Litigation in the technology and construction court

Adam Constable KC; Lucy Garrett and Calum Lamont

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CHAPTER 10 The TCC and ADR

Introduction

10.1 The Courts seek actively to encourage parties to settle their disputes in numerous ways. The Pre-Action Protocol’s () origins lie in an attempt to front-load preparation and make settlement prior to commencement of an action more likely. In the standard Court form submitted prior to the first CMC, the parties are required to indicate whether any form of alternative dispute resolution (ADR) has been attempted or whether a stay should be imposed for a period to allow ADR. As will be explored later, the Court will also consider, to some extent, the parties’ wishes when it comes to a timetable to the final hearing which can accommodate commercial negotiations, and the Court has the power to impose sanctions in costs if a party does not engage meaningfully in ADR. These tools are put to good effect: on the basis of the TCC annual reports, while there is no data which specifically identifies the number of cases which end by negotiated settlement, each year the number of fought trials equates to a relatively constant figure of around 10 per cent of the number of claims commenced. It is clear that, whatever the precise number, the very vast majority of claims commenced do not proceed to judgment. 10.2 This chapter explores the interrelationship between the Court and ADR, and the practical approach generally taken by the TCC in balancing the policy of encouraging negotiation and settlement, with the management of the progression of a dispute to trial.

What is ADR?

10.3 The term ‘ADR’ covers all types of dispute resolution other than litigation. This therefore includes arbitration, although given the many similarities (and some disadvantages) of the arbitral process to the Court process particularly in the UK domestic context, nowadays ADR is more commonly used as a term to refer to mediation, conciliation, early neutral evaluation or other hybrid procedures designed to encourage or facilitate settlement of the dispute. It also covers the use of dispute adjudication or resolution boards, which in recent years have become commonplace in large infrastructure and engineering projects. 10.4 ‘Mediation’ involves an independent and impartial third party who helps the parties reach agreement. It is often useful in the context of the type of disputes which come to the TCC for the mediator to understand the types of issues and risks which arise in TCC litigation; not because it is necessary for the mediator to provide an evaluation of the claim to the party, but so that they can with some authority identify for the parties the range of outcomes and risks faced in litigation. ‘Conciliation’ is a similar beast to mediation, but the principal difference is that, at some point, the conciliator is usually asked to provide the parties with a non-binding recommendation for the settlement. ‘Early Neutral Evaluation’ is a process in which more of the focus is upon the provision of a view by a trusted independent third

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party, sometimes on the potential outcome to the entirety of the dispute should the matter fight, but often on key contractual or legal points which the parties believe may unlock the wider case. It is now commonplace for parties to mix and match these procedures, so that there may be an early neutral evaluation followed (sometimes the following day or week) by a commercially focussed mediation. A Dispute Adjudication Board (DAB), or Dispute Resolution Board (DRB), is a panel, usually of three people often including engineering and legal expertise, retained by the parties to a significant construction project to provide recommendations or decisions on disputes as they arise. Sometimes the decisions are binding, or, like adjudications temporarily binding but subject always to final Court or arbitration proceedings; sometimes the board make recommendations which are not binding at all, although the recommendation carries with it some obvious benefit in the context of the parties’ ongoing project management and commercial negotiations. Because DABs/DRBs exist for the lifetime of the project, there is less interaction between the Court process and these forms of ADR, although disputes can arise if the DRB is part of a mandatory tiered resolution process with which the parties are required to comply prior to commencing litigation, considered in the following section.

Enforcement of contractual ADR schemes

10.5 Some contracts have tiered stages of ADR which the parties are either required or encouraged to engage with prior to Court proceedings being commenced, in relation to a particular dispute. If the contract does no more than encourage steps to be taken, by the use of permissive rather than mandatory language (for example, ‘may’), then there is obviously no bar to commencing litigation without having taken steps in accordance with the contractual structure. However, where the contract mandates that certain steps be taken, the common question faced by the TCC is: What does the Court do if a party to the contract commences litigation without having complied, or complied properly, with the required steps? 10.6 Traditionally, a simple agreement to negotiate, in broad and unspecific terms, is not enforceable. This is because it is regarded as too uncertain. Even an agreement to negotiate ‘in good faith’ is unlikely to be enforceable without more.1 It is considered to be unworkable in practice as it is inherently inconsistent with the position of a negotiating party; therefore, it provides uncertainty. Similarly, an agreement to ‘seek to have the dispute resolved amicably by mediation’ was held to be unenforceable.2 However, more recent cases have demonstrated that where some further definition of the obligation to negotiate is provided, the Court will strive to uphold the obligation. In Cable & Wireless Plc v IBM United Kingdom,3 the Court determined that the prescription of a particular procedure to an obligation to attempt in good faith to settle a dispute was the characteristic which turned an unenforceable obligation into one with sufficient certainty to be enforceable. That was the case notwithstanding that the description of the procedure, while not vague, was somewhat less than detailed: it was simply to follow whatever ADR was ‘recommended to the parties by the Centre for Dispute Resolution’. 10.7 The Court noted that in the face of a clear breach of the obligation to participate in ADR, there was an entitlement, prima facie, to enforcement of the obligation. However,

