04th September 2019
It is not uncommon for dispute resolution clauses to provide for escalation mechanism or mediation as a precursor to full-blown dispute resolution, either in the civil courts or via arbitration.
How will these alternative dispute resolution (“ADR”) mechanism, or precursors, be treated? Are they mandatory, in the form of condition precedent? How will these mechanism be enforce if a contracting party chooses to ignore them and proceed straight to have the dispute resolved in Courts or via arbitration?
These issues were ventilated in the recently decided English Technology and Construction Court’s case of Ohpen Operations UK Limited v Invesco Fund Managers Limited  EWHC 2246 (TCC).
The brief facts of the case, as reported, are as follows:-
(a) The Defendant (“Invesco”), an investment manager, engaged the Claimant (“Ophen”) vide a Framework Agreement dated 01.07.2016 (“Agreement”) to “develop and implement a digital online platform through which Invesco’s retail customers could buy and sell investments in funds offered by Invesco for an initial term of eight years”;
(b) During the period between the Effective Date of the Agreement, i.e. 01.07.2016, to the launch of the platform (“Development and Implementation Phase”):-
“(i) the parties would agree the requirements for the platform and its implementation, which would be set out in a Development and Implementation Plan (“the DIP”);
(ii) Ohpen would develop and deliver the platform in accordance with the DIP; and
(iii) Invesco would pay Ohpen an implementation fee of £75,000 per month.”
(c) Upon launching of the platform (“Commencement Date“), the platform would be operated by Ohpen to “process transactions and provide administration, reporting and other services, the Business Process Outsourcing (“BPO”) services”, Invesco would in turn pay Ohpen for service charges;
(d) The Commencement Date, as per the Agerement, is 01.03.2017, subject to any agreed extensions. However, the Commencement Date was not achieved. “There is a dispute as to responsibility for the delays and the revised Commencement Date agreed by the parties”;
(e) Invesco issued a notice of termination vide its letter dated 11.10.2018 “on the grounds of (incurable) material breach and/or repudiatory breach”;
(f) Ophen had, via letters dated 16.10.2018 and 22.11.2018, disputed any material and/or repudiatory breach as well as the validity of Invesco’s purported termination. Ophen had also purported to accept Invesco’s repudiatory breach;
(g) Both parties agree that their primary obligations under the Agreement have been terminated. The dispute is, which party was in material and/or repudiatory breach of the Agreement;
(h) Sometime at the end of January 2019, parties attended a “without prejudice” meeting in attempt to resolve the dispute. However, no settlement was concluded and Ophen sent a letter of claim on 20.02. 2019;
(i) On 23.04.2019, Ohpen initiated this suit premised on Invesco’s alleged wrongful termination, claiming for damages of £4.7 million. Invesco in turn counterclaimed for the sum of approximately £5.7 million;
(j) On 24.05.2019, Invesco applied for the following orders:-
“(i) a declaration that the Court will not exercise any jurisdiction it may have to hear the claim filed by Ohpen; and
(ii) an order for a stay of the claim pending compliance with the contractually agreed dispute resolution procedure.”
The parties’ submissions are succinctly summarised in the following paragraphs of the decision:-
“13. Mr Pilbrow QC, counsel for Invesco, submits that clause 11 of the Agreement is a valid, binding and applicable alternative dispute resolution clause, which prescribes a mandatory escalation and mediation procedure prior to the commencement of proceedings. Ohpen has commenced these proceedings in breach of that provision. In those circumstances, the Court should exercise its discretion to stay the proceedings to give effect to the procedure agreed by the parties.
14. Mr Parker, counsel for Ohpen, opposes the application on the ground that, as a matter of construction of the Agreement, the relevant dispute resolution provisions are not applicable outside the Development and Implementation Phase or following termination of the Agreement. The Agreement has been terminated by Ohpen or Invesco. It follows that the provisions are no longer binding on the parties.”
