A number of recent decisions have highlighted two aspects of ‘boilerplate’ clauses to which parties will be held strictly: dispute resolution mechanisms and jurisdiction clauses. It is essential that those negotiating complex contractual arrangements consider and understand these clauses and are satisfied that the scope of them is appropriate in the circumstances. For those dealing with a dispute arising under an agreement with relevant clauses, it is important to consider their impact at an early stage. Failure to do so can be costly and time-consuming. It could also hand an early court victory, and therefore a tactical advantage, to the other side.
Dispute Resolution processes
Detailed dispute resolution processes are a common feature of many commercial contracts, in particular IT and construction agreements. A typical clause may involve:
- an escalation process for meetings of representatives of increasing seniority;
- a mediation; and
- an agreement to arbitrate under specified rules or to litigate in an agreed court.
These are usually framed as mandatory requirements and progressive steps, ie one moves to a mediation only once the series of meetings has taken place and no resolution has been achieved.
Such clauses are included as a rational, commercial attempt to avoid parties becoming embroiled in costly proceedings without first exploring the possibility of settling the issue on commercial terms. Fulfilling the processes may involve significant senior management time. This is of course justified where agreement is reached without resorting to lengthy and costly litigation or arbitration. In some disputes it can be seen as an inconvenience by management and the process becomes delayed or overlooked. It is important that parties fulfil the requirements of the process and do not lose sight of this during negotiations, as they are unlikely to be able to progress court or arbitration proceedings, should these become necessary, until they have fulfilled the process prescribed.
Dispute resolution agreements are enforceable as an exception to the rule that agreements to agree and agreements to negotiate are not generally enforceable (as confirmed in Cable & Wireless v IBM United Kingdom Ltd [2002]). Recent decisions have highlighted the increasing tendency of the courts to hold parties to these requirements strictly, as contractual pre-conditions to a matter being referred to litigation or arbitration.
The court will generally only assist a party that has failed to comply with its obligations under such clauses in circumstances justifying the award of an interim remedy. The parties are likely to be required to fulfil the process following the interim hearing.
The parties to the contractual arrangements under scrutiny in the recent case of Ardentia Ltd v British Telecommunications Plc [2008] had agreed a detailed dispute resolution process. This involved an escalation followed by mediation. If no resolution was reached following such process, Ardentia could commence court proceedings upon giving BT 15 days’ written notice of its intention to do so. BT had the right to refer the matter to arbitration instead, within that 15-day period.
An exception was expressly included in relation to interim orders, which the contract specified that the court had jurisdiction to grant, in appropriate circumstances, without first requiring adherence to the dispute resolution process. Ardentia applied for and was granted an interim court order under this jurisdiction, restraining BT from procuring services from a third party. Ardentia then argued that, since the dispute was already before the court, it should hear the whole dispute and BT therefore no longer had the right to refer the dispute to arbitration.
Ardentia’s position did not find favour with David Donaldson QC (sitting as a deputy judge of the High Court), who stayed the proceedings in favour of arbitration. This was on the basis that BT had not, in the process of the application for interim relief, been given a fair opportunity to make a referral to arbitration, as required by the dispute resolution process. BT had made it clear from the commencement of the proceedings that it required the substantive dispute to be referred to arbitration. The court did not allow Ardentia to get around the dispute resolution process that it had agreed by operation of the interim order jurisdiction. The court reached this decision despite the fact that the clause in question included wording that in the event of the court considering an application for interim relief: ‘all issues in the dispute concerned… may be dealt with by the court’. The court found that this did not override the intention of the parties to allow BT an opportunity to refer the matter to arbitration. This robust approach to interpretation of the clause shows a desire by the court to support dispute resolution agreements.
In Harper v Interchange Group Ltd [2007] the claimant had failed to invoke the applicable contractual dispute resolution mechanism. Aikens J in the Commercial Court found that the claimant was not then entitled to commence an action in relation to the dispute, which fell within the scope of the contractual mechanism. The claimant was deprived of any remedy as a result, as he had missed the contractual period for invoking the dispute resolution mechanism. This decision was a particularly robust approach by the Court to the need to fulfil agreed dispute resolution mechanisms.
