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Ricky Cella

Senior Associate, Russell-Cooke

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“In cases where a party commences litigation in breach of an arbitration agreement, the court has the power to stay the legal proceedings.”

Contractual limitations on the right to litigate

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Contractual limitations on the right to litigate

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Ricky Cella examines a case which considers the enforcement of contractual restrictions on a right to litigate where ADR provisions apply

A party’s right to litigate can be fettered in a number of ways. Jurisdictional clauses specify the forum of any litigation. Contractual terms may prescribe dispute resolution processes that must be followed before litigation is commenced. The contract may also affect the limitation periods that apply. A recent decision of the Technology and Construction Court has considered whether and how such restrictions might be enforced where alternative dispute resolution (ADR) provisions apply.

In the case of Children's Ark Partnerships Ltd v Kajima Construction Europe (UK) Ltd and another [2022] EWHC 1595 (TCC),

the court was asked to determine what the judge described as a “novel application” to strike out or set aside a claim form on grounds of failure to comply with a contractual ADR provision.

The applicant (the defendant in the action) submitted that compliance with the ADR provision was a condition precedent to the commencement of litigation. This was particularly significant in this case because the limitation period for the claimant’s claim had expired shortly after the issue of the claim form. As such, if the claim form was struck out or set aside it would essentially be fatal to the claim.

The parties’ contract contained a dispute resolution procedure (DRP), and required that any dispute arising out of or in connection with the contract be resolved in accordance with the DRP. The defendant argued these provisions gave rise to a condition precedent to the right to litigate. Further, in circumstances where the parties had not first gone through the DRP, the defendant asserted that: (i) the court either had no jurisdiction to consider the claim or should not exercise any jurisdiction it might have; and/or (ii) the claim should be struck out on the basis that the claim form disclosed no reasonable grounds of success and/or it was an abuse of process.

In her judgment, Mrs Justice Joanna Smith DBE referred to an earlier judgment of O’Farrell J in Ohpen Operations UK Ltd v Invesco Fund Managers Ltd [2019] BLR 576 which considered the authorities on whether the court may stay proceedings where a party seeks to enforce an ADR provision. O’Farrell set out a number of principles derived from those authorities, including that: (i) an obligation requiring the parties to engage in ADR must be expressed clearly as a condition precedent to court proceedings or arbitration; and (ii) the court has a discretion to stay proceedings commenced in breach of an enforceable dispute resolution agreement.

The issue of whether an obligation to engage in ADR must amount to a condition precedent before the court will order a stay of the proceedings was disputed by the parties. After considering the relevant authorities, including Ohpen, the judge found the relevant obligation need not be expressed clearly as a condition precedent. Instead, the judge concluded the relevant authorities dealing with court proceedings (as opposed to arbitration) support the proposition that:

“… the court has an inherent jurisdiction to stay such proceedings for the enforcement of an alternative dispute resolution provision where the clause creates a mandatory obligation and where it is enforceable…”

In the event, the judge found the provisions governing the DRP were in fact a condition precedent to the commencement of litigation, but they were unenforceable because they lacked sufficient clarity. Nonetheless, the judge went on to make a number of obiter findings on the other issues in dispute.

In respect of the question of jurisdiction, the judge found the presence of a mandatory ADR provision does not deprive the court of its jurisdiction (Channel Tunnel v Balfour Beatty Ltd [1993] AC 334). However, had the DRP been enforceable, this would be a case where the court should exercise its discretion not to exercise its jurisdiction. Further, the judge found the relevant authorities made it clear the default remedy in such circumstances is a stay of the proceedings, and the facts of the case would not have provided a basis for departing from default position. This meant even if the DRP had been enforceable, the judge would not have been prepared to set aside the claim form, i.e. the judge would only have been prepared to order a stay in any event.

Having found the DRP was unenforceable, the judge concluded the claimant had a real prospect of advancing its claim at trial and the claim form should therefore not be struck out. The judge further found the claimant’s claim was not an abuse of process.

This judgment underlines the courts’ willingness to uphold contractual ADR processes. However, it also serves as an important reminder to ensure such processes are drafted with sufficient clarity and certainty, in the absence of which they may be deemed to be unenforceable.

Arbitration agreements

Arbitration agreements may be viewed as a special case of mandatory ADR provisions. In cases where a party commences litigation in breach of an arbitration agreement, the court has the power to stay the legal proceedings.

Arbitration agreements may include a Scott v Avery clause, which makes obtaining an arbitration award a condition precedent to the commencement of litigation. The existence of such a clause could provide a defendant with a complete defence to a claim brought in breach of the condition precedent. However, section 9(5) of the Arbitration Act 1996 provides if the court refuses to stay legal proceedings, any clause that provides an arbitration award is a condition precedent to the commencement of litigation is of no effect in those proceedings. As such, if the claimant is able to persuade the court not to stay the legal proceedings it has commenced, it will not then have to deal with a defence based on the existence of a purported Scott v Avery clause.

Agreements on limitation periods

The Limitation Act 1980 (LA) does not expressly state whether it is possible to contract out of the LA’s provisions, or whether parties can agree alternative limitation periods. However, there appears to be general consensus that this is possible. For example, in Ofulue v Bossert [2009] 1 A.C. 990 Lord Walker observed [at 55]:

“…there is nothing in the Limitation Act 1980 to outlaw an agreement varying its effect.”

It is therefore possible for parties to a contract to shorten the period within which certain claims can be brought. This is potentially a key way in which a party’s right to litigate could be materially restricted. That said, such contractual provisions are likely to be subject to the Unfair Contract Terms Act 1977 (UCTA) and, in the case of consumer contracts, subject to further consumer protection legislation.

Conclusion

There are a number of ways in which contracting parties can fetter the right of one or both of them to commence litigation. One common example is through the use of contractual ADR processes.

These often create a ‘tiered’ arrangement, whereby a would-be claimant must first exhaust the contractual ADR process before being able to press ahead with litigation. While the courts are prepared to uphold and enforce these arrangements, parties must ensure ADR provisions are sufficiently clear and certain, otherwise they risk being deemed unenforceable. Finally, parties should also consider the extent to which any terms aimed at limiting a party’s right to litigate may be deemed unreasonable, and (if applicable) in contravention of relevant consumer legislation.

Ricky Cella is a senior associate at Russell-Cooke russell-cooke.co.uk

 

 

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