Facts of case mean court uses discretion on ADR clause

As parties look to the end of private finance initiative (PFI) arrangements, with the 25-30 year contract terms coming to an end, we are seeing an increase in disputes over the project agreement and related contracts.

With many parties involved in a project, proceedings can be complicated – and this can be made more complex by the operation of potentially different alternative dispute resolution (ADR) clauses in the various contracts.

These ADR clauses might oblige parties to complete a single process, such as mediation, or a series of escalating measures.

ADR clauses, their use in standard form contracts and their benefits, are considered in more detail in a previous article, looking at a case where such a clause was not clear and therefore unenforceable.

In Lancashire Schools SPC Phase 2 Ltd v Lendlease Construction (Europe) Ltd and Others [2024] EWHC 37 (TCC), the Technology and Construction Court (TCC) once again had to consider the principles relevant to determining the enforceability of an ADR clause, and whether it should in fact be enforced.

In making its decision, the court exercised its discretion, and had to balance the public policy interest in upholding the parties' commercial agreement and the overriding objective of assisting the parties to resolve their dispute, dealing with the case justly and at a proportionate cost.

The PFI company entered into a building contract with the first defendant, building contractor Lendlease Construction (Europe) Limited, and a facilities management (FM) contract with the third defendant, Equans Buildings Limited.

Both contracts were interlinked, with the rights and obligations arising under the project agreement.

The building contractor's parent company, Lendlease Construction Holdings (Europe) Limited, is the second defendant, and the local authority, Lancashire County Council, is the fourth; the latter had complained of alleged defects in the school, and notified the PFI company that it intended to make deductions from the payments due under the project agreement.

The PFI company brought proceedings against the building contractor, its parent company, and the FM contractor for breach of contract.

It subsequently amended its claim to include the local authority as the fourth defendant, seeking a declaration that if there were no breach of contract by either of the contractors then there was no defect, and thus that the council could make no deductions.

As the TCC stated, 'the claim against the [local authority] is an attempt by [the claimant] to position itself so that no ultimate liability sits with it'.

Parallel proceedings for phase 1, covering similar defects and deductions, are in progress and the PFI company submitted that these would potentially be consolidated, which was relevant to the TCC's decision. However, this application, and judgment, relates exclusively to phase 2.

Before the main proceedings, the local authority made an application to set aside service of the claim form against it under Civil Procedure Rules (CPR) 11(1)(b) and 11(6)(b); or, alternatively, for the claim against it to be struck out pursuant to CPR 3.4(2)(a).

Therefore, the local authority was the applicant for this application, and the claimant, the PFI company, was the respondent.

Essentially, the local authority contended that the court should decline to exercise any jurisdiction over the claim, or strike it out, on the basis that it was brought in breach of a contractual requirement that all disputes must first be determined by adjudication.

In short, if the court were to grant a stay the following principles would have to be met.

• The agreement must create an enforceable obligation requiring the parties to engage in ADR.
• The ADR process to be followed need not be formal, but must be sufficiently clear and certain by reference to objective criteria.
• The court has a discretion to stay proceedings commenced in breach of an enforceable ADR procedure or agreement, having regard to both the public policy interest in upholding commercial agreements and furthering the overriding objective to help parties resolve their disputes.

The TCC agreed that, as concluded in Kajima, an ADR provision did not need to be a condition precedent; it was sufficient if it were mandatory and enforceable.

However, if found to be a condition precedent this would satisfy the requirement, and is therefore still an appropriate issue for the court to consider.

The legal authorities on the court's discretion were then considered, with the TCC concluding that it was not bound to grant a stay even where there is a mandatory ADR provision, with each case turning on its own facts.

The court had a discretion to order a stay of the proceedings pending adjudication, or to grant other relief.

The utility, or practical value, of the requirement to follow the dispute resolution process should be considered.

A condition precedent is a requirement or event that must occur before a subsequent event or situation can happen. In simple terms, a party agrees to do X subject to the other party doing Y.

In this case, the alleged condition precedent was that the right to litigate was conditional on an adjudication having already taken place.

The TCC concluded that it was 'wholly satisfied that adjudication is a condition precedent to litigation … before one party may start legal proceedings against the other, it must first have adjudicated the dispute'.

The court relied on the use of 'shall' in the ADR provision and the fact that the court's jurisdiction was 'subject to' this provision.

In any event, even if the judge were wrong about it being a condition precedent, the requirement to adjudicate first was mandatory and the process itself clear and certain, and therefore enforceable.

Perhaps surprisingly – at least to many practitioners – the TCC considered it inappropriate to make an order staying or striking out the proceedings, choosing to exercise its discretion to proceed with the claim.

In summarising its reasons for declining to enforce the ADR provision, the court acknowledged the burden should be on the party that was not following the provision to show why it was not doing so.

The court's principal reasons for declining to enforce the provision can be summarised as follows.

• This is essentially a multi-party dispute, and it was 'very doubtful' that a bilateral adjudication between the local authority and the PFI company would satisfactorily resolve matters. Although the ADR provision allowed for other parties to make submissions, this might be difficult to apply and could lead to procedural complications. There was a significant risk that adjudication would 'achieve little' and that any decision would be challenged.
• A stay for adjudication would likely delay the progress of the phase 2 litigation, and potentially the phase 1 litigation if consolidated. The ultimate disposal of the proceedings would probably be delayed, contrary to the overriding objective. No other parties had insisted on an adjudication.
• The consequences of the court refusing a stay are less significant than they might first appear; if the present application is dismissed, the local authority is still free to begin its own adjudication, now or in the future.
• Ordering a stay could have a negative impact on the ongoing multi-party mediation, by 'sending the dispute between the [PFI company] and the [local authority] down a different track'. All parties should be participating in the mediation for it to have a chance at succeeding.

In addition, the TCC held that it was not an abuse of process for the PFI company to have commenced proceedings against the local authority before referring the dispute to adjudication.

If it were, the court would still not strike out the claim, having regard to the overriding objective of dealing with a case justly and at proportionate cost, and given the reasons already mentioned.

The court dismissed the application for a stay – which would pause the proceedings and allow the process in the ADR clause to be followed, keeping the claim alive – or to strike it out, which would essentially end the claim, despite the proceedings being brought in breach of a condition precedent. Having done so, the court made no orders.

However, the decision clearly turned on the specific facts of the case, in particular the practical value – or lack thereof – in enforcing the ADR provision.

We can expect the courts to continue enforcing commercial agreements in the form of ADR clauses that have been freely entered into, unless there are compelling reasons not to; the circumstances in which a court declines to enforce an ADR clause of this type will continue to be limited.

Parties should follow the ADR provision in their contracts unless there is good reason not to do so, such as a limitation period being close to expiring.

Those who choose not to adhere to the contractual provision still run the risk of a court ordering a stay – or, worse, striking out the claim.

The court, again, emphasised the need for clarity in the wording of ADR provisions, to ensure that they are deemed mandatory and enforceable, even if not a condition precedent.

Failure to implement a dispute process correctly, although unlikely to be the end of a claim, could lead to a dispute in itself – involving additional time and money for those concerned, as seen in this case.

Therefore, when entering into a contract, ensure that any clauses are clearly drafted and then follow the procedure to the letter. If you are unable to do so, be prepared to justify that decision to save your claim.

While in this case the court agreed with the claimant (the respondent) and exercised its discretion in dismissing the local authority's application, it was influenced by the position in the ongoing related proceedings.

In other circumstances a court might nevertheless order a stay.