Can you rely on a dispute resolution clause in a contract?
What is a dispute resolution clause?
Over the last twenty years, dispute resolution clauses have become more common in contracts.
A dispute resolution clause usually provides for a protocol for the active resolution of disputes prior to litigation being issued. It is common to see provisions that initially provide for a meeting between the parties, followed perhaps by a mediation. Clauses that provide for an escalation from one process to another are called “tiered dispute resolution clauses”.
Having first been common in construction contracts such clauses are now regularly seen in a full range of commercial contracts.
The intention behind dispute resolution clauses is to enable the parties to avoid costly litigation in the event of a dispute as the contract will provide for a process for the parties to revolve that dispute first. The effect of a dispute resolution clause is that usually, it will be a bar to litigation proceeding until the process under the dispute resolution clause is exhausted.
Children’s Ark and a tiered dispute resolution clause
In June 2022, the court passed judgment on the scope of such clauses, their enforceability and their effect on any litigation, in the case of Children’s Ark Partnership Limited v Kajima Construction (UK) Limited [2022] EWHC 1595 TCC (“Children’s Ark”).
In Children’s Ark, the court was asked to examine a tiered dispute resolution clause that required “any dispute, claim or difference” to be referred to a “liaison committee”. If the liaison committee failed to resolve the dispute then there was a timetable under which other processes would be tried, with litigation being the last resort.
The contract did not define who would be on the liaison committee, how it would be formed, what timeframe would apply to its formation or to its decision making, its processes or the extent of the committee’s function.
The claimant issued proceedings close to the expiry of the limitation date claiming breach of contract. The defendant immediately applied to the court disputing jurisdiction and/or seeking to strike the claim out.
The court started its consideration by examining dispute resolution clauses in general, and initially concluded that it could stay litigation if the clause was mandatory and enforceable.
The court then looked at the specific clause and concluded that it was mandatory in that it was a condition precedent that the parties engage in alternative dispute resolution (ADR) before they could litigate. However, the current clause was unenforceable as the role, constitution and function of the liaison committee was not clear enough.
What makes a dispute resolution clause enforceable?
The court found that, to be enforceable, a dispute resolution clause had to contain at least the three following ingredients:
- The process under the dispute resolution clause must be clear enough to be easily understood with no need for any additional agreements at any stage to enable the process to proceed;
- the process for selecting and paying the dispute resolver (expert in the case of an expert determination, mediator, arbitrator etc) must be sufficiently clear; and
- there must be sufficient details about the operation of the process itself.
The court then observed that if the clause had been clear enough (and therefore, enforceable) then the application challenging the court’s jurisdiction would have succeeded, but only to the extent that the court would have stayed the proceedings and would not have struck them out. The proceedings could then be re-ignited if the contractually defined attempts at ADR then failed.
What can we learn from this case?
Children’s Ark therefore contains some important and interesting judicial guidance, as follows:
- That if the process within a dispute resolution clause is not clear enough then it will be held as unenforceable. This constitutes a warning to those responsible for drafting such clauses to ensure that they have to be well drafted and carefully considered.
- That the mere existence of a dispute resolution clause is not, on its own, a knockout blow for the litigation. This is because the court will only stay the claim and will not strike it out, meaning it will remain preserved so that the parties can re-visit it should negotiations break down.
Contact a commercial disputes solicitor
To find out more about how we can help you resolve a commercial dispute, please contact one of our solicitors or get in touch by requesting a consultation.
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