses and explains the extent to which the TCC’s recent decision in Children’s Ark Partnerships Ltd v Kajima Construction (Europe) UK Ltd1 has changed the position.

ADR clauses: a recap

ADR clauses are very common in construction contracts. At its simplest, an ADR clause allows the parties to agree that, if a dispute arises in connection with their contract, they will use a form of alternative dispute resolution to attempt to resolve it either prior to, alongside or as a precondition to formal dispute resolution such as litigation or arbitration. 

ADR clauses can be extremely valuable in the event of a dispute. Such clauses give parties a roadmap towards reaching a potential resolution of it and the chance to avoid the time and cost of litigation or arbitration. This can help preserve the commercial relationship, which is often lost by the time lawyers are instructed and formal proceedings are afoot. 

There are various types of ADR clause. Some clauses will simply provide for the parties to refer their dispute to litigation or arbitration and do not specify a form of ADR. More often, ADR clauses will specify a form of alternative dispute resolution that the parties must undertake, such as negotiation between principals, expert determination, or mediation, in order to attempt to resolve their disputes. It is usual for there to be an “escalation” or “multi-tiered” procedure in, whereby, after the service of some form of dispute notice by one party on the other, the parties are required to try one form of ADR first to resolve their dispute and then to move on to a second form of ADR in the event the first fails, and so on, before a party resorts to litigation or arbitration.   

The construction contract between the Children’s Ark Partnerships Ltd (“CAP”) and Kajima Construction (Europe) UK Ltd (“Kajima”)contained a tiered ADR clause, which provided for litigation “subject to the provisions of the Dispute Resolution Procedure” (DRP). The DRP applied to any dispute or claim arising from the contract, which were to be first referred to the Liaison Committee (LC) for resolution. The LC was to be comprised of representatives of CAP and the Brighton and Sussex University Hospital Trust (“the Trust”). CAP had entered into a project agreement with the Trust to design, build and finance the redevelopment of a children’s hospital and had engaged Kajima to provide the design and construction works. The Court referred to the omission of a representative from Kajima on the LC as a “curiosity”. 

The LC was expressly stated to provide a means of resolving disputes amicably. Where a dispute was referred to it, the LC was to seek to resolve it within 10 working days and its decision was to be final and binding unless otherwise agreed. However, it was accepted by the parties during the hearing that as Kajima was not represented on the LC, any decision it made could not possibly be binding. 

The procedural background

CAP alleged that there were defects in the cladding system installed by Kajima, who agreed to carry out various remedial works without prejudice to its position on liability. The parties agreed to enter into a series of limitation standstill agreements to allow Kajima to carry out the remedial works and, once they were complete, Kajima refused to enter into a further standstill. However, CAP considered it still had further claims to bring against Kajima, including claims intimated against CAP by the Trust. CAP, therefore, issued proceedings against Kajima a week before the limitation period was due to expire and immediately sought a stay of proceedings to allow the parties to attempt to resolve the dispute via the contractually agreed ADR mechanism and to go through the Pre-Action Protocol. 

In response to CAP’s application, Kajima applied to strike out or set aside CAP’s Claim Form on the grounds that CAP had failed to comply with the contractual ADR clause before commencing litigation, which it said was a condition precedent. Kajima contended that it had been deprived of a limitation defence that would have been available to it if CAP had complied with its contractual obligations. Kajima brought the application under CPR r. 11(1) on the basis that either the Court’s jurisdiction had not been invoked2 or the Court should decline to exercise its jurisdiction.3 Kajima requested that the Court use its discretion under CPR r. 11(6) to strike out CAP’s claim due to the failure to comply with the condition precedent. 

Are parties required to comply with ADR clauses before commencing litigation?

As long as the ADR clause meets certain requirements, the Court has a discretion to stay proceedings commenced in breach of it. These requirements were set out by O’Farrell J in Ohpen Operations UK Ltd v Invesco Fund Managers Ltd:4

1. The ADR clause in the contract must be an enforceable obligation; 
2. The obligation must be clearly expressed as a condition precedent to court proceedings or arbitration; and
3. The ADR clause must be sufficiently clear and certain and, for example, include machinery to appoint a mediator or other step in the procedure without the need for further agreement between the parties. 

CAP argued that O’Farrell J had gone too far in respect of the second requirement. CAP suggested that the ADR clause did not necessarily need to be expressed as a condition precedent for a Court to order a stay of proceedings commenced in breach of it. 

