Make your 'ADR' as clear as 'ABC'
Tang Chung Wah and Anor v Grant Thornton International Ltd & Ors [2012] EWHC 3198 (Ch)Contractual parties should be reminded by a recent High Court decision that tiered ADR provisions are only
Tang Chung Wah and Anor v Grant Thornton International Ltd & Ors [2012] EWHC 3198 (Ch)
Contractual parties should be reminded by a recent High Court decision that tiered ADR provisions are only enforceable if they describe a clear commitment to commence a process with readily identifiable steps. This post sets out the Court's guidance on what these clauses need to include.
Background
The use of Alternative Dispute Resolution ("ADR") clauses is becoming more widespread in contracts between parties working on projects. A common form is to set out a series of steps that the parties need to take before they are contractually permitted to commence litigation or arbitration proceedings (a "tiered ADR clause"). The idea behind these tiered ADR clauses is to give the parties an opportunity to negotiate or mediate in an amicable fashion and maintain the working relationship, whilst escalating the dispute resolution procedure if the parties are unable to agree.
Like an "agreement to agree", a provision for dispute resolution lacking sufficient details on the process to be undertaken cannot be enforced.
Facts
In the Wah case, the relevant agreement had stipulated the following (fairly standard) steps to be taken by the parties as a condition precedent to any arbitral process (a tiered ADR clause):
The Chief Executive had recused himself from resolving the dispute because of his own personal involvement. In turn, none of the Governors put themselves forward to serve on the Panel so this was never constituted. In effect, the steps set out in the ADR clause had not been complied with. An arbitration award was granted by the London Court of International Arbitration ("LCIA") but the Claimants wanted this set aside on the basis that the request for arbitration was invalid. The question for the Court was therefore whether the tiered arbitration clause had enforceable contractual effect.
Guidance on the content of tiered ADR clauses
The High Court noted that guidance on the enforceability of these clauses had emerged from recent case law:
A clause that obliges the parties to "attempt to resolve a dispute amicably" should prescribe the following:
If the clause prevents parties commencing proceedings before a given event, this event needs to be sufficiently defined so the Court can determine whether and when it has occurred.
The clause in Wah was " too equivocal in terms of the process required and too nebulous in terms of the content of the parties' respective obligations to be given legal effect as an enforceable condition precedent to arbitration ". There was nothing in the clause about the process of conciliation (other than it had to be done "amicably"), who was to be involved, what (if anything) they were required to do. Nor was there any detail about what constituted an " attempt to resolve " the dispute.
Lessons to learn
Parties drafting ADR clauses will always take comfort from adopting a version that has previously been held enforceable or from referring to long-established model processes. However, what worked for one agreement might not be appropriate for another: each set of circumstances needs to be considered separately.
Those contracts currently incorporating ADR clauses that oblige parties "to attempt to resolve a dispute" or "resolve the dispute amicably" should be reviewed to ensure that they also include the clear procedural obligations now prescribed by the Court.
Contracting parties sometimes set out a menu of different ADR procedures for the different types of dispute that may arise in their project. If so, these should also include a "catch-all" clause to ensure that all disputes are adequately covered (e.g. anything not covered by the specified ADR procedure should go to arbitration). In any event, parties should always determine at the outset whether they do want the ADR procedure to be mandatory (as was intended in Wah) or whether the drafting should allow them to commence arbitration without first exhausting the ADR route.
It is becoming clear that the English Courts are demanding a high threshold of certainty. Accordingly, these clauses need to be drafted carefully, with full consideration of the specific arrangements and with expert advice.
Contractual parties should be reminded by a recent High Court decision that tiered ADR provisions are only enforceable if they describe a clear commitment to commence a process with readily identifiable steps. This post sets out the Court's guidance on what these clauses need to include.
