- Written by
- David Hacker, Partner
Where a dispute arises in business, it is always preferable if it can be resolved without the need to go to court. That is why an increasing number of commercial contracts include an alternative dispute resolution process that must be followed before court proceedings can be instigated and which the parties to the contract are expected to obey.
But what happens where an alternative dispute resolution clause is ignored and your business is sued without the agreed process having been used? Is there anything you can do to force compliance or to bring a halt to the proceedings which have been issued?
As David Hacker commercial dispute resolution lawyer explains, ‘The answer depends on what the contract says and whether the alternative dispute resolution process that has been prescribed is clear enough to be followed’.
Wherever possible, the court will seek to ensure that an alternative dispute resolution clause is upheld and that an application to pause proceedings brought in breach of such a provision is granted. This is because the courts recognise the desirability of holding commercial parties to the terms of the deals they have struck and to the public interest in keeping disputes out of the court to relieve pressure on resources. However, there are certain criteria that need to be met in order for an alternative dispute resolution provision to be enforced.
Criteria for halting proceedings
The circumstances in which alternative dispute resolution clauses will generally be upheld were neatly stated in the case of Ohpen Operations UK Ltd v Invesco Fund Managers Ltd, which concerned a dispute about the validity of a termination notice served by Invesco to end a contract under which Ohpen had been commissioned to design, implement, maintain and develop a new online investment trading platform.
Under the terms of the contract, it had been agreed that before taking a dispute to court the parties were obliged to try to resolve matters between themselves first and to then refer the matter to mediation facilitated by the Centre for Effective Dispute Resolution.
In breach of the agreement, Ohpen attended one face-to-face meeting with Invesco and then moved straight to the instigation of court proceedings when this failed to yield a settlement.
Ruling that Ohpen should have followed the tiered dispute resolution process that had been agreed, the court confirmed that contractual provisions designed to keep disputes away from the court will usually be upheld and a pause in proceedings ordered, where:
• there is an enforceable obligation within the terms of the contract requiring the parties to follow an agreed alternative dispute resolution process;
• the obligation is clear in its requirements and expressed as being a ‘condition precedent’ to the making of a court claim – in other words, something the parties are compelled to do before proceedings can be issued; and
• the alternative dispute resolution process specified is capable of being understood and implemented without the need for the parties to reach any further agreement.
Alternative dispute resolution clauses that may be problematic
For an alternative dispute resolution clause to be enforceable, it needs to oblige the parties to follow a process which is sufficiently clear that a court can determine, with relative ease, whether or not the process has been complied with.
Thus, a clause which requires the parties to submit their dispute to mediation adopting a named set of rules before court proceedings can be issued is likely to be upheld given the ease with which the court would be able to ascertain whether this obligation has been met.
This contrasts with a clause requiring the parties to use their best endeavours to resolve a dispute through good faith negotiations, which would almost certainly be unenforceable given the obvious difficulty the court would encounter in determining whether negotiations between the parties had been approached in such a way as to meet this obligation.
Advice for businesses
In view of this, the message for businesses faced with court proceedings issued in breach of an alternative dispute resolution clause is to:
• seek immediate legal advice as to whether the terms of the clause are sufficiently clear and mandatory to make enforcement by the court likely; and, if they are
• to then make a swift application to have the proceedings paused (or ‘stayed’ to use the correct terminology) while the steps detailed in the clause are followed.
Where your application is successful (or the terms of your contract so provide), a request that your opponent cover your legal costs can also be made.
What if alternative dispute resolution fails
If utilisation of the alternative dispute resolution process you have agreed to follow fails to result in a settlement, then it will be open to you or your opponent to apply to the court to have the stay lifted and for the proceedings to then continue until such time as a settlement is agreed or the matter goes before a judge at trial for a formal determination.
Advice | 2 September 2021
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