The value of effective alternative dispute resolution clauses

Parties are encouraged to consider ADR before seeking the intervention of courts to resolve disputes, and an unreasonable refusal to do so could have cost consequences.

There are many benefits of ADR as opposed to court proceedings:

• Flexibility: generally, the ADR process is seen as more flexible and usually gives the decision maker more discretion over the practicalities of how to proceed;
• Privacy: matters remain confidential, as opposed to the public nature of court proceedings;
• Costs: typically, the successful party in an ADR process will recover around 80% of their costs, whereas this figure is under 50% in relation to the cost of court proceedings;
• Expertise of decision maker: the decision maker is usually chosen by parties and appointed on the basis of prior experience and expertise in the sector. For technical or specialised disputes, this can save a huge amount of time and cost.

ADR is very much on the government agenda too. The Scottish parliament and other bodies have the likes of mediation on their reform agenda, and in recent years have been consulting on possible legislation to promote its use.

It is very common for modern commercial contracts to include a provision for an ADR process. However, during a negotiation, parties often do not engage with this aspect of the contract and the result can be that an unclear, or unenforceable, ADR clause is inadvertently agreed. Recent case law has provided some guidance as to what courts across the UK will consider and what core elements make up an effective ADR clause.

The recent case of Children’s Ark Partnerships Ltd v Kajima Construction (Europe) UK Ltd and another, ruled on by the High Court in England and Wales, highlights the importance of a well drafted ADR clause.

In this case, the contract between parties contained a dispute resolution procedure which required parties to refer disputes firstly to a “liaison committee”, and stated that the committee’s decision should be final and binding. The contract also stated that parties “may” refer a dispute to mediation and adjudication before dealing with court proceedings. The court determined that a properly drafted ADR clause was a condition precedent to litigation, meaning it must be satisfied before litigation can be commenced, however the clause was held to be unenforceable as it was neither clear nor certain. The main reasons for this listed by the court included:

• there was no meaningful description of the process to be followed;
• there was no unequivocal commitment to a particular ADR procedure;
• the provision did not define the liaison committee.

There are further lessons to learn from a dispute that arose in the world of Scottish football.

Two football clubs, Heart of Midlothian and Partick Thistle, lodged a petition before the Court of Session in Edinburgh alleging that the affairs of the Scottish Professional Football League (SPFL) had been conducted in a manner which was unfairly prejudicial to them. The allegation arose from the passing of an SPFL resolution in April 2020 which resulted in the 2019-20 league season being concluded early due to the outbreak of Covid-19, and the resultant relegation of Hearts and Partick Thistle from their respective divisions.

The SPFL’s Articles of Association and the Scottish Football Association’s Articles of Association contained provisions to the effect that any “football dispute” must be settled by arbitration. There was considerable debate around the definition of football dispute, and whether the provision applied.

In reviewing the petition, Lord Clark considered section 10(1) of the Arbitration (Scotland) Act, which provides that the court must pause proceedings pending the outcome of arbitration, if certain conditions are satisfied. Those conditions include, among others, that parties have agreed that a dispute be determined by arbitration. Lord Clark considered that where there is an agreement to resolve a dispute by arbitration, the court will only consider that the condition is not met where “the court is satisfied that the arbitration agreement concerned is void, inoperative or incapable of being performed” – which is a high test. In this case, Lord Clark considered that the parties’ intentions were sufficiently clear from the wording of the clause, and that he was required to pause the proceedings pending arbitration.

Lessons for businesses

The central lesson from the two cases is that an ADR clause can create a condition precedent to the commencement of court proceedings. While parties never want to think they will end up in a dispute, there is huge benefit to giving it consideration while they are still on good terms.

A properly drafted clause can remove uncertainty and have a major impact on the conduct and outcome of disputes between parties. Without that certainty, parties risk proceeding down a costly course of action to resolve the dispute, which may result in wasted expenditure that is unrecoverable.

Also, very important elements and milestones of a dispute can be outlined in a clause at the outset, such as:

• the parties can pick and choose the level of good faith negotiation prior to escalating the matter;
• the appropriate ADR forum to resolve the dispute in;
• who the “dispute resolver” is; and
• the extent to which the outcome of the ADR process binds the parties and is open to review.

There are four factors to focus in on when considering an ADR clause. These are:

• Be clear and concise – the Children’s Ark case highlighted the need to avoid vague language. The court will endeavour to give effect to parties’ intentions wherever possible, but it is much easier if these are expressed in a way which creates little room for doubt. Consideration should be given to the scope of the clause. Parties should clarify, using unequivocal language, whether they want all disputes to follow the same process, or only specific types of disputes;
• Objective criteria – the case law highlights the benefits of an unambiguous process referring to objective criteria. Where this exists, the courts show a willingness to uphold the provisions;
• Beware of defined terms – if the dispute resolution clause makes reference to defined terms, these should be explained as clearly as possible. In the SPFL petition, there was considerable debate as to what constitutes a football dispute to establish whether the arbitration clause applied. Clear drafting can help avoid this;
• Be specific – it is preferable that the provision expresses a commitment to a particular form of ADR. Parties should give thought to the advantages and disadvantages of different types of ADR in advance and commit to one where possible. Outlining the process to be followed thereafter is particularly helpful.

Co-written by Christine Pirie of Pinsent Masons.