Construction contract – Alternative dispute resolution – Condition precedent – Claimant seeking damages for breach of building contract arising from alleged defects in works at school – Defendant local authority alleging claim in breach of contractual requirement that all disputes first determined by adjudication – Defendant applying to set aside or strike out claim – Whether court should exercise discretion by declining jurisdiction – Application dismissed
The fourth defendant was a children’s services authority with duties and powers to provide primary and secondary education under the Education Acts. As part of the Building Schools for the Future programme, the fourth defendant engaged the claimant to provide serviced accommodation at a school including the carrying out of works and the provision of services thereto (the Phase 2 project agreement). The first defendant was the building contractor, the second defendant was its parent company and the third defendant was the facilities management (FM) contractor.
The claimant sought damages for breach of the building contract and/or other relief against the first defendant, arising from the alleged defects at the school which were further particularised in extensive schedules. Sums were also claimed against the second defendant pursuant to a parent company guarantee. Alternatively, the claimant also sought damages and other relief against the third defendant for breaches of the FM agreement.
The fourth defendant applied for an order against the claimant pursuant to CPR 11(1)(b) and CPR 11(6)(b), to set aside service of the claim form against it; alternatively, an order striking out the claim pursuant to CPR 3.4(2)(a). In essence, it contended that the court should exercise its discretion by declining jurisdiction to entertain the claim (or by striking it out) which had allegedly been brought in breach of a contractual requirement that all disputes first had to be determined by adjudication (the ADR provision).
Held: The application was dismissed.
(1) Where one party sought to stay proceedings by reason of an ADR provision, the agreement had to create an enforceable obligation requiring the parties to engage in alternative dispute resolution. The obligation had to be expressed clearly as a condition precedent to court proceedings or arbitration. The dispute resolution process did not have to be formal but had to be sufficiently clear and certain by reference to objective criteria, including machinery to appoint a mediator or determine any other necessary step in the procedure without requiring any further agreement by the parties. Further, the court had a discretion to stay proceedings commenced in breach of an enforceable dispute resolution agreement. In exercising its discretion, the court would have regard to the public policy interest in upholding the parties’ commercial agreement and furthering the overriding objective in assisting the parties to resolve their disputes: Ohpen Operations UK Ltd v Invesco Fund Managers Ltd [2019] EWHC 2246 (TCC) followed.
In Children’s Ark Partnership Ltd v Kajima Construction Europe (UK) Ltd [2022] EWHC 1595; 203 Con LR 91, the court doubted that it was necessary for the provision to have been expressed as a condition precedent. It was sufficient for the provision to have been mandatory and enforceable although, in that case, it was decided that the provision was a condition precedent. On appeal, the court said that the usual order, when proceedings were started in breach of a mandatory contractual dispute resolution mechanism, was a stay of proceedings: [2023] EWCA Civ 292.
(2) The court had an inherent power to stay any proceedings brought in breach of an agreement to decide disputes by an alternative method. There was a presumption that those who made agreements for the resolution of disputes had to show good reasons for departing from them. It was beside the point that they later felt that their chosen method was ill-suited for the purpose in respect of the dispute that had arisen. it was for the party resisting the stay to demonstrate why it should not be granted. It was in keeping with the court’s general policy of seeking to enforce the terms of an agreement made by the parties. Ultimately, beyond the presumption, each case turned on its own facts and the features which arose for consideration in the exercise of discretion: Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] AC 334 and DGT Steel and Cladding Ltd v Cubitt Building and Interiors Ltd [2007] EWHC 1584 (TCC); [2007] PLSCS 158; 116 Con LR 118 considered.
The machinery for alternative dispute resolution would be upheld where: (i) the process was sufficiently certain in that there should not be the need for an agreement at any stage before matters could proceed; (ii) the administrative processes for selecting a party to resolve the dispute and to pay that person were defined; and (iii) the process or at least a model of the process was set out. Where a contract contained valid machinery for resolving potential disputes between the parties, it would usually be necessary for the parties to follow that machinery, and the court would not permit an action to be brought in breach of the agreement.
(3) The court’s task was to ascertain the objective meaning of the language which the parties had chosen to express their agreement. The court had to consider the language used and ascertain what a reasonable person in the situation in which they were at the time of the contract, would have understood the parties to have meant. In the present case, the court was satisfied that adjudication was a condition precedent to litigation. The parties had clearly agreed that, under the project agreement, before one party might start legal proceedings against the other, it must first have adjudicated the dispute. The requirement to adjudicate first was mandatory. The adjudication process was clear and certain by reference to objective criteria.
(4) Whilst the burden was on the claimant to show why effect should not be given to the requirement for adjudication, this was essentially a multi-party dispute. If the court was to insist on it, there was a real risk that the adjudication would achieve little. The less satisfactory the adjudication, the more likely any decision in respect of it would be challenged.
A stay for adjudication would probably interfere with the orderly progress of the litigation which was already underway against the other defendants. None of the other three parties, including the claimant, was interested in adjudicating the issues first, yet they would each be impacted by such a stay. In all the circumstances, the application under CPR Part 11 failed.
(5) Insofar as the remedy of strike out under CPR 3(4) was discretionary, having regard to the overriding objective and the reasons given in respect of CPR Part 11, it would not be an appropriate outcome to strike out the claim.
Adrian Williamson KC and Ryan Turner (instructed by Ward Hadaway LLP) appeared for the fourth defendant; Mark Chennells KC and Mischa Balen (instructed by Macfarlanes LLP) appeared for the claimant.
Eileen O’Grady, barrister