The material clauses of the Agreement, amongst others, are:-
“Parties will jointly agree in writing on the contents of the Development and Implementation Plan within a period of two (2) months after the Effective Date… Ohpen will manage the process of drafting the Development and Implementation Plan for approval by Client and when Parties agree on its contents, it shall be signed by Parties and attached to this Agreement as Schedule 4 (Development and Implementation Plan) (“Agreed Development and Implementation Plan”). Ohpen will thereafter manage the execution and delivery of the Agreed Development and Implementation Plan in accordance with the agreed planning, deliverables and dependencies (including any agreed actions to be executed by Client and Rplan) set out in the Agreed Development and Implementation Plan.
The date after the signature date on which the last Party has signed off the Development and Implementation Plan is considered to be the Commencement Date of the BPO Services, unless Parties agreed to a specific and different commencement date of such BPO Services.”
“During the Development and Implementation Phase, Ohpen will carry out the Implementation Services in order to meet its obligations resulting from the agreed Development and Implementation Plan. Ohpen shall have an autonomous responsibility to plan its resources in such a way that the milestones derived from the Development and Implementation Plan shall be met in time. An Implementation Fee as described in Schedule 3 (Pricing) shall apply to Client from the Effective Date.
Any disputes about or arising out of delays shall be resolved through the Dispute Procedure as described in clause 011.1.1 and 11.1.2. Pending the resolution of the dispute, the parties shall continue to work together to resolve the causes of, and mitigate the effects of, the delay.”
Clause 11 – Dispute Resolution
“11.1 Internal Escalation
11.1.1 The Parties will first use their respective reasonable efforts to resolve any Dispute that may arise out of or relate to this Agreement or any breach thereof, in accordance with this Clause 0. If any such Dispute cannot be settled amicably through ordinary negotiations within a timeframe acceptable to Client and Ohpen, either Party may refer the Dispute to the Contract Managers who shall meet and use their reasonable efforts to resolve the Dispute.
11.1.2 During the Development and Implementation Phase, any disputes shall firstly be handled by the persons as described in Clause 22.1. If such escalation does not lead to resolution of the Dispute, then the Dispute shall be escalated to the executive committees of respectively Client and Ohpen. If escalation to the executive committee does not lead to resolution of the Dispute, then the Dispute shall be referred for resolution to mediation under the Model Mediation Procedure of the Centre of Dispute Resolution (CEDR) for the time being in force. If the Parties are unable to resolve the Dispute by mediation, either Party may commence court proceedings.
11.1.3 If any such Dispute that arises after Commencement Date is not resolved by the Contract Managers within ten (10) Business Days after it is referred to them, either Party may escalate the Dispute through the hierarchy of the committees, as set out in the chapter on governance of Schedule 2 (Service Level Agreement), who will meet and use their respective reasonable efforts to resolve the Dispute.
11.1.4 Ohpen shall continue to provide the Services and to perform its obligations under this Agreement notwithstanding any Dispute or the implementation of the procedures set out in this Clause. Client’s payment obligations that are listed in Schedule 3 (Pricing) shall not be halted during the resolution of any Dispute.
If a Dispute is not resolved in accordance with the Dispute Procedure, then such Dispute can be submitted by either Party to the exclusive jurisdiction of the English courts.
11.3 Urgent Relief
Nothing contained in Clause 11.1 shall restrict either Party’s freedom to commence summary proceedings to procure or ensure performance of obligations and/or any required action to prevent further damages, preserve any legal right or remedy or to prevent the misuse of any of its Confidential Information.”
Schedule 1 (definition)
Dispute: “a dispute or failure to agree.”
Dispute Procedure: “the procedure for resolving Disputes contained in Clause 11 of the Agreement.”
Clause 22.1 “identifies the individual for each party to whom communications and notices should be sent. Those individuals are the persons who are required to handle disputes as set out in clause 11.1.2”.
At the outset, Mrs. Justice O’Farrell observed that clauses requiring parties to follow a specific route for dispute resolution can create a condition precedent to commencement of dispute resolution proper, in this case, court proceedings:-
“27. It is common ground that a clause requiring the parties to follow a specified dispute resolution process can in principle create a condition precedent to the commencement of court proceedings.”