Background
The use of Alternative Dispute Resolution ("ADR") clauses is becoming more widespread in contracts between parties working on projects. A common form is to set out a series of steps that the parties need to take before they are contractually permitted to commence litigation or arbitration proceedings (a "tiered ADR clause"). The idea behind these tiered ADR clauses is to give the parties an opportunity to negotiate or mediate in an amicable fashion and maintain the working relationship, whilst escalating the dispute resolution procedure if the parties are unable to agree.
Like an "agreement to agree", a provision for dispute resolution lacking sufficient details on the process to be undertaken cannot be enforced.
Facts
In the Wah case, the relevant agreement had stipulated the following (fairly standard) steps to be taken by the parties as a condition precedent to any arbitral process (a tiered ADR clause):
- any dispute had first to be referred to the Chief Executives who had one month "to attempt to resolve the dispute in an amicable fashion";
- if not resolved within 1 month, the dispute had to be referred to a panel of 3 members of the Board of Governors (the "Panel") who had up to one month to " attempt to resolve the dispute ";
- no party could commence arbitration procedures until the earliest of one month after the referral to the Panel or the Panel had determined that it could not resolve the dispute.
The Chief Executive had recused himself from resolving the dispute because of his own personal involvement. In turn, none of the Governors put themselves forward to serve on the Panel so this was never constituted. In effect, the steps set out in the ADR clause had not been complied with. An arbitration award was granted by the London Court of International Arbitration ("LCIA") but the Claimants wanted this set aside on the basis that the request for arbitration was invalid. The question for the Court was therefore whether the tiered arbitration clause had enforceable contractual effect.
Guidance on the content of tiered ADR clauses
The High Court noted that guidance on the enforceability of these clauses had emerged from recent case law:
- The Courts will consider each case on its own terms and will strain to find a construction that gives effect to the provision. For that reason, the Court will readily imply criteria or machinery in the context of a stipulation for agreement of a fair and reasonable price ;
- However, " agreements to agree " and " agreements to negotiate in good faith ", without more, are unenforceable;
- The test is not whether a specific clause is a valid provision for a recognised process of ADR: it is whether the obligations it imposes are sufficiently clear and certain to be given legal effect.
A clause that obliges the parties to "attempt to resolve a dispute amicably" should prescribe the following:
- a sufficiently certain and unequivocal commitment to commence the process;
- clearly defined steps that each party is required to take;
- the minimum participation required by the parties; and
- when and how the process is exhausted.
If the clause prevents parties commencing proceedings before a given event, this event needs to be sufficiently defined so the Court can determine whether and when it has occurred.
The clause in Wah was " too equivocal in terms of the process required and too nebulous in terms of the content of the parties' respective obligations to be given legal effect as an enforceable condition precedent to arbitration ". There was nothing in the clause about the process of conciliation (other than it had to be done "amicably"), who was to be involved, what (if anything) they were required to do. Nor was there any detail about what constituted an " attempt to resolve " the dispute.
Lessons to learn
Parties drafting ADR clauses will always take comfort from adopting a version that has previously been held enforceable or from referring to long-established model processes. However, what worked for one agreement might not be appropriate for another: each set of circumstances needs to be considered separately.
Those contracts currently incorporating ADR clauses that oblige parties "to attempt to resolve a dispute" or "resolve the dispute amicably" should be reviewed to ensure that they also include the clear procedural obligations now prescribed by the Court.
Contracting parties sometimes set out a menu of different ADR procedures for the different types of dispute that may arise in their project. If so, these should also include a "catch-all" clause to ensure that all disputes are adequately covered (e.g. anything not covered by the specified ADR procedure should go to arbitration). In any event, parties should always determine at the outset whether they do want the ADR procedure to be mandatory (as was intended in Wah) or whether the drafting should allow them to commence arbitration without first exhausting the ADR route.
It is becoming clear that the English Courts are demanding a high threshold of certainty. Accordingly, these clauses need to be drafted carefully, with full consideration of the specific arrangements and with expert advice.