REUTERS | Rebecca Naden

Mediation update: TCC issues guidance on ADR clauses

When a problem surfaces, many turn to mediation to help them solve it.

A mediation may lead a party to review its risks and what lies ahead if it continues the dispute. The mediator may be able to facilitate a conversation that clears the air, corrects an impression or allows an appreciation of another perspective. Within a short space of time (usually four or eight hours), all parties may be able to leave with a deal that puts an end to their dispute and lets everyone move on.

Mediators are most often called in after parties have fallen into dispute. Those parties may already have parted company or, as is also commonplace, may still be working together on an ongoing project.

The well-known benefits of mediation have however led some to think of mediation before any dispute has arisen and include an alternative dispute resolution (ADR) clause that refers to mediation in their contract.

This post looks at Ohpen Operations UK Ltd v Invesco Fund Managers Ltd, a recent TCC decision about the enforceability of such ADR clauses.

Ohpen Operations UK Ltd v Invesco Fund Managers Ltd

In Ohpen Operations v Invesco, Invesco argued that its contract with Ophen contained a valid, binding and applicable ADR clause that prescribed a mandatory escalation and mediation procedure prior to the commencement of proceedings. As a result, Invesco said the court should exercise its discretion to stay the proceedings Ohpen had commenced, pending referral of the dispute to mediation.

Ohpen opposed the stay. It argued that, as a matter of construction of the contract, the relevant dispute resolution provisions were not applicable outside a certain period or following termination of the contract (the contract having been terminated by one of the parties).

The judge, Mrs Justice O’Farrell DBE, reviewed a number of authorities and summarised the principles applicable where a party seeks to enforce an ADR provision by means of an order staying proceedings as follows:

“(i) The agreement must create an enforceable obligation requiring the parties to engage in alternative dispute resolution.

(ii) The obligation must be expressed clearly as a condition precedent to court proceedings or arbitration.

(iii) 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.

(iv) 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.”

Applying those principles to the contract in question, the judge concluded that the proceedings should be stayed. In summary she found:

  • On a proper construction of the contract, it contained a dispute resolution provision that was applicable to the dispute between the parties and created an enforceable obligation requiring the parties to engage in mediation. The judge considered the meaning of the words used, as well as their commercial purpose.
  • The dispute resolution provision operated as a condition precedent to the commencement of legal proceedings. Although the term “condition precedent” was not used in the clause, the words used were clear that the right to commence proceedings was subject to the failure of the dispute resolution procedure, including the mediation process.
  • The mechanism under the clause was sufficiently clear and certain to be enforceable. No further agreement by the parties was required to enable a mediation to proceed.
  • It would be appropriate for it to stay the proceedings to enable a mediation to take place.

As to when the court should exercise its discretion to stay proceedings (the fourth principle), the judge also made this general point:

“There is a clear and strong policy in favour of enforcing alternative dispute resolution provisions and in encouraging parties to attempt to resolve disputes prior to litigation. Where a contract contains valid machinery for resolving potential disputes between the parties, it will usually be necessary for the parties to follow that machinery, and the court will not permit an action to be brought in breach of such agreement.

The Court must consider the interests of justice in enforcing the agreed machinery under the [contract]. However, it must also take into account the overriding objective in the Civil Procedure Rules when considering the appropriate order to make.”

Conclusion

Parties are choosing mediation before, during and after projects.

Although the enforceability of an ADR clause will of course turn on the proper construction of the contract in question, the TCC’s guidance in Ophen will prove useful to practitioners.

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