8th June 2023
Dispute escalation clauses (or ‘tiered’ dispute resolution clauses) can be a useful tool. They can be structured to allow time for and/or mandate the use of negotiation, mediation or other forms of Alternative or Negotiated Dispute Resolution (ADR/NDR) before a dispute proceeds to formal litigation or arbitration.
Walker Morris Commercial Dispute Resolution Partner Nick McQueen and Construction & Engineering Associate Inam Hasan highlight important lessons to learn from a recent Court of Appeal case in the construction sector on the enforceability and effect of dispute escalation clauses, and offer their practical advice.
When a party issues proceedings in breach of a dispute escalation clause, the court is ordinarily likely to stay those proceedings until the dispute resolution procedure set out in the clause is completed. One reason the recent case of Kajima Construction  is of interest is how the Court of Appeal dealt with two complicating factors.
Firstly, the prescribed dispute resolution procedure was described by the High Court judge as a condition precedent to court proceedings, so that contractually it should have been completed before any proceedings were started. Because of this, Kajima sought to strike out the claim in its entirety, arguing that the court either had no jurisdiction or, if it did, it shouldn’t exercise it. Secondly, if the claim was struck out, it appeared likely that any fresh claim would be statute-barred. Merely staying the proceedings would therefore deprive Kajima of a limitation defence.
The decision is also a cautionary reminder to contracting parties of the importance of sufficiently clear drafting if they want their dispute escalation clause to be enforceable. As the judge giving the leading judgment said in this case: “Whilst the court has to endeavour to enforce the agreement between the parties, it should not overstrain to do so, so as to arrive at an artificial result.”
In summary, the Court of Appeal upheld the High Court’s decision that the dispute resolution procedure in this case was unenforceable for uncertainty. And while a stay of proceedings is the usual remedy, it’s not a “default remedy” in the sense of an automatic or inevitable relief which the court will grant where a party has ignored a contractual dispute resolution procedure. The right remedy will always turn on the individual facts.
Deprivation of a limitation defence is an important element of the balancing exercise that a court will undertake, but it can’t be decisive on its own. In the only case authority identified where proceedings were struck out, deprivation of a limitation defence was only decisive because it was balanced against the judge’s finding of unreasonableness on the claimant’s part. That wasn’t the case here. The proportionate order was for a stay.
It’s notable that despite the parties settling the matter out of court 12 days after the hearing, the Court of Appeal nonetheless proceeded to finalise and hand down the judgment, noting that the points raised were of some importance generally.
To be enforceable, dispute escalation clauses must be precise and clearly drafted, setting out each party’s obligations during an intended ADR/NDR process. The key is to consider what the parties want to achieve when agreeing to a dispute escalation clause and exactly what the contract must expressly state in order to make this intention effective.
Parties should make sure the clause: provides for a certain and unequivocal commitment to commence the ADR/NDR process (if that’s what’s intended); sets out clear steps that each party is required to take to effect the process; and defines the extent of the process sufficiently so that the parties know exactly the point at which they have a right to start formal litigation or arbitration proceedings.
The process to be followed doesn’t have to be formal, but it must be sufficiently clear and certain, without requiring any further agreement between the parties (an ‘agreement to agree’ will be unenforceable). That means that all steps in the process, including machinery for the appointment of any mediator or other expert, must be comprehensively specified. This may include incorporating the procedures of an external ADR/NDR body. The clause should also address matters such as clarification of the issues in dispute, confidentiality, any time limits and the consequences of any failures to comply with the clause.
This case highlights the importance of making sure that dispute escalation clauses are drafted with the specific contract in mind. Think carefully, for example, before simply copying the clause from a head contract into a subcontract.
Parties faced with a limitation deadline should try to engage with any contractual dispute resolution process and seek to agree a standstill arrangement. If that isn’t possible, the best course is likely to be to commence proceedings and ask the court for a stay. Always seek specialist advice.
Remember that, when deciding what order to make, the court will take into account the reasonableness of the party’s conduct – what reasons did they have for breaching the terms of the dispute escalation clause and commencing proceedings?
Children’s Ark Partnership (CAP) entered into a project agreement with an NHS Trust to redevelop a hospital. CAP subcontracted Kajima to undertake the design and construction works. The project agreement and construction contract contained substantially the same dispute escalation clause which provided that all disputes were to be referred first to a ‘Liaison Committee’ – comprising representatives of CAP and the Trust – for resolution. The Liaison Committee was to seek to resolve any referred dispute within 10 business days, and its decision would be final and binding unless otherwise agreed.
Following the Grenfell Tower tragedy in 2017, 10 years after the initial works were completed, checks were undertaken in respect of the cladding and fire-stopping works at the hospital. Kajima was notified of concerns and agreed to conduct remedial works at its own cost, without admission of liability. The original limitation period expired in April 2019, but as a result of the remedial works, the parties entered into several standstill agreements which had the effect of extending the limitation period. When Kajima indicated that it wouldn’t enter into any further standstills, CAP commenced proceedings and sought a stay until the parties had engaged with the Liaison Committee.
Taken together with other factors, the five reasons noted by the High Court judge led the Court of Appeal to similarly conclude that the clause was unenforceable:
If you have any queries arising from this briefing, or need advice or assistance in relation to dispute resolution options, drafting or strategy, please contact Nick, Inam, or any of our Dispute Resolution experts.