When disputes arise, it can be difficult for parties to agree on how to resolve them. Human nature being what it is, emotions can prevail. Perversely, whether right or wrong, a party might want to make life as hard as possible for the other party. Or, a defending party with no cash to meet the liability might put its head in the sand rather than find a way forward.

Such tactics could be justifiable but are often dubious. This is where dispute resolution (DR) clauses in contracts prove their usefulness: they remove the scope for emotive responses in the early, uncomfortable stages of a dispute. They impose mandatory processes to bring parties together, promote early settlement and limit commercial damage.

‘Tiered’ DR clause are common, especially in complex projects. They start with simple processes (communication and information exchanges) and escalate to alternative dispute resolution (ADR) processes (eg mediation or expert determination). They set the scene for and encourage early settlement and treat litigation or arbitration as the last resort. Being analogous to arbitration clauses, they generally survive the discharge of contractual obligations. DR clauses are also agreed as part of normal trade practice between commercial partners as a proven way of reducing the costs, wasted management time and further project disruption that disputes cause.

For these reasons, DR provisions are firmly in the public interest. There are strong policy reasons for their enforcement and they therefore enjoy robust judicial support provided they are clearly drafted. When disputes arise, parties must follow the process they have agreed and judges will refuse to permit court action brought in breach of such agreements.

The decision in Ohpen Operations UK Ltd v Invesco Fund Managers Ltd [2019] EWHC 2246 (TCC) is a good example of how the courts support DR clauses.

Invesco engaged Ohpen to develop and implement a digital online platform. Their contract included a tiered DR clause which specified that the parties could only commence court proceedings if mediation was unsuccessful.

A dispute arose and the contract was terminated. The parties attended a ‘without prejudice’ meeting which did not settle the dispute. Ohpen sent a letter of claim and, later, issued proceedings.

Invesco asked the court to stay (put on hold) the proceedings because Ohpen’s issue of proceedings was in breach of the DR clause. The court agreed and, on the facts, upheld the DR clause, found that it survived the termination and applied to all disputes, stayed the proceedings and ordered the parties to implement the clause by mediating (although, interestingly in this case, it ordered the parties to finish serving pleadings first – to improve settlement prospects).

Applicable principles

The court, rather usefully, set out the applicable principles for consideration when asked to enforce a DR clause. In summary:

• the agreement must create an enforceable obligation requiring the parties to engage in ADR;
• the obligation must be expressed clearly as a condition precedent to court proceedings or arbitration;
• the stipulated DR process need not be formal but must be sufficiently clear and certain by reference to objective criteria, including mechanisms to appoint a mediator, or determine any other necessary step in the procedure without needing further agreement by the parties; and
• in exercising its discretion to stay proceedings commenced in breach of an enforceable DR agreement, the court will have regard to the public policy interest in upholding the parties’ commercial agreement and furthering the overriding objective in assisting the parties to resolve their disputes.

Most standard form contracts include enforceable DR clauses. If you are creating a bespoke contract, do check that the agreement includes DR processes appropriate for your project. Otherwise you might find yourself arguing about how to argue your claim – and that might not be a cheap exercise!

This article was written by Tracey Summerell and first published under the title "Dispute resolution clauses" in Construction Law's ADR column on 1 October 2019. You can read the original here.