The Learned Judge then proceed to examine the relevant authorities on this point, i.e. Cable & Wireless Plc v IBM United Kingdom Ltd  EWHC 2059 (Comm), Holloway v Chancery Mead Ltd  EWHC 2495 (TCC), Tang v Grant Thornton International Ltd  EWHC 3198 (Ch) and Emirates Trading Agency LLC v Prime Mineral Exports Pte Ltd  EWHC 2104 (Comm).
Notwithstanding that there is no specific statute providing for stay pending these ADR mechanism (escalation and/or mediation), the Learned Judge observed the following passage from Cable & Wireless’ case that illustrate that the jurisdiction to stay proceedings has its origin as an equitable remedy and such ADR mechanism is capable of forming the basis of a stay or an injunction:-
“ The reference to ADR is analogous to an agreement to arbitrate. As such, it represents a free-standing agreement ancillary to the main contract and capable of being enforced by a stay of the proceedings or by injunction absent any pending proceedings. The jurisdiction to stay, although introduced by statute in the field of arbitration agreement, is in origin an equitable remedy.”
Having examined those authorities, the Learned Judge then proceed to observe that the principle applicable where a party is seeking for a stay of proceedings to enforce an ADR provision are:-
“31. The following principles can be derived from the above authorities as applicable where a party seeks to enforce an alternative dispute resolution provision by means of an order staying proceedings:
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.”
The Learned Judge finds that clause 11 sets out different dispute resolution procedures for different stage of the Project. Clause 11.1.2 expressly applies during the Development and Implementation Phase whereas clause 11.1.3 expressly applies to any dispute that arises after the Commencement Date, that is, after the end of the Development and Implementation Phase.
“39. In my judgment, on a proper construction of the Agreement, clause 11.1.2 applies to any dispute arising during the Development and Implementation Phase. I accept that the express words: “During the Development and Implementation Phase” at the beginning of clause 11.1.2 indicate a temporal limitation to the provision. However, despite those opening words, the clear intent is for the procedure to apply to all disputes arising during that part of the project. Support for that intent is found in Schedule 1. The definition of “Dispute” is wide and encompasses any failure to agree. The definition of “Dispute Procedure” indicates that clause 11 contains the procedure for resolving all disputes. It follows that, subject to any express term to the contrary, any dispute must be capable of falling into either the procedures set out in clause 11.1.2 or those set out in clause 11.1.3.”
In other words, as long as the Dispute arose during the Development and Implementation Phase, the dispute resolution mechanism procedure for that phase would apply even if the Project had moved on to the next phase, or in this case, terminated. The logic behind this reading is illustrated by the following passage of the case:-
“40. Clause 11.1.3 expressly refers to disputes arising after the Commencement Date. If, as Ohpen submits, the application of clause 11.1.2 were limited to dispute resolution procedures during the Development and Implementation Phase, there would be a gap in the procedures for disputes arising during that phase but remaining unresolved at the end of the phase. No commercial purpose would be served by curtailing the parties’ right to use the dispute resolution process in respect of a dispute that had already arisen, or by halting an ongoing process, on conclusion or termination of the relevant phase. This could lead to a situation where certain disputes in relation to the development of the platform were caught by the dispute resolution procedure and others not, even where such disputes were closely connected and arose at the same time. It is very unlikely that the parties would have intended an incomplete mechanism for resolving their disputes.”
For completion, the Court also finds that, as a matter of principle, dispute resolution obligations ordinarily survive the termination of the principle agreement.
“43. It is common ground that, as a matter of principle, dispute resolution obligations ordinarily survive the discharge of the parties’ primary obligations under a contract: Port Jackson Stevedoring Pty Ltd v Salmond and Spraggon (Australia) Pty  1 WLR 138 (PC)…”
In the upshot and notwithstanding the termination of the Agreement, the Court finds that the ADR clause is applicable to the dispute at hand and creates an enforceable obligation on the parties.
