Clarity about minimum requirements from proceedings allows parties to protect against risk, says Richard Little

Joint ventures, partnerships and project contracts where parties have to work together for a period of time often contain tiered dispute resolution clauses.

These set out a series of procedures for parties to follow in order to resolve any dispute without commencing proceedings.

These clauses can serve a valuable purpose during the operation of the relevant contract as they allow issues to be resolved quickly in a manner that maintains the parties' working relationship.

However, once the relationship is at an end, these clauses can frustrate claimants who are anxious to get proceedings underway.

Parties can challenge the jurisdiction of the court on the grounds that such clauses are conditions precedent to issuing proceedings.

In Wah (aka Alan Tang) and another v Grant Thornton International Limited and others [2012] EWCA Civ 638, the court determined that a fairly standard tiered dispute resolution clause was not enforceable as it 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".

The facts

The clause was contained in an accountancy firm's terms of membership agreement. When one of the partners in that partnership was expelled in 2010, it sought to initiate the dispute resolution procedure set out in the agreement.

The clauses in question set out a detailed procedure that the parties were to follow prior to initiating arbitration. In the first instance, any dispute was to be referred to the chief executive for "amicable conciliation".

In the event that the chief executive did not resolve the dispute within one month, it was to be referred to a panel of three members of the board of governors, which was also given a month to resolve the dispute.

Finally, in the event that the board of governors was unable to resolve the dispute, the parties were able to commence arbitration proceedings.

The chief executive recused himself as he considered that he was unable to act as an objective conciliator. Further, no members of the board of governors put themselves forward to serve on the reconciliation panel.

As a result, the three-person panel envisaged was never constituted.

An arbitration was then commenced and it was argued before the arbitral tribunal that the steps laid out in the membership agreement were not sufficiently complied with. As such, the request for arbitration was not valid.

The defendants in the court proceedings on the other hand contended that the clauses were not sufficiently precise or certain to be contractually binding.

The tribunal's decision

The tribunal determined that the steps outlined in the agreement did not constitute a detailed process that was sufficiently certain to be enforceable.

In doing so, it relied on a number of previous judgments which had considered the validity of alternative dispute resolution clauses.

In Holloway and another v Chancery Mead Ltd, Ramsey J held that "the ADR clause must meet at least the following three requirements: First, that the process must be sufficiently certain. Second, the administrative processes for selecting a party to resolve the dispute and to pay that person should also be defined. Third, the process or at least a model of the process should be set out so that the detail of the process is sufficiently certain".

The tribunal also considered the judgment of Steyn J in Itex Shipping PTE Ltd v China Ocean Shipping Co, The "Jing Hong Hai". Here, an agreement that the parties were to seek to resolve their disputes amicably and only refer the matter to arbitration in the event of being unable to settle was not a legally enforceable obligation constituting a condition precedent.

The court's decision

The tribunal's decision was challenged before Hildyard J who also considered:

1. The judgment of Colman J in Cable & Wireless v IBM that there created an obligation on both parties to participate at least to the extent of co-operating in the appointment of a mediator and attending at least one meeting.

2. Moore-Bick LJ's judgment in Sulamerica CIA Nacional de Seguros SA and others v Enesa Engenharia SA that the provisions in question did not create a binding obligation to participate in a mediation process before arbitration because it was insufficiently certain.

Reviewing the clauses in the membership agreement, the court noted that there was no detail as to what form the conciliation should take, or who was to be involved in it. Nor was there any detail about how exactly the chief executive should attempt to resolve the dispute.

It therefore concluded that the process laid out in the agreement 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".

It has been observed that there was a growing trend following Cable & Wireless to find contractual constructions that allow the enforcement of tiered dispute resolution clauses, despite the potential for uncertainty within them.

However, in both Sulamerica and Wah the courts have looked for true certainty in obligations.

Hildyard J noted that: "The test is not whether a clause is a valid provision for a recognised process of ADR: it is whether the obligations and/or negative injunctions it imposes are sufficiently clear and certain to be given legal effect."

It is important, therefore, that within a tiered dispute resolution clause there is a clear and unequivocal commitment to commence a process with readily identifiable steps. That way, the court can construe them in a manner that will create a legally binding obligation.

Being clear as to the minimum requirements of who, what and when as well as how the process is to be concluded is of real importance.

Using a clause whose wording has already been held by the court to create a binding clause is one way to protect against the risk that the clause being used will not be enforceable.

Richard Little (pictured, above) is a partner and solicitor advocate in Eversheds commercial dispute management group.