In the case of Holloway v Chancery Mead Ltd [2007], a dispute resolution mechanism had been agreed, culminating in an arbitration agreement. The Technology and Construction Court found that where a dispute fell within the scope of the dispute resolution provision, it was a condition precedent to the dispute being referred to arbitration for the rest of the process to have been followed and completed first. On the facts, the Court found that the dispute did not fall within the scope of the process but made clear that had it done so, the dispute could not have been resolved by arbitration until the process had been exhausted.
The Commercial Court considered a fairly standard escalation and dispute resolution clause in Cable & Wireless (see above). This was an early example of the Court strictly enforcing such an agreement. The agreement in question made the escalation process a pre-condition to commencement of proceedings but also provided for the parties to enter into an alternative dispute resolution (ADR) procedure following the escalation process. The court found that the parties were obliged to enter into the ADR procedure, even though commencement of proceedings had been permitted under the agreement. The failure of Cable & Wireless to engage in an ADR procedure was sufficient to justify a stay of the proceedings to ADR until these were completed.
By contrast, in Thames Valley Power Ltd v Total Gas & Power Ltd [2005], despite finding that the dispute fell within the scope of the provision for expert determination, Clark J noted that he had a discretion whether to grant a stay of proceedings to require the parties to comply with a clear dispute resolution process. This was on the basis that, as the agreement did not amount to an arbitration agreement and therefore did not fall within the obligation imposed on the Court to stay proceedings under s9 of the Arbitration Act 1996, the court had discretion. On the facts, Clark J decided not to grant a stay. This case is unusual when considered alongside the later cases referred to above and is a reminder that the court will not always require strict fulfilment of contractual dispute resolution processes. The facts, however, were unusual, in that the court had heard full argument on the substantive issues and the proceedings had been progressed on an expedited basis.
Two lessons can be learnt from these cases. First, lawyers involved in the negotiation of dispute resolution processes should be satisfied that they are appropriate to the agreement in question. Consideration should be given to the fact that they will have to be fulfilled before any dispute can be litigated or arbitrated. Secondly, when a dispute does arise, the underlying agreement should be considered carefully and the agreed process followed closely. It can be easy to lose sight of the requirements of a dispute resolution clause when negotiations appear to be progressing well. However, if negotiations fail, it will become important for these to have been fulfilled. It is therefore generally advisable to continue to comply with the mechanism, including serving notices by specified dates and participating in meetings within specified time frames, even if negotiations are continuing alongside the formal process.
Competing Jurisdiction clauses
Another provision regularly included in complex commercial agreements is a jurisdiction clause, by which there is agreement that a specified forum shall have jurisdiction in the event of dispute. This may give the relevant court or tribunal exclusive or non-exclusive jurisdiction over the disputes arising.
In commercial transactions that are embodied in a number of agreements, it is sometimes the case that different agreements contain different jurisdiction clauses. For example, one agreement may include an exclusive jurisdiction clause for the German courts and a related agreement may contain a non-exclusive jurisdiction clause for the English courts. Issues can arise in such circumstances where there are a number of related disputes arising under different, related agreements or where the dispute could be characterised as arising under different agreements. The courts have to decide whether to respect each individual jurisdiction clause absolutely, and thereby potentially to cause overlapping proceedings to come into existence in different forums, or whether there are grounds to find that the disputes should be heard in a single place.
In Fiona Trust & Holdings Corp v Privalov [2007] Hoffman LJ held that there is an:
‘… assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal’.
This effectively gives rise to an assumption that the parties intended disputes to be resolved in a single forum. However, recent cases make clear that such an assumption can be rebutted where clauses are clearly framed.
In Fiona Trust the issue related to an arbitration agreement and the question of whether the dispute fell to be determined by arbitration or whether it could be referred to litigation instead. The approach taken has since been applied in the field of competing jurisdiction clauses in different agreements, as well as in relation to arbitration agreements.
