Children’s Ark decisions in the High Court and Court of Appeal
Background to the Lendlease dispute – the project, parties, contracts and defects
The project
The Lendlease disputes arose out of alleged defects with serviced accommodation at a school. This was part of a PFI project, with multiple project phases, parties and back-to-back supply contracts involved. The proceedings in question concerned the project agreement for Phase 2 (the Project Agreement).
The Phase 2 parties and contracts
The Project Agreement was between a special purpose vehicle (Project Co) and a local authority (the Authority). The Project Agreement contained an ADR clause requiring the parties to refer any dispute to adjudication before commencing litigation.
The Project Agreement was back-to-back with two downstream supply contracts:
1) a Building Contract between Project Co and the building contractor; and
2) a Facilities Management Contract between Project Co and the facilities management contractor.
The Phase 2 defects
The Authority called for alleged defects to be rectified and gave Project Co notice of entitlement to withhold deductions for breach of the Project Agreement.
Project Co commences litigation
Project Co commenced separate High Court actions against the building contractor, and against the Authority. The purpose of these actions was to ensure that ultimate liability for the defects would not sit with Project Co.
Prior to commencing the action in respect of the Phase 2 defects, litigation was already underway between Project Co and the building contractor (and the facilities contractor was soon to join) regarding similar defects in respect of the Phase 1 project. Mediation was also being attempted.
It was expected that the Authority would also join the Phase 1 litigation, and that the Phase 1 and Phase 2 proceedings would be consolidated.
Project Co sought a declaration from the Court that, if in respect of an alleged defect, there was no breach by the building contractor under the Building Contract, or by the facilities management contractor under the Facilities Management Contract, then Project Co would not be in breach of its Project Agreement with the Authority. In that case, the alleged defect would not be a ‘Defect’ within the meaning of the Project Agreement and there would be no basis for the Authority to claim deductions.
The Authority applies to stay the proceedings against it
Project Co had commenced the Phase 2 action against the Authority without first referring the dispute to adjudication, in breach of the ADR clause in the Project Agreement.
The Authority applied to the Court to stay or strike out Project Co’s claim.
The Court considers the Authority’s stay/ strike out application
- The agreement must create an enforceable obligation requiring the parties to engage in ADR.
- The obligation must be expressed clearly as a condition precedent to court proceedings or arbitration.[8]
- The ADR process must be sufficiently clear and certain by reference to objective criteria.
Exercising the discretion to stay
The principles
In weighing how it should exercise its discretion to grant or refuse a stay, the Court noted:
- There is a presumption that those who have agreed to resolve their disputes by ADR must show good reasons for departing from their agreement.[10]
- The party resisting the stay (in this case Project Co) has the obligation to show why it should not be granted.[11]
- Beyond the presumption, each case turns on its own facts.
- Issues the court will have regard to in exercising its discretion include:
The overriding objective, utility and wider impacts
The Court focused on the overriding objective of resolving the dispute and the issues of utility, practical value, and the wider impacts. It acknowledged that Project Co had the burden of showing why the ADR clause should not be enforced and that there was a public policy interest in holding the parties to their bargain, but emphatically stated that the question is what the Court considers is the most appropriate course in the exercise of its discretion.
The Court noted that these proceedings were complicated because of the multiple parties, contracts, disputes and proceedings involved.
The building contractor and the facilities management contractor (the Contractors) were not parties to the Project Agreement, which was the subject of the current proceedings. But there was no real issue between Project Co and the Authority in the current proceedings – their dispute was contingent on the other multi-party dispute with the Contractors.
Both sets of proceedings concerned common defects; and the Contractors were likely to hold each other responsible for those defects. The Contractors were already involved in the parallel proceedings and neither wished to refer matters to adjudication.
The Court refuses to grant the stay
The Court found in favour of Project Co and refused to stay the proceedings. It decided that a stay would not be appropriate because of the dispute’s complex, multiparty nature and the wider impacts that a stay would have on the other parties and other proceedings. Requiring Project Co and the Authority to adjudicate would only cause further complication, expense and delay and reduce the likelihood of successful resolution.
The condition precedent ‘failed’ on the utility and practicalities of enforcing it and referring this particular dispute to adjudication, as follows:
Bi-lateral adjudication likely to achieve little in a multi-party dispute
The Court found it very difficult to see how a bi-partite adjudication between Project Co and the Authority would be effective or useful when this was just one part of a wider dispute with the Contractors.
The Phase 2 defects could not be considered in isolation from the Phase 1 defects, and adjudication in respect of Phase 2 was unlikely to be helpful in resolving the wider dispute.
As such, there was a real risk that the adjudication would achieve little. And the less satisfactory the adjudication, the more likely the outcome would be challenged.
Impacts on other parties and proceedings
The Contractors did not want to become involved in adjudication. But requiring it would mean they would become involved, and this may spawn other satellite arguments, disputes and adjudications, causing further delays for the parallel proceedings and a mismatch in progress between both actions. In this regard, the Judge remarked, I am content to accept that things could become complicated.
Impacts on case management
Granting the stay would also interfere with the Court’s ability to case manage and consolidate both actions.
Impacts on successful mediation
The parties to the parallel proceedings were attempting mediation, and these attempts may be impacted by sending the current proceedings down a different track. Project Co and the Contractors may be reluctant to settle with each other while the current proceedings with the Authority were stayed and delayed for adjudication.
Impact on the Authority (or lack thereof)
If the Court did not grant the Authority’s application for a stay, the Authority was still free to start adjudication itself.
Conclusion
This case is a good reminder to make sure your contract’s ADR clause is clear and well drafted with a robust and well recognised procedure.
But it shows that no matter how well drafted it is, or how clear the parties’ intention to avoid litigation, the Court is not bound to give effect to an ADR clause if it considers that doing so would not be pragmatic in the circumstances, or as here, if things could get too complicated.
References
[1] Lancashire Schools SPC Phase 2 Limited v Lendlease Construction (Europe) Limited and Others [2024] EWHC 37 (TCC).
[2] Children’s Ark Partnerships Ltd v Kajima Construction Europe (UK) Limited and Kajima Europe Limited [2022] EWHC 1595 (TCC), previously discussed in issue 48 of BuildLaw and on our blog.
[3] Ohpen Operations UK Ltd v Invesco Fund Managers Ltd [2019] EWHC 2246 [32(iii)].
[4] In Children’s Ark, the party commencing the court proceedings had requested the stay so that it could comply with the ADR clause without missing the lime limits for bringing an action.
[5] Kajima Construction Europe (UK) Limited and Kajima Europe Limited v Children’s Ark Partnership Limited [2023] EWCA Civ 292, previously discussed in issue 50 of BuildLaw and on our blog.
[6] Children’s Ark, above n 5, at [91]–[92].
[7] Applying the principles from Ohpen, above n 3.
[8] The High Court in Children’s Ark disagreed with this requirement and considered it sufficient that the provision is mandatory and enforceable.
[9] Lendlease, above n 1 at [40], citing Children’s Ark, above n 5, at [92].
[10] Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] AC 334.
[11] DGT Steel and Cladding Ltd v Cubitt Building and Interiors Ltd [2007] EWHC 1584 (TCC).
[12] Ohpen, above n 3.
[13] Children’s Ark, above n 2 and n 5.