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the remedy was equitable and therefore discretionary, and while strong cause would have to be shown in order to justify declining to enforce an agreement, once determined as sufficiently certain, it was suggested that there may be cases where ‘a reference to ADR would be obviously futile and where the likelihood of a productive mediation taking place would be so slight as not to justify enforcing the agreement. Even in such circumstances ADR would have to be a completely hopeless exercise’.4 In the recent case of Astor Management AG v Atalaya Mining Plc,5 Leggatt J held (albeit in the context of the construction of a reasonable endeavours clause) that there was no ‘principle of futility’ (whether as a principle of law of interpretative presumption) which enabled the disapplication of a contractual precondition just because the Court considered that compliance served no useful purpose. It is unlikely that this is determinative against the Court’s ability to refuse to provide discretionary equitable relief on grounds of futility, it is in line with the general direction of travel which makes it increasingly improbable that the Court will sanction non-compliance with dispute resolution condition precedent clauses. 10.8 In Holloway v Chancery Mead Ltd,6 Ramsey J held that the ADR clause must meet at least the following three requirements:

the process must be sufficiently certain in that there should not be the need for an agreement at any stage before matters can proceed;
the administrative processes for selecting a party to resolve the dispute and to pay that person should also be defined;
the process or at least a model of the process should be set out so that the detail of the process is sufficiently certain.

10.9 In line with this approach, a clause which required disputes to be resolved by a senior officer ‘in an amicable fashion’ within a period of up to one month, following consideration by a panel of three executives, again within a defined period, was considered ‘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’.7 Of particular concern was the absence of ‘guidance as to the quality or nature of the attempts to be made’. 10.10 However, even these criteria are in doubt. In Emirates Trading Agency LLC v Prime Mineral Exports Private Ltd,8 Teare J considered the effect of a requirement9 for the parties to ‘first seek to resolve the dispute or claim by friendly discussion’, in circumstances where a party can then invoke the arbitration clause ‘if no solution can be arrived at in between the Parties for a continuous period of 4 weeks’. Teare J inventively distinguished the Court of Appeal’s decision in Sul America on the basis that as the reference to mediation did not go on further to define that process (for example, a particular overseeing body), it was ‘incomplete’; and recognised implicitly that other first instance authorities may have provided requirements for greater certainty – such as Ramsey J’s decision in Chancery Mead – but that, as first instance decisions, were not binding upon him. Teare

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J found that the requirement was sufficiently certain to be enforced, when coupled with an implied obligation to resolve by friendly discussions ‘in good faith’ – thus providing the identifiable standard ‘namely fair, honest and genuine discussions’. His decision was explicitly driven by public policy concerns: enforcement of such an agreement when found as part of a dispute resolution clause was in the public interest, firstly, because commercial men expect the Court to enforce obligations which they have freely undertaken and, secondly, because the object of the agreement is to avoid what might otherwise be an expensive and time-consuming arbitration. This case certainly represents the high-water mark in enforceability of a loosely drafted requirement to negotiation. While it contained a temporal limit, which no doubt helped, it is far from clear from Teare J’s reasoning that this was determinative; rather, his rationale as regards certainty rested more on the ‘friendly discussions’ themselves being sufficiently certain, when benchmarked against good faith. It is obvious that the Courts have, in developing the law in light of changed public policy, effected a U-turn from the early authorities; and enforcing a requirement for ‘friendly discussions’ while determining that a clause requiring ‘mediation’ is uncertain would, objectively, appear to be in conflict. There is no modern appellate decision resolving these differences, so it is, presently, unclear whether the TCC would adopt Ramsey J’s criteria from Chancery Mead, or move from them in the way the Commercial Court has done. The authors’ view is that the public policy appetite for encouraging dispute resolution outside of the Courts is likely to be the overwhelming criteria and clauses with looser and looser language may well be enforceable. 10.11 It might also be noted that the original rationale for the absence of sufficient certainty in the older authorities related not just to an ability to determine whether the obligation might have been breached, but, because, per Lord Denning, ‘no court could estimate damages’.10 The line of authorities including Cable & Wireless consider the question of certainty in the context of, in effect, injunctive relief staying Court proceedings pending compliance, rather than in the context of a claim for damages. Lord Denning’s fundamental objection has not been cured by the introduction of more certainty as to the procedure that must be followed for the negotiations: it remains the case that it would be in many cases impossible for the Court to determine what damages might flow from breach. However, plainly for the same policy reasons aligning the law with the modern judicial approach to encouraging ADR,11 the question of certainty in the context of damages is no longer troubling. In Emirates Trading, Teare J seemed less concerned about the damages point, commenting only that if a party were to seek damages for breach of the obligation it might be difficult to establish what the outcome of the discussions would have been, but in such a case damages could, in appropriate cases, be awarded for loss of a chance.

