Contractual dispute resolution mechanisms intended to avoid or narrow formal disputes through early dialogue are popular, particularly in long-term contracts.
The case of Kajima Construction Europe (UK) Ltd v Children’s Ark Partnership Ltd[1] serves as a reminder: a contractual Dispute Resolution Provision (“DRP”) can be a condition precedent to commencing proceedings. In a departure from previous case law,[2] the High Court in Kajima found a DRP does not actually have to be expressed as a condition precedent to be enforceable as one. However, the DRP does need to be set out as a mandatory obligation that is sufficiently clear and certain – which was not the case in Kajima itself.
Background
In 2004, Kajima Construction Europe (UK) (“Kajima Construction”) entered a construction contract with the Children’s Ark Partnership (“CAP”) to design, build and finance the redevelopment of a hospital. In 2013, Kajima Europe Ltd guaranteed contractual performance (the “Guarantee”).
The construction contract included a detailed DRP provision: in essence, a requirement to refer all disputes to a “Liaison Committee” for resolution, with Court proceedings envisaged only if disputes were “not finally resolved” through ADR.
In 2018, CAP raised concerns about fire safety issues at the hospital. Kajima Construction subsequently agreed to carry out remedial works. The parties also entered into a ‘Standstill Agreement’ extending the contractual limitation period for commencing proceedings. Eventually, Kajima Construction considered the remedial works to be largely completed and did not wish to extend the Standstill Period any further. CAP disagreed and asserted that there were defects in the work.
CAP brought court proceedings against Kajima shortly before the expiry of the extended limitation period. CAP also applied for a stay of proceedings to comply with the DRP. It had not referred the dispute to the Liaison Committee in advance of issuing proceedings, although there was evidence the remedial works had been discussed with the committee on various occasions.
In response, Kajima made an application to set aside or strike out CAP’s claim on the ground that CAP had failed to comply with the DRP.
First instance decision[3]
Mrs Justice Smith found the DRP gave rise to a condition precedent and CAP had not complied with it, but that it was not clear how the DRP was intended to commence, nor what procedure was to be followed either at the outset or thereafter. This meant that the obligation to refer disputes to the Liaison Committee was unenforceable for uncertainty.
The Judge also decided that even if the DRP had been enforceable, she would have exercised her discretion to stay the proceedings to allow the DRP to be followed instead of striking the claim out.
Court of Appeal
Kajima’s appeal was dismissed, with the Court of Appeal largely agreeing with Mrs Justice Smith’s decision. In summary:
- Enforceability of the DRP – the Court of Appeal agreed that the DRP was unenforceable. Kajima’s argument that the condition precedent was limited to the requirement to refer the dispute to the Liaison Committee was rejected as it would be unlikely that referral on its own could satisfy the condition precedent. To say otherwise ignored all the other parts of the DRP process.
- Exercise of discretion – the Court of Appeal clarified that a stay of proceedings is not a “default remedy” that a court should grant when a party ignores a DRP, as the right remedy would always be to turn on the facts of the case. However, it is likely to be the usual (albeit not inevitable) order when proceedings are started in breach of a mandatory DRP.
- Claim against Kajima Europe Ltd – in the event the appeal had been successful, CAP would only have been prevented from seeking a remedy against Kajima Construction. CAP would have still been entitled to bring proceedings against Kajima Europe Ltd since the Guarantee did not contain the DRP. There would be no limitation defence and Kajima Europe Ltd would be liable as the principal debtor under the Guarantee.
Where does this leave us?
The decision in Kajima demonstrates that DRP clauses are able to create a condition precedent to the commencement of proceedings. However, clear language is needed. This will require a meaningful description of the process to be followed; an unequivocal commitment to engage in an ADR procedure; a clear process for the parties to follow (with objective criteria); and clarity on how the parties intend the ADR process to be brought to an end.
The full Court of Appeal judgment can be found here.
[1] (1) Kajima Construction Europe (UK) Limited and (2) Kajima Europe Limited v Children’s Ark Partnership Limited [2023] EWCA Civ 292
[2] Ohpen Operations UK Ltd v Invesco Fund Managers Ltd [2019]
[3] Children’s Ark Partnership Limited v (1) Kajima Construction Europe (UK) Limited and (2) Kajima Europe Limited [2022] EWHC 1595 (TCC)
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