Litigation - the dangers of jumping the gun

30 October 2014

We all know that parties engaged in construction contracts can sometimes fall out. If that happens, take a minute to check your contract and make sure that you follow the dispute resolution procedure that forms part of the agreed contract terms. Jumping straight into court proceedings or arbitration could be premature and costly.

In Peterborough City Council v Enterprise Managed Services Ltd [2014], Mr Justice Edwards-Stuart found that the parties had agreed that adjudication, in accordance with the International Federation of Consulting Engineers (FIDIC) Silver Book dispute resolution procedure, was a pre-condition to any action being taken in the courts.

Background

Enterprise Managed Services Ltd (EMS) was engaged by Peterborough City Council (the Council) to design, supply, install, test and commission a 1.5MW solar energy plant on the roof of a building owned by the Council. It was a term of the contract that the plant would generate 55KW by 31 July 2011 and that, if this target was not achieved, EMS would be required to pay the Council liquidated damages of £1.3 million.

The Council alleged that the target had not been achieved and consequently claimed liquidated damages under the contract, which EMS disputed. The Council issued a letter of claim and EMS's solicitors responded stating that the Council should have referred the dispute to the Dispute Adjudication Board (DAB) rather than threaten litigation.

A mediation then took place but no settlement was achieved. EMS served a notice of adjudication in July 2014 and an adjudicator was appointed in August 2014.

In August 2014, the Council commenced litigation. EMS subsequently applied to the court seeking a stay of the proceedings, so as to allow the dispute to be referred to adjudication in accordance with the terms of the contract entered into between the parties.

Dispute resolution clause

The contract was made on the FIDIC General Conditions of Contract for EPC/Turnkey Projects (the Silver Book) issued by FIDIC in 1999. Clause 20 was the dispute resolution clause, and this included the following:

  • Disputes shall be adjudicated by a DAB that has been jointly appointed by the Parties (sub-clause 20.2.1).
  • The Agreement between the parties and the adjudicator shall incorporate, by reference, the General Conditions of Dispute Adjudication Agreement contained in the Appendix to the General Conditions (sub-clause 20.2.5).
  • After a DAB has been appointed either Party may refer the dispute in writing to the DAB for its decision (sub-clause 20.4.1).
  • The DAB's decision shall be binding on both Parties unless and until it is revised by an amicable settlement; by legal proceedings; or by other agreement between the Parties (sub-clause 20.4.4).
  • If either Party is dissatisfied with the DAB's decision, then either Party may, within 28 days after receiving the decision, give notice to the other Party of its dissatisfaction (sub-clause 20.4.5).
  • If no notice of dissatisfaction has been given by either Party within 28 days after it received the DAB's decision, then the decision shall become final and binding upon both Parties (sub-clause 20.4.7).
  • If notice of dissatisfaction has been given, both Parties shall attempt to settle the dispute amicably before the commencement of court proceedings but court proceedings may be commenced 56 days after the notice of dissatisfaction even if no attempt at an amicable settlement has been made (sub-clause 20.5.2).
  • Unless settled amicably, any dispute in which the DAB's decision has not become final and binding shall be finally settled by the Courts of England and Wales (sub-clause 20.6.1).
  • If a dispute arises and there is no DAB in place, the requirement to obtain a DAB's decision (sub-clause 20.4) and amicable settlement (sub-clause 20.5) shall not apply and the dispute may be referred directly to the courts of England and Wales under sub-clause 20.6 (sub-clause 20.8).

The issues

There were two issues to be determined by the court:

  1. Did the contract require reference to adjudication as a pre-condition of any action in the courts?
  2. If adjudication was a pre-condition to any action in the courts, should the Council's action be stayed?

Issue 1: was adjudication a pre-condition of any action in the courts?

The submissions

EMS relied on the wording of sub-clause 20.2.1 of the contract, submitting that there was a mandatory requirement to refer disputes arising under the contract in the first place to adjudication in accordance with sub-clause 20.4.

The Council's key submissions were:

  1. Sub-clause 20.8 was in effect an opt-out that allowed a party who did not wish to resolve the dispute by adjudication to refer the dispute directly to the court.
  2. There was a gap in the provisions of sub-clauses 20.4 to 20.7, rendering them unenforceable for lack of certainty. The gap was said to arise when the DAB has made a decision and one party has given notice of dissatisfaction. As a result, the DAB's decision, while binding, is not final. The problem? It was suggested that if the unsuccessful party refuses to comply with the DAB's decision, the only remedy available to the other party is to refer the dispute occasioned by the refusal to comply, to another adjudication. There could, therefore, be a course of persistent non-compliance with DAB decisions with no effective remedy.
  3. There was no DAB in place as the adjudication agreement had not been signed by the parties and the adjudicator.

