In Children's Ark Partnerships Ltd v Kajima Construction (Europe) UK Ltd and another [2022], the Technology and Construction Court (TCC) found that a contractual alternative dispute resolution (ADR) clause gave rise to a condition precedent to the commencement of litigation. However, the ADR provision in question was unenforceable due to its lack of "clarity and certainty".

Background

  • In 2004, Children's Ark Partnerships Ltd (the Claimant) entered into a construction contract with Kajima Construction (the First Defendant) for the design, construction and commissioning of the Royal Alexandra Hospital for Sick Children in Brighton. The Claimant had signed a Project Agreement of the same date with the NHS Hospital Trust for the design, building and financing of the redevelopment of the Hospital.
  • Kajima Construction commenced works in 2004 and the Actual Completion Date was 2 April 2007.
  • The Construction Contract, as well as the Guarantee provided by the Defendant's parent company Kajima Europe (the Second Defendant), provided that no claim could be commenced against the Defendants after 12 years from Actual Completion, i.e. 2 April 2019.
  • In around 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. These commenced in December 2018 and were sequenced over a long period to avoid disruption at the Hospital.
  • In light of the remedial works, the Parties signed a series of standstill agreements extending the limitation period, which finally lapsed on 29 December 2021.

The Claim

The Claimant issued its Claim Form just prior to the expiry of the limitation period alleging design and/or construction defects in the works, which the Hospital Trust required it to remedy.

The Claimant subsequently sought a two-month stay of the proceedings to allow it to comply with the contractual Dispute Resolution Procedure (DRP). This required all disputes to be first referred to a 'Liaison Committee' for a final and binding decision.

The Claimant convened the Liaison Committee (discussed further below) and thereafter, submitted its Particulars of Claim. It claimed losses including deductions levied or to be levied by the Trust under the Project Agreement of approximately £14 million, as well as its own costs of investigating and dealing with the defects.

The Defendants' application

The Defendants applied to strike out the claim. They submitted that the court either:

  1. had no jurisdiction to hear the claim, under CPR 11(1)(a); or
  2. should not exercise its jurisdiction, pursuant to CPR 11(1)(b),

because the Claimant had failed to refer the dispute to the Liaison Committee and thus failed to comply with the DRP.

The Defendants contended that the DRP was a condition precedent, and that the court's jurisdiction was expressly subject to compliance with that condition precedent. As such, they submitted that the Claimant's right to bring a claim had not arisen at the date it issued its Claim Form.

TCC decision

Enforceability of a contractual ADR provision

The first question before the TCC was whether the applicable authorities required it to stay proceedings where a party seeks to enforce a contractual ADR provision. It considered the principles set out in the earlier case of Ohpen Operations UK Ltd v Invesco Fund Managers Ltd [2019] which had concluded on the basis of the authorities that:

  1. the agreement must create an enforceable obligation to engage in ADR;
  2. the obligation must be expressed clearly as a condition precedent to litigation / arbitration;
  3. the ADR process must be "sufficiently clear and certain by reference to objective criteria" (although it does not have to be formal); and
  4. the court has a discretion to stay proceedings commenced in breach of an enforceable ADR provision, and will have regard to public policy interests in upholding parties' commercial agreements.

Whilst the TCC agreed with and applied points one, three and four, it disagreed with Ohpen on point two. On a review of the authorities which related to litigation, and stripping out those relating to arbitration (i.e. a consensual process with a different jurisdictional basis, and not therefore of direct application when considering the inherent jurisdiction of the court), it held that the courts:

  • have not distinguished between mandatory obligations and conditions precedent in decisions as to the enforceability of ADR clauses prior to litigation; and
  • have an "inherent jurisdiction" to stay court proceedings for the enforcement of an ADR provision where such provision "creates a mandatory obligation and where it is enforceable". It was not necessary for the ADR provision to be construed as a condition precedent in order for the court's jurisdiction to stay proceedings to arise.

Did the DRP give rise to a condition precedent?

The TCC considered the Defendants' submission that the DRP gave rise to a condition precedent. It held that in the circumstances, the DRP was properly to be interpreted as a condition precedent to the commencement of court proceedings, observing that:

  • the court's task is to apply the ordinary and well known principles of contractual interpretation, i.e. to ascertain the objective meaning of the language used by the parties to express their agreement;
  • it is not necessary for the words "condition precedent" to be used, provided the words used are "clear that the right to commence proceedings is subject to the failure of the dispute resolution procedure". It is necessary in this context to have "more than a mere statement that compliance with the dispute resolution procedure is mandatory", which in this case was achieved (when read in the context of other provisions in the contract setting out mandatory obligations and sequencing) by including wording that the right to commence court proceedings was "subject to" the agreed DRP;
  • when viewed together, the provisions of the Construction Contract anticipate that the right to commence court proceedings is subject to compliance with the DRP.