Two cases which have recently considered the Fiona Trust approach in the context of conflicting jurisdiction clauses are UBS AG v HSH Nordbank AG [2008] and ACP Capital Ltd v IFR Capital plc [2008]. In both cases, a suite of documents was agreed between the parties as part of complex transactions and different jurisdiction clauses were included in different agreements. In UBS some of the agreements included English exclusive jurisdiction clauses and others included non-exclusive New York jurisdiction clauses. Proceedings had been commenced in both jurisdictions. In ACP one agreement included a Jersey jurisdiction clause and later agreements included English jurisdiction clauses. Proceedings were on foot only in England at the time of the application for a stay of the part of the claim falling within the scope of the Jersey exclusive jurisdiction clause.
In both cases, applications were made to the English court to stay proceedings on the basis of the clauses relating to other jurisdictions. The approach taken by the court was to consider to which contract the dispute in question related most closely and then strictly to apply the jurisdiction clause in that contract. On the facts of both cases, stays were granted and the disputes (or part of them) were referred to other jurisdictions, as required by the contracts found to be applicable. It was noted in ACP that the earlier agreement would not be construed by reference to the subsequent conduct of the parties (ie the later jurisdiction agreements). Applying this on the facts resulted in proceedings having to take place in two different jurisdictions (England and Jersey).
In Equitas Ltd v Allstate Insurance Company [2008] the court allowed proceedings to continue in the English courts, on the basis that the dispute fell within the scope of an exclusive jurisdiction clause by which the English court was chosen. Despite arbitral proceedings progressing in Texas, pursuant to an arbitration agreement in a related contract, in which related matters would be determined, the court held the parties to their exclusive choice of the English court.
The courts have adopted with some enthusiasm the approach of considering what commercial business people intended in relation to conflicting jurisdiction clauses (see, for example, its application by Walker J in UBS). While this approach is a welcome development, it would of course be preferable for the parties’ intentions to be clear from the documents, rather than the court having to apply its own views as to what the parties intended.
Parties agreeing a suite of documents in relation to a single transaction should be careful to check that where different jurisdiction clauses are included in different agreements, this is intentional and appropriate. Consideration should be given to the type of disputes that may arise, whether there is a potential for disputes to come before different courts and, if so, whether it would be more sensible for them to come before a single court. While the court will be willing to take account of a ‘master’ agreement containing a jurisdiction clause (or arbitration agreement), where a dispute falls clearly within the scope of another agreement, with a different jurisdiction clause, that clause will prevail. This can lead to costly jurisdictional battles at the outset of proceedings and ultimately to proceedings in different jurisdictions, resulting in duplicated costs.
A word of warning
The approach taken in these cases sounds a warning to those negotiating agreements and those involved in disputes. To those entering into transactions, consider carefully the dispute resolution process and jurisdiction clauses included – the court will hold you to them strictly. To those who encounter a dispute in relation to a contract containing a dispute resolution process or jurisdiction clause, be sure to fulfil the obligations under it – to ignore it could be a costly mistake.
Not taking these matters seriously at both the drafting stage and when a dispute is arising can lead to a number of risks. First, a party can be forced to follow an unsuitable dispute resolution clause, which was included without adequate consideration of its appropriateness, to the letter. Secondly, a party can be denied a remedy unless and until a dispute resolution process is fulfilled, which may in some instances result in no remedy being available if contractual deadlines have been missed. Thirdly, costly jurisdictional battles can arise as a result of unclear drafting or a failure to comply with an agreement. Fourthly, an early court victory can be won by the other side if an agreement is not correctly followed. Fifthly, costly overlapping substantive proceedings can arise in different jurisdictions under clauses in different but related agreements.
Such issues can generally be avoided by a sensible consideration of the dispute resolution and jurisdiction clauses included in agreements at the time of negotiation and by a careful reading and application of them when a dispute arises.
For more information, please visit www.sjberwin.com.
