How effective is your tiered dispute resolution clause?

Written on 25 Sep 2019

The recent English High Court case of Ohpen Operations UK Limited v Invesco Fund Managers Limited highlights some of the issues arising when parties agree to a tiered dispute resolution mechanism in their contracts which includes mandatory or compulsory mediation. The case also reveals some fundamental problems regarding the court’s interaction with private mediation.

What was the dispute about?

The claimant and defendant entered into a framework agreement for the development and implementation of a digital online platform. Delays occurred and there was a dispute between the parties as to responsibility for the delays and the revised commencement date of the launch of the platform. This culminated in the defendant customer terminating the contract and the claimant supplier disputing the defendant’s right to terminate for breach. One thing the parties agreed on was that their primary obligations under the agreement had been terminated.

After a ‘without prejudice’ meeting and some correspondence, the claimant issued proceedings. The parties had not tried to resolve their dispute in a mediation and, in commencing court proceedings at this stage of the dispute, the claimant appeared not to have complied with the dispute resolution mechanism in the parties’ contract that provided that they should hold a mediation before going to court. The defendant claimed that issuing proceedings at this stage therefore amounted to a breach of the parties’ agreed dispute resolution mechanism and issued an application seeking a declaration that the court would not exercise any jurisdiction, and an order for a stay of proceedings.

What was the issue for the court to decide?

The court had to decide whether the claim had been issued in breach of a contractually agreed tiered dispute resolution procedure, and if so, whether the proceedings should be stayed, pending referral of the dispute to mediation.

How did the parties agree to resolve their disputes under the agreement?

There was a dispute between the parties as to the interpretation of the tiered dispute resolution mechanism. The defendant submitted that there was a valid, binding and applicable alternative dispute resolution clause which prescribed a mandatory escalation and mediation procedure prior to the commencement of proceedings. The claimant contended that, as a matter of construction, the dispute resolution mechanism and the requirement to mediate did not apply outside the prescribed phases of the project or once the contract had been terminated.

The question for the court was whether, and if so on what terms, to enforce the agreement to mediate.

What is the relevant law?

It was common ground that a clause requiring parties to follow a specified dispute resolution process is in principle capable of creating a condition precedent to the commencement of court proceedings. In Cable & Wireless Plc v IBM United Kingdom Ltd, the court decided that a contractual agreement to refer a dispute to alternative dispute resolution could be enforceable by a stay of court proceedings. The court distilled a number of principles from the authorities that the court must take into account where a party seeks to enforce an alternative dispute resolution provision by means of an order staying proceedings:

  • The agreement must create an enforceable obligation requiring the parties to engage in alternative dispute resolution.
  • The obligation must be expressed clearly as a condition precedent to court proceedings or arbitration.
  • The dispute resolution process to be followed does not have to be formal but must be sufficiently clear and certain by reference to objective criteria, including machinery to appoint a mediator or determine any other necessary step in the procedure without the requirement for any further agreement by the parties.
  • The court has a discretion to stay proceedings commenced in breach of an enforceable dispute resolution agreement. In exercising its discretion, 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.

What did the court find in Ohpen Operations?

The court held, finding in favour of the defendant, that the parties’ agreement to mediate was a legally enforceable condition precedent to commencing legal proceedings. The court disagreed with the claimant’s submissions and decided that the dispute resolution mechanism (i) applied to all disputes arising during the project and (ii) fell within the meaning of the survival clause of the agreement, as a provision intended by implication to continue in force after termination. The claimant had therefore issued court proceedings in breach of the parties’ dispute resolution mechanism.

What did the court order?

In utilising the wide discretion available under section 49(3) of the Senior Courts Act 1981 and/or under its inherent jurisdiction to stay proceedings pending mediation, the court ordered the proceedings to be stayed accordingly to allow a mediation to take place. However, it also ordered defendant to file a defence and counterclaim before any mediation took place so that “the substantive issues may be clarified”.

Osborne Clarke comment

This case outlines the importance of unambiguous drafting of dispute resolution clauses in contracts, particularly ones intended to compel the parties to mediate their dispute before going to court. The principles that the court took into account as to when it is appropriate to stay proceedings pending mediation provide a helpful guide to drafting clauses that provide for mandatory mediation so as to ensure that the clause creates an enforceable obligation.

More surprising was the court’s decision to compel the defendant to file a defence before it could exercise its right to hold a mediation. The court’s decision presupposes that it is necessary for the legal case to be fully pleaded before a mediation can take place and be effective. This is not our experience. We frequently conduct mediations for our clients and we can say from experience that it is certainly possible to have an effective mediation before court proceedings have begun and before the parties have set out their legal cases.

This is because parties, when considering how to resolve their dispute, will factor in many considerations, not just legal arguments and/or what the result might be if the dispute ends up in court. Indeed, there is often very little discussion of legal issues at a mediation and the negotiation between the parties is often dominated by commercial and interpersonal matters. In that context the court’s decision could be seen as being out of step with the practice of mediation. Given that a major purpose of dispute resolution clauses is to give an opportunity to resolve disputes without the parties being put to the expense of litigation, it might be expected that, just like with other forms of ADR such as arbitration, the courts should not interfere in mediation.
What can be done by parties in their commercial agreements to discourage the courts from interfering with or changing their agreements about mediation? As a matter of law, the courts have a discretion to decide whether or not to stay proceedings to allow a mediation to take place. The power to decline to stay proceedings in favour of mediation, and/or to rule that mediation should take place at a later stage of the proceedings as here, cannot therefore be excluded altogether by the parties’ agreement.

In order to give the parties the best chance of having their pre-agreed dispute resolution provisions upheld by the court, the parties could include wording in the dispute resolution clause to demonstrate to the court that they acknowledge and accept that in mediating prior to court proceedings commencing, the issues in dispute may not be fully articulated.

Clear drafting should enable the parties to use what can be a highly effective mechanism for resolving disputes without the cost, time and hardening of positions that often develops during litigation.