The recent case of Harper v Interchange Group Limited [2007] EWHC 1834 provides further confirmation that the courts will expect parties to follow any dispute resolution provisions they may have contractually agreed to.

Here Mr Justice Aikens had to consider a claim for commission payments by Mr Harper. In a series of preliminary issues, he found against Mr Harper. Having done so, his comments on the expert determination provisions of the contract are strictly obiter and therefore not binding. However, they are of interest, because they demonstrate the importance of fully understanding and then following the dispute resolution procedures to be found in the contract.

Clause 3.4 and 3.5 of the Agreement between the parties provided that:

"Upon any payment being made by the Purchaser to Mr Harper pursuant to Clause 3.3, the Purchaser will deliver to Mr Harper a statement ("the Statement") of the Gross Margin and/or License Fees forming the basis of such payment. Mr Harper will have 28 days in which to agree the Statement or to notify the Purchaser of the basis on which he objects to the Statement ("an Objection"), Mr Harper may also make an Objection in the event that Mr Harper believes that the Purchaser should have failed to make a payment under clause 3.3. Mr Harper may make an Objection notwithstanding that Mr Harper may have accepted any payment made under clause 3.3. If Mr Harper makes an objection the Purchaser and Mr Harper will endeavour to resolve the objection within the following 28 days.

If the Purchaser and Mr Harper are unable to agree the Statement and/or settle any objection then the dispute shall be referred, with the agreement of the Purchaser and Mr Harper, or in the absence of such agreement, by the President for the time being of the Institute of Chartered Accountants in England and Wales on the application of either of them, to an independent chartered accountant (being a partner of one of the "big 6" firms) who, once appointed, shall act as an expert (not as arbitrator) and whose decision shall, in the absence of manifest error, be final and binding on the parties. The costs of such accountant shall be paid as such accountant determines is fair and reasonable in all the circumstances or, in the absence of such determination, shall be borne equally by Mr Harper and the Purchaser."

Interchange said that these clauses provided a mechanism for the determination of disputes concerning commission by way of reference to an expert to determine the sums in dispute. Interchange argued that the effect of clause 3.4 was that Mr Harper had a period of 28 days from the delivery of the statement to him to notify Interchange of any basis on which he objected to the statement. If the parties could not resolve their differences, the dispute was to be referred to an independent chartered accountant.

Interchange further said that as Mr Harper had failed to use this mechanism in accordance with the terms of the Agreement, it was now too late for him to do so. Accordingly, if Mr Harper did not object to the statement within the 28 day period, he could not challenge the statement and the basis on which the commission had been calculated. Therefore, Mr Harper was not entitled to pursue his claim for additional commission in the courts.

Mr Harper disagreed that the procedure had to be followed and alternatively argued that the mechanism applied only to mathematical calculation disputes not to issues of construction.

The Judge stressed the importance of upholding, if possible, the validity of contracts. He also indicated that the courts were reluctant to allow contracts to become ineffective as a result of one party taking advantage of its failure to perform a particular contractual obligation.

Here, the Judge thought that the dispute resolution procedures set out the following procedure:

  1. Interchange was to make payments to Mr Harper in accordance with the terms and timetable.

  2. At the same time as payment was made, Interchange had to deliver a statement of the gross margin and to recall license fees forming the basis of the payment made.

  3. Mr Harper then had 28 days in which to agree the statement or notify Interchange of the basis of his objections.

  4. If Mr Harper did object, then the parties had 28 days to resolve the dispute; and

  5. If they were unable to agree then the dispute would be referred to an independent chartered accountant.

Once the accountant was appointed he would act as an expert, not an arbitrator. The accountant’s decision was to be final and binding on the parties in the absence of manifest error.

The Judge said that these steps constituted:

"a comprehensive agreement between the parties of a contractual mechanism for resolving disputes about payment".

Further, it was a comprehensive agreement which covered not only mathematical calculations, but the basis of those calculations. It was necessary for Mr Harper to set out any objection about the nature of his complaint with sufficient detail in order that Interchange could respond to it sensibly. A general objection would not be sufficient.

Conclusion

The Judge did not consider that Mr Harper had attempted to follow the contractual mechanism with regard to his complaints. Accordingly, he had failed to carry out the dispute resolution procedure as he was contractually bound to do so. He was therefore not now entitled to bring an action in which he claimed that he had been wrongly paid as a consequence of this failure to invoke the contractual machinery for dealing with such a dispute.

This article is based on an article from a forthcoming issue of the Fenwick Elliott Dispatch, a monthly newsletter which summarises recent redevelopments relating to contentious and non-contentious construction law issues. To see the current issue please visit www.fenwickelliott.co.uk.

Footnote

1 For further evidence please see our articles entitled "Is there a Remedy for Breaching the Dispute Resolution Procedures of a Contract" and "Will the Courts Stay Proceedings in favour of Adjudication".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.