Was the DRP enforceable?

The TCC held that it was not: the obligation to refer disputes to the Liaison Committee was not sufficiently clear or certain. Specifically, there was no "meaningful description" of the procedure, nor was it clear how a dispute was to be referred to the Liaison Committee or how the process would come to an end such that the dispute could be referred to the courts.

Further, the Liaison Committee (which was defined in the Project Agreement rather than the Construction Contract) comprised only representatives from the Hospital Trust and the Claimant, with no representation of Kajima Construction on the committee. In such circumstances, it was "impossible to see" how the process could be said to provide a means of resolving disputes between the parties amicably.

As such, the DRP could not constitute a "legally effective precondition to the commencement of proceedings" and was not enforceable. The Defendant's jurisdictional challenge was dismissed on this basis.

Was either CPR 11(1)(a) or (b) engaged?

In light of its finding on enforceability, it was not strictly necessary for the court to consider this question. However, in her obiter remarks the judge commented that CPR 11(1)(a) was not engaged: it is clear from the authorities (including an earlier House of Lords decision) that the presence of a mandatory ADR provision does not oust the court's jurisdiction.

However, an enforceable ADR provision expressed as a condition precedent to litigation should engage CPR 11(1)(b): the courts should exercise their discretion as to jurisdiction and seek to give effect to bargains struck by commercial parties.

We note that this decision also follows other authority in relation to a FIDIC contract where the TCC ordered a stay of Court proceedings issued before the dispute had been determined by the Dispute Adjudication Board required under the contract as a precursor to litigation (see Peterborough City Council v Enterprise Managed Services Limited [2014]).

If CPR 11(1)(b) was engaged, how should the court exercise its discretion?

Had the DRP been enforceable, and had CPR 11(1)(b) therefore been engaged, the TCC confirmed that it would not however have exercised its discretion to do anything more than stay the proceedings.

The Claimant's decision to issue its Claim Form at the eleventh hour, to avoid expiry of the limitation period, and to apply for a stay thereafter to allow it to comply with the DRP, was an "entirely sensible approach". It was "better that the parties issue proceedings on time and engage in ADR in a meaningful way at a later date when ready to do so than that they are rushed into pointless compliance with an ADR provision which will never bear fruit".

Commentary: Ashley Pigott, partner, Construction & Engineering

This decision will be of particular interest to parties involved in Private Finance Initiative (PFI) projects approaching expiry / handback. PFI contracts and related construction contracts are famously lengthy and intricate: in Amey Birmingham Highways Ltd v Birmingham City Council [2018], the Court of Appeal described the contract as a "formidable document". Limitation is a key issue: on projects where practical completion was achieved close to 12 years ago, contractual limitation periods are approaching expiry. If phased completion was used, the situation becomes yet more complex.

In addition to the multiple steps that need to be taken in advance of handback (including monitoring the condition of the asset, ensuring any required maintenance / defect rectification has been carried out, final surveys, etc.), parties involved in PFI projects should be alert to the expiry of contractual limitation periods which may result in claims being time-barred. It is also vital to ensure compliance with any mandatory dispute resolution steps before commencing court / arbitration proceedings.

Notably, the TCC observed that the arguments put before it in this case could be "of particular significance in the context of a situation in which legal proceedings have been commenced shortly before expiry of the limitation period and in circumstances where an ADR provision which is a condition precedent to the commencement of such proceedings has not been complied with." (Para. 56).

Commentary: Sean Adams, Partner, Dispute Resolution Group

As was the case in Children's Ark Partnerships Ltd v Kajima Construction (Europe) UK Ltd and another [2022], tiered dispute resolution mechanisms are common in commercial contracts, and often take different forms. This decision confirms the court's willingness to enforce tiered dispute resolution clauses and stay court proceedings where such clauses have not been complied with. It also confirms that completely ousting the court's jurisdiction, as opposed to convincing the court not to exercise that jurisdiction in order to give effect to the commercial bargain struck by the parties, remains inherently challenging.

However, in this case the DRP was unenforceable for lack of "clarity and certainty". The TCC reiterated the requirements for an enforceable ADR provision as follows: (i) the process must be sufficiently certain in that there should be no need for an agreement at any stage before matters can proceed; (ii) the administrative processes for selecting a party to resolve the dispute and to pay that person should be defined; and (iii) the process or at least a model of the process should be set out to ensure that the detail is sufficiently certain.

If these requirements are not met there is a risk that agreed contractual machinery for resolving disputes will not – as the Defendants in this case found to their detriment – be capable of enforcement in court. As with all contractual provisions, it is extremely important that the drafting is clear if the parties want to obtain certainty around the way in which those provisions will be enforced if and when they come to be tested.

If you have any questions about the topics discussed in this article, please contact Ashley Pigott, Sean Adams or Emma Knight.