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Commercial Contracts and ADR Clauses – Who said they were optional?

Nov 11, 2020

Most Commercial Contracts will have an ADR (Alternative Dispute Resolution) clause that requires the parties to engage in non-Court methods to resolve a dispute rather than launching straight into Court action.

The Courts have been taking a more robust approach in making it clear to parties that such clauses should be followed and are not optional.

In order for the Court to enforce the use of such a clause, it must be satisfied that:

1. The non-Court method of ADR is clear and certain in terms of its process; and
2. The administrative mechanism for selecting the party to resolve the dispute must be clear.

In Ohpen Operations UK Ltd -v- Invesco Fund Managers Ltd [2019] EWHC 2246 (TCC) the Court was clear that the parties had to use the ADR clause in the contract that required them to engage in Mediation before issuing Court proceedings.

A similar approach has been taken in the recent case of Taylor Wimpey UK -v- Harron Homes Ltd [2020] EWHC 1190 (TCC). Here the parties had entered into a Collaboration Agreement to construct drains on their respective development land to adoptable standard and in accordance with a design prepared by the nominated consultant. Harron Homes asserted Taylor Wimpey had not complied with those obligations and it had suffered loss as a result. Harron Homes triggered the ADR clause obliging the parties to refer to dispute to Expert Determination, by serving the required Notice. Taylor Wimpey seems to have taken the view (amongst others) that because the Collaboration Agreement also contained an exclusive jurisdiction clause in favour of the Courts of England & Wales; that overrode the ADR clause.

In any event Taylor Wimpey declined to respond to the Notice or use the Expert Determination provision. Instead Taylor Wimpey made an application to the Court for Pre-Action Disclosure. A process of asking the Court to make the other side provide certain documents to you even though you have not yet issued the actual Claim. Succeeding in a Pre-Action Disclosure Application is tricky at the best of times and the Court dismissed the Application for a number of reasons.

The Judgement of Mr Justice Fraser also addressed the ADR clause and confirmed that it dealt clearly with how to invoke it; how to select and appoint the Expert; how to deal with any dispute over who should be the Expert and the process to be followed once the Expert was appointed.

He went on to say “ADR has a vast number of advantages to parties to commercial agreements. It enables parties to have their disputes decided privately, by specialists either chosen by the parties jointly or, in default of agreement, by a body specifically appointed for that purpose. It is almost always far quicker than litigation, and almost always far cheaper, to have disputes resolved in this way. The court in all cases will be astute to prevent pre-action disclosure being sued to frustrate, impede or interfere with contractually agreed mechanisms……….Here the documents necessary or desirable for the proper conduct of the expert determination reference are a matter for the expert, not for the court.”

Although this decision related to a property-based dispute, it applies to any Commercial Contract that contains a properly formulated ADR Clause. Given the strains placed on the Court system by COVID in recent months; the comments by Mr Justice Fraser are all the more relevant.
If you have contractually agreed that ADR should be used to determine disputes – then you must expect to use them. If you ignore the ADR clause and decide to issue Court proceedings instead – whether from a genuine belief that you are in the right, or as an aggressive tactic to bring your opponent “to heel” – there is a high risk that if your opponent objects and applies to have the Claim thrown out because ADR has not been employed; that the Court will agree. That can leave you with a hefty costs order not to mention a certain amount of embarrassment.

If you need advice or assistance on a problem relating to the above then please contact us on drteam@herrington-carmichael.com.

This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter. 

Frankie Tierney

Partner, Disputes and Claims  

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