The Court carefully reviewed the authorities5 and concluded that, insofar as ADR provisions prior to litigation (as opposed to arbitration) were concerned, the case law did not appear to have distinguished between mandatory obligations and conditions precedent for the purposes of deciding whether to stay proceedings commenced in breach of an ADR clause. The Court, therefore, respectfully disagreed with O’Farrell J in Ohpen that the ADR clause had to be expressed as a condition precedent before a Court would order a stay of proceedings. However, the Court concluded that the other two requirements identified by O’Farrell J did apply. 

It now appears to be settled that parties to a construction contract, which includes an enforceable and mandatory ADR clause, must comply with it prior to commencing litigation, even if it is not expressed in the form of a condition precedent. If they do not, there is a risk that the Court will grant a stay of proceedings to allow compliance with the provisions of the clause. 

Notwithstanding the above, the Court found that the ADR clause did amount to a condition precedent due to the presence of the words “subject to the provisions of the Dispute Resolution Procedure” before the rest of the jurisdiction clause which provided for litigation. 

Will the ADR clause be enforceable?

In order to be enforceable, an ADR clause must be “sufficiently clear and certain by reference to objective criteria”6. Further, there should be no need for a further agreement between the parties before the procedure under the ADR clause can commence and the process for selecting a party to resolve the dispute and to pay that person should be identified7. Finally, the ADR process should be clearly defined so that it can be determined objectively what the parties have got to do to comply with it and how it will be exhausted or ended without one party being in breach8.

The Court decided that the ADR clause in the contract between CAP and Kajima did not meet these requirements and that the clause did not create an enforceable obligation:  

1. First, there was no “meaningful description of the process to be followed” and the LC could make its own rules and procedures. The Court was particularly critical of the fact that Kajima itself was not required to be represented on the LC. Kajima’s participation would, therefore, require further agreement. 
2. Secondly, it was not possible to see how an ADR clause, which did not require Kajima’s attendance, could possibly provide a means of “amicably” resolving a dispute between it and CAP or how a decision of the LC could be binding on Kajima if it was not present. 
3. Finally, it was not clear how any dispute was to be referred to the LC by the service of a dispute notice or similar. 

In the light of the Court’s finding that the ADR clause was not enforceable, Kajima’s application for strike out was dismissed. 

In the Judge’s obiter remarks, she found that had the ADR clause been enforceable; the fact that it was expressed as a condition precedent would have given rise to a jurisdictional issue under CPR r. 11(1)(b), but not 11(1)(a) (as this was clear from authority). However, the Judge commented that she would have done no more than stay the proceedings, as that was the default remedy, and would not have used her discretion to grant the draconian relief of strike out because she found that CAP’s decision to issue the Claim Form to avoid the expiry of limitation was an “entirely sensible approach”. 

Comment

The decision confirms the Court’s willingness to enforce parties’ commercial agreements and signals its endorsement of ADR clauses as a means of resolving disputes, provided they are enforceable. 

Indeed, following CAP v Kajima, it now appears that an ADR clause does not have to be expressed as a condition precedent to the commencement of litigation in order for the Court to stay the proceedings to allow for the ADR process to take place. Those acting for parties whose contracts contain a mandatory ADR clause, and where litigation is contemplated, should check to ensure it has been complied with, particularly if limitation is due to expire. If the ADR clause has not been properly complied with, then, absent any other non-compliance, the default option for the Court is to grant a stay of proceedings rather than any more stringent relief.

The case also serves as a warning for those drafting ADR clauses to ensure that they are sufficiently clear and certain by reference to objective criteria, else they may not prove to be enforceable. 

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• 1. [2022] EWHC 1595 (TCC). We understand that leave has been given to appeal to the Court of Appeal.
• 2. CPR r. 11(1)(a).
• 3. CPR r. 11(1)(b).
• 4. [2019] BLR 576.
• 5. Channel Tunnel v Balfour Beatty Ltd [1993] AC 334 and DGT Steel and Cladding Ltd v Cubitt Building and Interiors Ltd [2008] Bus LR 132.
• 6. Ohpen Operations UK Ltd v Invesco Fund Managers Ltd [2019] BLR 576 at [32(iii)].
• 7. Holloway v Chancery Mead Ltd [2007] EWHC 2495 (TCC) at [81].
• 8. Wah (Aka AlanTang) v Grant Thornton International Ltd [2012] EWHC 3198 (Ch) at [60].