A recent Court of Appeal decision provides welcome clarity as to the approach to be taken to court proceedings commenced in breach of a tiered dispute resolution procedure due to an approaching limitation period. Although the granting of a stay may be the most common outcome in such circumstances, it is not to be considered the “default” or “inevitable” result and the proceedings may be struck out where non-compliance with the DRP is unreasonable. The decision also provides a useful reminder to contracting parties, particularly those involved in PFI and other multi-level contracting arrangements, of the importance of clarity in dispute resolution procedures.
Kajima Construction Europe (UK) Limited vs Children’s Ark Partnership Limited
CAP was engaged by Brighton and Sussex University Hospital NHS Trust (the “Trust”) to design, build and finance the redevelopment of the Royal Alexandra Hospital for Sick Children in Brighton (“the Project Agreement”). CAP, in turn, engaged Kajima to design, construct and commission the Hospital (“the Construction Contract”).
The Project Agreement Dispute Resolution Procedure (“DRP”) included the following:
“Subject to paragraph 2 and 6 of this Schedule, all Disputes shall first be referred to the Liaison Committee for resolution. Any decision of the Liaison Committee shall be final and binding unless the parties otherwise agree.”
The Liaison Committee was defined, in the Project Agreement, as being comprised of representatives from the Trust and CAP. Further provisions relating to the operation and aims of the Liaison Committee were included in Section 12 of the Project Agreement.
The DRP in the Construction Contract was, with the exception of the title, identical to the DRP in the Project Agreement. However, the Liaison Committee was defined in the Construction Contract as “the committee referred to in clause 12…of the Project Agreement” and the provisions of Section 12 of the Project Agreement were not carried through into the Construction Contract. With no further clarity offered elsewhere in the drafting, Kajima was, on the face of things, not entitled to have a representative on the Liaison Committee, even in respect of disputes under the Construction Contract.
CAP’s claim against Kajima
In 2019, the parties entered into a Standstill Agreement to allow investigations and works to be carried out in respect of certain fire-stopping defects. The limitation period was subsequently extended on several occasions over the next two years.
Remedial works were ongoing but not complete when Kajima advised CAP that it would not agree to a further extension. Facing the expiry of the limitation period and the possibility of a significant claim from the Trust, CAP issued TCC proceedings against Kajima without first referring the dispute to the Liaison Committee.
Shortly after filing its claim, CAP applied to stay the proceedings to allow the parties to comply with the DRP. Kajima cross-applied to set aside or strike out the claim on the basis that CAP had failed to comply with the DRP.
The TCC decided that the DRP was unenforceable due to a lack of clarity but, even if it had been enforceable, it would only have stayed the proceedings rather than strike them out. Striking out would have pushed CAP’s claim outside the limitation period and in the court’s view such a result was unwarranted given (i) the reasonableness of the parties’ conduct; (ii) the fact that the parties had not simply overlooked the expiry of the limitation period (indeed Kajima was well aware that a claim was likely and had had the opportunity to bring protective proceedings against its own subcontractors); and (iii) the fact that CAP’s claim against Kajima could not be quantified until the Trust’s claims against CAP were known.
The enforceability of the DRP
The Court of Appeal upheld the TCC’s decision that the DRP was unenforceable. In addition to the difficulties caused by the fact that the DRP under the Construction Contract involved the Trust (who was not a party to the Construction Contract) but did not involve Kajima (who was a party), the Court also noted numerous other uncertainties in the DRP when considered as a whole, including how the referral process was to be commenced and how it was to be concluded.
Is a stay the “default remedy”?
At first instance, the judge had described a stay of proceedings as “the appropriate or default remedy”, but went on to note that she could see no reason why “the court could not determine that a different form of relief was appropriate having regard to the particular facts.” On appeal, Lord Justice Coulson (with whom Lord Justice Holroyde agreed) was quick to clarify that:
“a stay of proceedings is not a default remedy in the sense of an automatic or inevitable relief which the court will grant to A, when B ignores the contractual dispute resolution procedure. The right remedy will always turn on the facts of the case.”
However, a stay was in his view, the “usual (as opposed to the inevitable) order that the court will make when proceedings are started in breach of a mandatory contractual dispute resolution mechanism.”
While agreeing with the overall decision on the facts of this case, Lord Justice Popplewell disagreed with the suggestion that a stay should be the “usual” remedy. In his view, everything depended on the facts and, for example, if proceedings had been commenced in breach of an agreed DRP and compliance with the DRP would have provided the defendant with a limitation defence, “both those factors are important considerations in favour of striking out rather than staying the claim.”
When might it be appropriate to strike out?
The Court of Appeal agreed with the reasons given by the TCC for staying the proceedings rather than striking them out. The Court emphasised the reasonableness of CAP’s conduct after being left in a difficult position by Kajima’s refusal to extend the standstill agreement whilst the remedial works were still ongoing and the quantum of the Trust’s claim was not yet known.
Lord Justice Popplewell emphasised that this conclusion was based on the assumed need to complete the Liaison Committee process before commencing proceedings. Taking a harder line than the other two Judges, he considered that a mere requirement to commence such a process would have led to a different result in circumstances of this case:
“If the condition precedent under consideration in this case were the commencement of the mediation process rather than its completion, I would strongly incline to the view that the appropriate remedy would be to strike out the claim. To do otherwise would be to allow CAP to rely on its breach of contract to deprive Kajima of a limitation defence; and to do so when in the period following notification that the Standstill Agreement was not going to be renewed, there was ample time to comply with the condition and no practical obstacle to doing so.”
Conclusions and implications
This decision provides valuable appellate guidance as to the approach to be taken where a party commences proceedings in breach of a multi-tiered DRP. As noted in the Court’s judgment, most cases to date have allowed proceedings to be stayed whilst the DRP was complied with. The Court’s decision makes clear that this is not a “default” rule and that striking out may be appropriate where the failure to comply with the DRP has deprived the defendant of a limitation defence. In such cases the key question will be whether the claimant has acted reasonably in commencing proceedings out of step with the DRP.
The significance of this decision can be illustrated by way of contrast to an earlier case decided by the Scottish Court of Session in 2021. Greater Glasgow Health Board v Multiplex Construction also concerned a defects claim in respect of a large public health project. NEC terms applied which required adjudication to be commenced as a pre-condition to the commencement of court proceedings. Shortly before the expiration of the relevant prescription period under Scots law (the equivalent of a limitation period in England), the employer commenced court proceedings claiming that the dispute was too complex to be referred to adjudication and was therefore not caught by the NEC’s mandatory adjudication clause. This position was rejected, but the proceedings were stayed, with the Court noting that was “the usual course”. Under the Court of Appeal’s judgment in the present case, one might expect that an enquiry would be needed in such circumstances as to whether the employer’s decision to bypass the adjudication clause was a reasonable one. For our Law-Now on the Greater Glasgow Health Board case, please click here.
Finally, the present case also provides an important reminder as to the importance of clear drafting when incorporating DRPs in multi-level contractual structures commonly found on PFI and other large projects. Such provisions are often “dropped down” to lower levels of the contractual structure, but care is needed to ensure that any provisions replicated in this manner are properly tailored to the lower-level contract. As this case shows, the consequence of failing to do so may be that the DRP is unenforceable.
Kajima Construction Europe (UK) Limited & Anor vs Children’s Ark Partnership Limited  EWCA Civ 292
Greater Glasgow Health Board v Multiplex Construction Europe Limited  CSOH 115