It is not unusual for lawyers to espouse the importance of clarity in the drafting of commercial contracts, not only in the “front-end” terms, but also in the so-called “back-end” or “boilerplate” provisions whose content can often be over-looked.
The recent decision of the Technology & Construction court in Children’s Ark Partnerships Ltd v (1) Kajima Construction Europe (UK) Ltd and (2) Kajima Europe Ltd [2022] EWHC 1595 (TCC) required the court to analyse the drafting of a dispute resolution escalation clause to determine (i) whether it was a “condition precedent” and had to be fully complied with before legal proceedings could be pursued, and (ii) whether its wording was sufficiently clear for it to be an enforceable clause in any event. The court also considered whether, if the answer to both (i) and (ii) was "yes", would it be appropriate to stay or strike out the claim.
The basic facts are these:
- In June 2004 Children’s Ark Partnerships Ltd (CAP) had contracted with the Brighton and Sussex University Hospital NHS Trust for the design and redevelopment of the Royal Alexandra Hospital for Sick Children in Brighton.
- On the same date CAP entered into a construction contract with Kajima Construction Europe UK Ltd (Kajima Construction) for the redesign and development of the hospital. It was a term of the contract that no proceedings could be brought against Kajima Construction after the expiry of 12 years from the completion of the work. The various obligations placed on Kajima Construction were guaranteed under a separate contract between CAP and Kajima Europe Ltd.
- The construction contract contained a Dispute Resolution Procedure (the DRP) that would apply to “any dispute, claim or indifference arising out of or relating to” the construction contract. The DRP referenced a “Liaison Committee” (made up of members of the hospital trust and CAP, but not either of the Kajima parties) whose function was (amongst many others) to resolve disputes amicably.
- Formal completion of the work took place on 2 April 2007, but in September 2018 concerns were raised about cladding/fire-stopping issues. Kajima Construction agreed to carry out remedial works at its own cost, on a without prejudice basis. The Liaison Committee had been convened to discuss the remedial works.
- To allow these remedial works to proceed, the parties signed a series of standstill agreements each time extending the 12 year limitation period, the last of which resulted in the limitation ending on 29 December 2021.
- At the end of November 2021 Kaijma Construction notified CAP that the remedial works had been completed, the effect of which was to put CAP on notice that if it did wish to pursue any claim, it only had a month to do so.
- To protect its position given the impending limitation deadline, CAP issued a claim against both Kajima entities on 21 December 2021, and shortly afterwards sought their consent to a “stay” (a temporary suspension) of those proceedings in order to pursue the DRP, pointing out that “the Liaison Committee is a mandatory part of the dispute resolution process agreed”.
Issues for the court to consider
In response to being served with the claim, the Kajima entities applied to the court to “strike out” the claim on the basis that, as CAP had failed to refer the dispute to the Liaison Committee in accordance with the DRP, the court had no “jurisdiction” to hear the claim and should not exercise jurisdiction to do so. The Kajima entities pursued these jurisdiction challenges pursuant to parts 11(1)(a) and (b) respectively of the Civil Procedure Rules.
At the hearing of Kajima’s application, the court had to address two fundamental points:
- What was the legal status of the DRP and, critically, whether the DRP was a “condition precedent” to the commencement of court proceedings (i.e. court proceedings cannot be instigated unless and until the DRP has been followed) and
- Whether the provisions of the DRP, as drafted, were sufficiently clear to be capable of being enforced in any event.
As to (1) the court provided a helpful summary of previous court decisions which had considered whether alternative dispute resolution clauses in contracts are capable of amounting to conditions precedent. The court found that, based on the specific wording of the DRP, and applying the well-established principles of contract interpretation (i.e. taking an objective approach to what the parties meant by the language used), the DRP did have such status. It did not matter that the term “condition precedent” was not used in the wording, as long it was made clear that the right to commence proceedings is subject to compliance with (and ultimately failure of) the DRP.
In principle, therefore, the DRP ought to have been complied with before CAP issued its claim. This was a promising start for the Kajima entities.
However, to be a condition precedent the DRP must be enforceable. Again, the court analysed previous decisions on the legal effectiveness of escalation clauses (in particular Holloway v Chancery Mead Ltd [2007] 117 ConLR 30). To be enforceable the DRP (or any similar clause) (i) must be a process that is sufficiently certain in that there should not be the need for an agreement at any stage before matters can proceed, (ii) must have the administrative process for selecting the party/parties to resolve the dispute clearly defined, and (iii) provide certainty as to the details of the process to be followed. As to (2), the court found that the DRP had fallen foul of this test not least because it did not contain any meaningful description of the process to be followed, the process did not allow the Kajima parties to participate, there was no explanation how a dispute is to be formally referred to the Liaison Committee, and how any decision could ever be enforceable on Kajima. Given these factors, the DRP was not an enforceable procedure and therefore could not constitute a legally effective precondition to the commencement of legal proceedings.
Accordingly, even though it had been established that, in principle, the DRP ought to have been followed by CAP before instigating proceedings, as the DRP was an ineffective process in any event, CAP’s failure to do so was irrelevant, and Kajima’s strike out application should fail.
What if the DRP had been enforceable?
Although it was not obliged to do so, the court went on to consider what approach it might have taken if the wording of the DRP had made it an enforceable process. It considered that the presence of a mandatory alternative dispute resolution process (such as the DRP) was not sufficient to automatically oust the court’s jurisdiction to hear a claim (the CPR 11(1)(a) argument).
Instead, courts should be invited to apply their discretion (the CPR 11(1)(b) argument) as to jurisdiction but should also seek to give effect to the bargain struck by the parties. In this case, had the DRP been enforceable, the judge commented that the court would only have exercised its discretion to stay the proceedings to allow the DRP to be complied with. Stating it was an “entirely sensible approach”, the court was sympathetic to CAP, in commencing a claim to avoid expiry of the limitation period, and to apply for a stay afterwards to allow the DRP to be pursued.
Comment
Describing the tiered dispute resolution clause as “unusual and surprising”, the decision highlights the importance of clear drafting of all aspects of commercial agreements, and serves as a warning to contract draftspersons who wish to include nonstandard or bespoke dispute resolution clauses in their agreements. Helpfully, the decision does signal the court’s willingness to enforce such clauses (if properly drafted) and their desire to consider such clauses as conditions precedent to the commencement of legal proceedings, thereby giving effect to the intentions of the parties to resolve disputes before resorting to the court process. The decision also gives hope to those who may find themselves up against limitation, that the court may exercise its discretion to grant a stay while any conditions precedent are complied with, rather than allow time to lapse while the party attempts to comply with the contract.
Claire Perry