The decision

The court rejected the Council's submissions, for the following reasons:

  1. Sub-Clause 20.8 only applied if a dispute arose and there was no DAB in place. The FIDIC Contracts provide for two mutually exclusive types of DAB: a standing DAB which is named in the contract or an ad hoc DAB appointed following a dispute. This case involved an ad hoc DAB which will only ever be put in place after a dispute arises. Sub-clause 20.8 probably only applied in cases where the contract provided for a standing DAB, rather than an ad hoc DAB. Sub-clause 20.8 therefore did not confer a unilateral right to opt-out of adjudication, except where the parties had agreed at the outset to appoint a standing DAB which had ceased to be in place by the time the dispute arose.
  2. The relevant provisions of the contract were enforceable. The court found that the problems of uncertainty referred to by the Council disappeared when the contract provided that the forum for dispute resolution was litigation (rather than arbitration) as there would be no reason why the court could not intervene, at the instance of one of the parties, by ordering specific performance of the obligation to comply with a decision of the DAB. This is something that an arbitrator may not have jurisdiction to do.
  3. There was a DAB in place. The parties had incorporated into the contract the Appendix to the Conditions which contained the terms of the Dispute Adjudication Agreement. This meant that all the relevant and necessary terms of that agreement were therefore in place, except in relation to the adjudicator's fees. It would be implied into that agreement that the adjudicator would be entitled to his or her reasonable fees and expenses.

Accordingly, the court accepted EMS's case and held that the contract first required the determination of the dispute to be by way of adjudication and amicable settlement and only failing that, by litigation.

Issue 2: should the Council's action be stayed?

The submissions

The Council submitted that any decision by the DAB would almost inevitably provoke a notice of dissatisfaction from one of the parties, so to embark on the adjudication procedure would be unproductive. Further, the rough and ready process of adjudication was inapt to deal with the dispute, which raised complex issues and required extensive disclosure.

EMS submitted that it cannot be assumed that the parties would adopt the same positions in light of a reasoned decision by an adjudicator. Alternatively, even if the adjudicator's decision was not accepted, it might nevertheless provide a starting point from which the parties could settle the dispute. It could not be assumed that the adjudication would serve no purpose.

The decision

There is a presumption in favour of leaving the parties to resolve their dispute in the manner provided for by their contract.

The complexity of the dispute about when the required output was achieved was foreseeable from the outset. Nevertheless, the parties still chose to incorporate the adjudication machinery in their contract.

Therefore, the action was stayed and the parties were left to resolve their dispute in accordance with the agreed contractual machinery.

Trend

The judgment in Peterborough supports the courts' trend of viewing each of the steps in the dispute resolution clauses as a condition precedent to litigation or arbitration.

For example, in a judgment of Mr Justice Teare from Spring this year (Emirates Trading Agency LLC v. Prime Mineral Exports Private Ltd), the court held that the dispute resolution clause, requiring the parties to first seek to resolve any dispute by "friendly discussion" was, on the facts of that case, a condition precedent that had to be satisfied before an arbitrator had jurisdiction to hear and determine a claim.

It was argued in that case that the requirement for a "friendly discussion" was 'an agreement to agree' and was therefore unenforceable for uncertainty. The court disagreed: it distinguished a number of authorities on this point and found that there was a clear public policy argument in favour of enforcing obligations in dispute resolution clauses which are designed to avoid the expense of litigation or arbitration. On the detailed evidence submitted, the court found that the requirement for a "friendly discussion" had, in fact, been satisfied.

Commentary

Before embarking on expensive litigation or arbitration ensure you follow all the steps/pre-conditions to doing so within your dispute resolution clause.

To demonstrate that you have satisfied any pre-conditions, it is important to keep records of all meetings, discussions and correspondence regarding attempts to resolve a dispute. To minimise the risk of later arguments concerning the contractual status of the various steps taken, it is good practice to mark the correspondence and the records of the discussions as having taken place in accordance with the relevant provisions of the dispute resolution clause.


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