Contractual Clauses Requiring ADR Before Litigation ' What Happens When They Are Breached?

• Jurisdiction: European Union
• Law Firm: Herbert Smith Freehills
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Real Estate and Construction, Contracts and Commercial Law, Arbitration & Dispute Resolution, Construction & Planning
• Author: Jan O'neill
• Published date: 01 May 2023

The Court of Appeal recently delivered an important decision regarding the enforceability and effect of contractual dispute resolution provisions that oblige parties to engage in an ADR process before commencing proceedings. Of particular interest is the court's discussion of what remedy is appropriate where such a clause is enforceable and has been breached by a claimant starting litigation before engaging in the process: Kajima Construction Europe (UK) Ltd v Children's Ark Partnership Ltd [2023] EWCA Civ 292.

It is well established that such clauses can be enforced by the court, but only where the nominated ADR process is specified in enough detail to provide certainty as to the parties' obligations. In this case the process, which had been imported into a construction subcontract from the head contract, was found to be not workable in that context and unenforceable for uncertainty. To that extent, the decision is a reminder of the importance of such clauses being carefully tailored to the specific contract. It also suggests that a court will not readily be persuaded to 'salvage' and enforce particular elements of a proposed ADR process that is otherwise unenforceable (although the minority judgment here would have been prepared to do so).

As to the appropriate remedy where such a clause is enforceable, the Court of Appeal confirmed that a stay of the proceedings is not an automatic or inevitable response, and that the appropriate remedy will always depend on the situation. However, it accepted that a stay is the "usual" order. On the facts here, it agreed that that was the appropriate response - even if this effectively deprived the defendant of a limitation defence it would otherwise have. As is the case for other discretionary decisions (such as where there has been an abuse of process), deprivation of a limitation defence will be an important factor in the balancing exercise, but it will not be decisive.

The court's reasoning suggests that a key factor in this context will be the reasonableness of the claimant's conduct. The majority was clearly influenced by the fact that this was not a case where the claimant had simply ignored the ADR process, or where the limitation pressure had arisen due simply to its failure to pursue the claim earlier with no good reason. Rather, the claimant's approach in the particular circumstances was "entirely sensible". However, the judgments leave scope for another court to exercise its discretion differently, and...