ADR Clauses – Respect them, or else

Following my last article touching on the court’s power to compel parties to take part in an Early Neutral Evaluation (ENE) hearing, there have been further developments in relation to Dispute Resolution Clauses that are becoming more common in all kinds of commercial contracts.

These types of clauses compel parties to use different types of Alternative Dispute Resolution (ADR) before issuing court proceedings. An ENE hearing (as a form of ADR) could be provided for in such a clause, so this article will delve a little deeper into ADR contractually and its commercial importance.

Whilst the recent decision in the Ohpen Operations UK Ltd v Invesco Fund Managers is not a construction case, its findings are applicable to all those contracting in the construction sector. This is especially the case where the parties wish to settle any potential disputes by mediation or arbitration in their contracts, in order to avoid court proceedings.

Background

The dispute was between a software company (Ohpen) and an investment manager (Invesco). Invesco instructed Ohpen to develop and implement an online platform where retail customers could buy and sell investments. The platform was due to go live on 1 March 2017 but had still not been finished by the time the Invesco issued a notice of termination on 11 October 2018.

A without prejudice meeting was attended by both parties at the end of January 2019 to attempt to resolve the issues. Ohpen issued proceedings on 23 April 2019 for wrongful termination. Invesco then made an application, on 24 May 2019, specifically in relation to the Dispute Resolution clause in the contract and asked to stop the proceedings until the clause was complied with.

The Dispute Resolution clauses of the contract provided a clear process of escalation to resolve disputes. This started with reasonable negotiations between the parties themselves; moving up to contract managers; then to an executive committee; then a more formal mediation under the Model Mediation Procedure of the Centre of Dispute Resolution. It was only after the exhaustion of this process, that either party could or should issue court proceedings.

Invesco was asserting that the process was not optional and that Ohpen should not have issued proceedings until this process had been exhausted.

Decision

The court outlined a number of case specific principles that were integral to the decision:

• The contract must create an enforceable obligation requiring the parties to engage in ADR
• This obligation must actually state that it needs to be followed before a party can issue proceedings – it should be a condition precedent to court proceedings
• The process needs to be sufficiently clear to follow with reference to objective criteria, such as the appointment of a third party, it does not need not be a recognised formal process
• The court’s power is discretionary to stop proceedings and will take into account:
  • Public policy in upholding the parties’ commercial agreement; and
  • Furthering the overriding objective of the courts in assisting the parties to resolve disputes

Applying these principles, the court ruled that there was a mandatory requirement for the parties to follow the processes set out in the contract before either of them should issue formal proceedings.

The parties could only commence court proceedings once and only if the mediation process was unsuccessful. Despite high level negotiations taking place, the court agreed that these failing did not allow either of the parties to refuse to take part in mediation. The proceedings were, therefore, stopped to allow mediation to take place.

This is consistent with the court’s general position that alternative dispute resolution should always be properly considered and attempted by contracting parties and that formal court proceedings should be a last resort.

Urgent & Emergency Applications

Whilst the Dispute Resolution provisions should generally be followed, that would not prevent emergency applications to the court that would be rendered useless if you had to wait until the provisions had been complied with. For example, where there is a significant risk that materials or stock will be moved or irreparably damaged; or where it is almost certain that key evidence will be destroyed, certain types of application will be essential. In these limited situations, the court will allow you to apply to the court ahead of completing the Dispute Resolution provisions.

Normally, the court will consider these type of applications and either permit or reject them. If they permit them they would allow the execution of the application, but order that once that has been done that the parties then comply with the contractual provisions. This is because granting an application for an urgent order will not circumvent the requirement for the parties to attempt to find a resolution to the underlying dispute. Therefore, although things like freezing orders, injunctions and search orders will be available to those in need of them, they will only be granted in the most appropriate circumstances. Such orders are unlikely to allow a party to side-step a contractual resolution method.

Should my contracts contain a Dispute Resolution procedure?

In all contractual relationships, and particularly in construction contracts, things do and can go wrong from time to time. A robust and carefully drafted Dispute Resolution clause can be a very useful mechanism to encourage negotiated compromises and allow the performance of a contract, rather than having to go through the time consuming and expensive delays of court processes.

In particular, those contracting in the construction sector will be aware of how disputes can be resolved swiftly and decisively through adjudication. A well drafted Dispute Resolution clause will ensure parties go through this process before formal court proceedings, with the intention of achieving a quick result, so that both parties can move on in their respective works.

Conclusion

For those in the construction sector, by far the most useful clauses will be those referred to as “tiered” Dispute Resolution clauses. These types of clauses will allow for negotiations between those in dispute first in an informal setting, rising to a more formal dispute resolution process such as mediation and then possibly forcing the parties to adjudicate, before formal court proceedings.

The main benefit of these clauses is that they can be drafted to suit the particular needs of the parties and can predict the best way to solve the likely issues that they may come up against.

The case above illustrates that courts are willing to uphold these clauses and compel those unwilling to submit to the procedure in the contract to do so.  The corollary is that whilst these clauses should be included, you would be bound to follow them if there is a dispute. They are incredibly flexible and a very useful tool at the drafting stage and should be carefully considered as they can save both cost and time in construction contracts.

Article by Mark James, partner in the Real Estate sector group at law firm Coffin Mew