ADR clauses in contracts

June 19, 2015
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Parties to major building projects have openly discussed the effectiveness of signing up in advance to their own agreed form of alternative dispute resolution, rather than relying on adjudication or court procedures. The emphasis is on saving costs and keeping the project going.

ADR clauses in various guises have been subject to court scrutiny – are they enforceable? There was a run of cases where the courts were reluctant to enforce them, comparing these clauses to agreements to negotiate and stating that they were void for uncertainty.

However, last year in Emirates Trading Agency LLC v Prime Mineral Exports Private Limited [2014] EWHC 2104 (Comm), Mr Justice Teale delivered, in my opinion, a very helpful and sensible judgment in this area. The clause in question required that in the case of any dispute arising out of the contract “the Parties shall first seek to resolve the dispute or claim by friendly discussions…”. If no solution could be found within four weeks then the non-defaulting party could invoke the arbitration clause.

The judge reviewed the English authorities (which suggested that the clause was unenforceable) and those from other jurisdictions, such as Australia and Singapore (which supported such clauses). He considered that where parties have entered into obligations they reasonably expect the courts to uphold those obligations and that English law “arguably frustrated that expectation.” He did not agree that the concept of “good faith” was too open ended a concept to provide a sufficient definition of what such an agreement must as a minimum involve. He commented that “difficulty in proving a breach should not be confused with a suggestion that the clause lacks certainty.”

The judge decided that he was not bound by the previous English cases and held that the clause was enforceable, commenting that “concluding that the obligation was enforceable would be consistent with the public policy of encouraging parties to resolve disputes without the need for expensive arbitration or litigation”.

The case therefore leaves open the possibility of parties designing their own mediation clauses, that might go something like this: “The parties agree that in the event of a dispute they will not issue proceedings in relation to that dispute until they have first sought to resolve their differences by mediation conducted by a member of The Property Mediators”!

Jacqui Joyce – an earlier version of this article first appeared in Estates Gazette


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