“51. For the above reasons, I conclude that the Agreement contains a dispute resolution provision that is applicable to the dispute between the parties and creates an enforceable obligation requiring the parties to engage in mediation.”
Further, the Learned Judge also finds that the ADR provision, requiring for mediation, operates as a condition precedent notwithstanding that the express term “condition precedent” was not used in the Agreement.
“52. Clause 11.2 provides: “If a Dispute is not resolved in accordance with the Dispute Procedure, then such Dispute can be submitted by either Party to the exclusive jurisdiction of the English courts”. Compliance with clause 11 is identified as a condition precedent to the parties’ entitlement to commence court proceedings. In this case, if the parties are unable to resolve the dispute by mediation, either party may commence court proceedings.
53. The clear purpose of clause 11.2 is the mandatory requirement to operate the dispute resolution procedure in clause 11 before the parties become entitled to institute proceedings. Although the term “condition precedent” is not used, the words used are clear that the right to commence proceedings is subject to the failure of the dispute resolution procedure, including the mediation process.”
Enforceable ADR Process
The Court also finds that the ADR process in this case is enforceable as specific mediation procedure was provided and does not require any further agreement by parties to enable a mediation to proceed:-
“55. The parties have referred the dispute to their executives and held a ‘without prejudice’ meeting. The dispute remains unresolved. Clause 11.1.2 stipulates that the parties must use the CEDR Model Mediation Procedure to attempt to reach a settlement of the dispute.
56. The mechanism under clause 11.1.2 is sufficiently clear and certain to be enforceable. The provision for mediation to be carried out under the CEDR model procedure produces a process that does not require any further agreement by the parties to enable a mediation to proceed. The rules for selection of the mediator and conduct of the mediation are set out in the CEDR rules. It would be possible for the Court to determine by reference to objective criteria whether the parties had participated in a mediation and whether or not their disputes remained unresolved.”
Exercise of Discretion
The Court noted that there is clear and strong policy in favour of ADR provisions and that the courts will not permit an action to be brought in breach of such agreement.
“58. 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 also recognised that it must take into account of the overriding objective of the English Civil Procedure Rules and ordered parties to file their respective claims / defence and counterclaim before allowing a temporary stay to enable parties to mediate. The purpose in directing the parties to file their respective pleading is to give parties a clearer picture of each other’s case:-
“59. The Court must consider the interests of justice in enforcing the agreed machinery under the Agreement. However, it must also take into account the overriding objective in the Civil Procedure Rules when considering the appropriate order to make.
60. In this case, I conclude that it would be appropriate for the Court to stay the proceedings to enable a mediation to take place. However, the prospects of a settlement will be improved if the parties are clear as to the ambit and basis of the claims and defences relied on. Pleadings should be served so that the substantive issues may be clarified before the mediation.”
Effect of Decision
The policy to enforce ADR provisions is indeed strong and clear.
Parties will not ordinarily be permitted to unilaterally wriggle out of a pre-agreed ADR procedure and this extends to condition precedents to dispute resolution proper, such as mediation. In the appropriate case, an order for stay can be granted to enforce such condition precedent.
Whilst this is an English decision, it nonetheless has persuasive force in Malaysia.
For completion, Justice Lee Swee Seng (now JCA) had in fact enforced condition precedents to arbitration proceeding in the case of Usahasama SPNB-LTAT v Abi Construction Sdn Bhd  7 CLJ 275. Although the case does not involve a stay application, the Court recognized that the Arbitrator in that case is not clothed with jurisdiction to resolve the dispute, until the condition precedent, i.e. reference to the Superintending Officer under a PWD contract, is fulfilled.
In view of the above, parties ought to be clear as to what condition precedents are included in their dispute resolution clauses as such condition precedents may be the basis for granting of a stay, should a party fail to fulfill the same, prior to dispute resolution proper.
If you have any questions or comments on this article, please contact:-
Andrew Heng Yeng Hoe
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