Multi-tiered dispute resolution clauses in UK infrastructure contracts: Key points to consider

Most construction contracts have an express dispute clause; however some are far more complicated than others. Recent developments have provided clarity on the application of such clauses and have highlighted certain issues for parties to consider.

In this article, we consider the approach to multi-tiered dispute resolution provisions in English law and how such clauses can be strengthened.

 

What is a multi-tiered disputes procedure?

Multi-tiered dispute resolution clauses set out the contractual procedure agreed by the parties to address potential disputes. They provide stages for resolving the dispute before the final (and often most costly) stage of either court or arbitration is necessary.

These procedures come in many forms, but often have stages for consultation, mediation and adjudication followed by arbitration or court proceedings. Each stage will have wording denoting that it is intended to be either mandatory (“shall”) or voluntary (“may”), however, as explained below, parties must treat such wording with caution.

The use of multi-tiered dispute resolution clauses under English law is common in construction and PFI/PPP contracts, although parties have to be mindful of the implied right to adjudicate at any time under the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the Construction Act). This will apply to construction contracts caught by the Construction Act and will be implied into the procedure by the Scheme for Construction Contracts (England and Wales) Regulations 1998 if not expressly stated.

 

Why are multi-tiered dispute resolution provisions used?

The key purpose of multi-tiered dispute resolution clauses is to encourage settlement between the parties and to avoid costly litigation or arbitration proceedings. In interpretating these clauses, English courts often take account of the public policy interest in enforcing a commercial bargain agreed between the parties.

Against this context, the courts tend to uphold clearly drafted multi-tiered dispute resolution provision on public policy grounds. Edward Shaw and Apoorvaa Paranjpe have considered the position in international arbitration proceedings in Singapore international commercial court rules on tiered dispute resolution provisions in an amended FIDIC contract.

 

Is each stage required?

A key consideration for parties when facing a dispute is whether each and every stage in a multi-tiered dispute clause is a requirement before embarking on the next (ie is it a condition precedent?). Similarly, whether a dispute can be contested by the defendant if any of the preceding steps have not been complied with by the claimant.

The starting point is that there is no established “one size fits all” test. If challenged, each case will be determined by the court on its facts, applying the established rules of contractual interpretation under English law.

The English courts have a wide discretion in determining whether to enforce such a clause. At its most extreme, the court has the right to strike out a claim if it determines that it does not have jurisdiction under the contract and/or legislation, which can have a significant adverse impact on the claimant, especially where the limitation period has expired.

In these circumstances, the courts will carefully consider whether the wording of the clause is sufficiently certain, the specific wording used and how the procedure works as a whole.

 

Points to Consider

Whilst each clause must be considered individually on its own merits, the following factors are important to bear in mind.

Enforceability

An agreement to agree or to negotiate will not be enforceable under English law if a court finds that it lacks the “necessary certainty” (Walford v Miles [1992] 2 A.C. 128, at 138). Depending on its drafting, a multi-tiered dispute resolution provision may be seen to be an agreement to agree or negotiate and lack sufficient certainty to be enforceable.

Condition Precedent

To be a condition precedent, the provision must create an enforceable obligation requiring the parties to engage in alternative dispute resolution, rather than simply being a voluntary step (eg a suggestion that the parties try to negotiate in good faith) as set out in Ohpen Operations UK Ltd v Invesco Fund Managers Ltd [2019] EWHC 2246 (TCC).

Language

The obligation must be clearly expressed as a condition precedent or a mandatory step prior to issuing litigation or arbitration proceedings. Generally, the use of the word “shall” shows an intention that the clause creates a mandatory obligation to engage with the steps set out in the dispute resolution provision. Similarly, reference to the governing law and jurisdiction clause has been found to create an exclusion framework for the parties.

Use of voluntary language (eg may) may not be conclusive evidence that a step should not be treated as mandatory. For example, where a subsequent step in the procedure specifically states that it should follow an earlier step, a court may determine that the earlier step is mandatory notwithstanding use of voluntary (may) rather than mandatory (shall) language in the preceding step (see Lancashire Schools SPC Phase 2 Ltd v Lendlease Construction (Europe) Ltd [2024] EWHC 37 (TCC)).

The Court's Discretion

Even if the court finds that a preceding stage has not been complied with, it may not lead to the claim being struck out. The court has the discretion to stay proceedings instead to provide the parties with time to follow the preceding stages.

In exercising its discretion, the court will have regard to the public policy interest in upholding the parties’ commercial agreement (ie the fact that the parties agreed preceding mandatory stages) and furthering the overriding objective (ie dealing with the case justly and at proportionate cost).

The court will be mindful of the statutory right to adjudicate under the Construction Act. Whilst English courts are likely to stay litigation proceedings to give parties the opportunity to comply with the preceding steps, parties to a construction contract under the Construction Act are permitted, under Section 108(2), to issue adjudication proceedings at any time. Accordingly, in circumstances where one party fails to comply with the early stages of the multi-tiered dispute resolution provision (for example, a prior requirement to negotiate or mediate) and issues an adjudication, it can rely on its statutory rights under the Construction Act as a defence if adjudication jurisdiction is challenged based on the failure to comply with the preceding clauses.

 

Conclusion

Whilst there is no overarching test for whether each stage of a multi-tiered dispute resolution procedure is enforceable, parties can seek to protect their position by ensuring that the drafting is clear and unambiguous and by considering how the stages work together as a combined whole.

Parties should not assume that the use of “may” and “shall” is definitive in respect of whether a stage in the process is voluntary or mandatory. In some circumstances, “may” might be interpreted to mean “shall” due to the application of wider contractual clauses. It is important that care is taken when considering whether certain stages in the procedure can be skipped.

Whilst the interpretation of each procedure is at the court’s ultimate discretion, we can assist with the review of any dispute resolution clauses to advise on possible application and strategy.