Jurisdiction, adjournment or stay?

10.12 A failure to partake in a contractually stipulated ADR procedure does not affect the jurisdiction of the Court. It is possible, therefore, to commence proceedings. The question is whether the proceedings would then be adjourned or stayed. One issue which

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potentially arises is where an action is commenced in flagrant breach of a dispute resolution procedure solely to issue proceedings in time, for limitation purposes. There does not appear to be any reported authority directly on point; it seems to the authors that it is more likely that the Court would conclude that the proceedings have been validly commenced for limitation purposes (providing the cause of action itself has accrued, obviously), and that the appropriate course is to stay or adjourn the proceedings pending the parties’ compliance with the contractual procedure. 10.13 The concepts of ‘adjourning’, or pausing, proceedings to give effect to required ADR provisions or ‘staying’ those proceedings are used somewhat interchangeably. Indeed, the TCC Guide effectively elides the two when, at 7.2.2, it states, ‘the court will not necessarily grant a stay of proceedings upon demand and it will always need to be satisfied that an adjournment is actually necessary to enable ADR to take place’. 10.14 One commonly perceived distinction is that costs incurred during the stay of proceedings are not recoverable, whereas costs during adjourned proceedings are. It is difficult to identify the rationale for this distinction, in light of section 51 of the Supreme Court Act 1981, which provides that ‘the costs of and incidental to the proceedings. . . shall be in the discretion of the Court’. It is clear that this can include pre-action costs where the matter is not resolved and proceedings are begun.12 There is no reason in principle why costs incurred during a stay might themselves not be regarded as ‘incidental’ to the proceedings and thus fall within the discretion of the Court. It may be that, in its discretion, a Court refuses to allow costs incurred during a stay which have only fallen to be incurred during the proceedings themselves because of a failure to comply with a contractual precondition. So, if the costs of a senior executive negotiation would not themselves have fallen to be recovered as part of litigation costs,13 the failure to have instituted that procedure until after commencing proceedings does not necessarily have the effect of making those costs recoverable. 10.15 In the case of Roundstone Nurseries Ltd v Stephenson Holdings Ltd,14 the parties asked the TCC to stay the proceedings while they endeavoured to comply with the Pre-Action Protocol, into which they wanted to incorporate a mediation hearing. The mediation was cancelled at the last minute, but one of the parties then entered judgment in default of defence against the other, because a mix up over dates had led to a failure to have served the defence within the automatic dates required by the CPR. Ultimately, the application to set aside judgment pursuant to CPR Part 13 was allowed by consent, albeit on the basis that, it was argued, the costs of the application be paid by the party in default. However, the Court determined that judgment should not have been entered in default, given the knowledge of the claimant of the existence of a substantive defence, and the claimant was made to pay the costs of the application to set aside. The case was referred to by Coulson J (as he then was) in his judgment in CIP Properties (AIPT) Ltd v Galliford Try Infrastructures Ltd 15 as

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a reason why staying proceedings for the purposes of ADR may lead to unnecessary complication, given there is little practical difference between the two.16 10.16 Appendix E to the TCC Guide, however, still contains a draft order in respect of ADR which stays proceedings, rather than adjourns them. The order provides for a specific date by which the parties are to inform the Court as to whether or not the case has been finally settled, and that, if it has not been settled, the parties are to comply with all outstanding directions made by the Court.

ADR and the Pre-Action Protocol

10.17 ADR will often be appropriate before the proceedings have begun, or at any subsequent stage. It is generally regarded that the later ADR takes place, the more the costs which will have been incurred, often unnecessarily. The TCC encourages parties actively to consider the best timing of ADR. 10.18 As pointed out by Section 8 of the TCC Guide, the TCC Pre-Action Protocol17 itself provides for a type of ADR, because it requires there to be at least one face-to-face meeting between the parties before the commencement of proceedings. At this meeting, there should be sufficient time to discuss and resolve the dispute. However, Higginson Securities (Developments) Ltd and another v Hodson 18 concerned an application for a stay to enable without prejudice meetings to occur as part of the Pre-Action Protocol. The Protocol provides at paragraph 5.1:

The overriding objective (CPR rule 1.1) applies to the pre-action period. The Protocol must not be used as a tactical device to secure advantage for one party or to generate unnecessary costs. In many cases, including those of modest value, the letter of claim and the response can be simple and the costs of both sides should be kept to a modest level. In all cases, the costs incurred at the Protocol stage should be proportionate to the complexity of the case and the amount of money which is at stake. The Protocol is not intended to impose a requirement on the parties to marshal and disclose all the supporting details and evidence that may ultimately be required if the case proceeds to litigation.

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