1. Can a contract bar litigation or arbitration of a dispute until adjudication is over?
A party to a construction contract subject to the Housing Grants Act can go to adjudication at any time. But is a clause that says a dispute cannot be referred to court or arbitration until an adjudicator has made their decision, effective as a contractual bar? Or can it be sidestepped because the clause ousts the jurisdiction of the courts?
Clause W2.4(1) of NEC3 is such a clause and, in deciding that it is an effective contractual bar, making adjudication a mandatory step prior to referring any dispute to a tribunal (whether court or arbitration), a Scottish court said it was clear from the language of the clause, and its relationship with other clauses, that these provisions were intended to be definitive as to the means, and the sequence, for determining disputes. The claimant's approach, that these provisions could be ignored in favour of an unqualified right of direct recourse to the court without any stipulated timeframe, would effectively permit a parallel regime of dispute resolution wholly at odds with the clear words and detailed specification of the agreed means for dispute resolution and make the agreed terms of Clause W2.4 superfluous.
The claimant's approach also cut across the Housing Grants Act right to refer a dispute to adjudication, the quick and inexpensive means of interim dispute resolution introduced by the Act. It would deny the defendant the advantages and speed of that contractually-agreed first mode of dispute resolution.
The Scottish court also adopted analysis of the issue in the English case of Anglian Water Services Limited v Laing O'Rourke Utilities Limited, where the court noted that a clause similar to W2.4(1) did not fetter the right to refer a dispute to adjudication at any time. It did, however, prevent a party starting court or arbitration proceedings at any time, without having first referred the dispute to adjudication.
The Fraserburgh Harbour Commissioners v McLaughlin & Harvey Ltd at:
https://www.bailii.org/scot/cases/ ScotCS/2021/2021_CSOH_8.html
2. How to deal with a liquidated damages clause
In a dispute under an aircraft sale agreement, there was a claim for liquidated damages of US $42.95m, in respect of undelivered aircraft. The buyer claimed the liquidated damages were an unenforceable penalty and that, if they were not recoverable, the seller could not, instead, recover damages at common law.
Applying the Supreme Court ruling on liquidated damages in Cavendish Square Holding v Makdessi, the court in this case noted that the judgment had said that, "In a negotiated contract between properly advised parties of comparable bargaining power, the strong initial presumption must be that the parties themselves are the best judges of what is legitimate in a provision dealing with the consequences of breach." and that, in judging whether the damages are "extravagant,exorbitant or unconscionable...the extent to which the parties were negotiating at arm's-length on the basis of legal advice and had every opportunity to appreciate what they were agreeing must at least be a relevant factor."
The onus is on the party asserting that a liquidated damages clause is unenforceable, and the question is one of construction at the date of the contract. The parties in this case were both represented by sophisticated and experienced lawyers, and were substantial commercial operators in the aircraft industry with a long-standing commercial relationship, and with comparable bargaining power. The Defendant had every opportunity for advice, and to use its own experience, before agreeing, in a purchase agreement clause, that "such liquidated damages do not constitute a penalty and are a reasonable and agreed amount of the anticipated or actual harm or damages to be suffered by [the Claimant] as a result of or in connection with Buyer's default".
Ruling that the damages agreed as a pre-estimate of loss in this clause were not an irrecoverable penalty, the court said that the defendant had made no attempt to cast doubt on the realistic nature of the estimate.
Although the court did not have to decide the claimant's alternative claim for damages at common law, if liquidated damages were irrecoverable, it noted that the Supreme Court in Makdessi had said that if an innocent party was deprived of the benefit of a liquidated damages clause it then has a remedy in damages under the general law. The 'penalty' imposed for an excessive pre-estimate of loss is the need to calculate the actual loss, with the possible difficulty and expense entailed. It is not being deprived of any recovery at all. And by agreeing an exclusive remedies clause the parties had not irrevocably contracted out of the recovery of damages at common law.
De Havilland Aircraft of Canada Ltd v Spicejet Ltd [2021] EWHC 362
3. Agreement "Subject to contract" – not waiving? Not binding?
A site developer resisted enforcement of an adjudicator's award, claiming there had been a subsequent agreement, to deal with the award and with retention and warranty works. The agreement was made over the phone and confirmed by an email exchange but was stated to be "without prejudice and subject to contract", with a settlement deed and payment guarantee to be prepared by lawyers. Some, but not all, payments were made, and work carried out, under the agreement, but the deed and guarantee were never signed. Had the "subject to contract" label been waived so that the agreement was binding?
The court referred to RTS v Molkerei, where the Supreme Court said that: "Whether [in a without prejudice subject to contract case] the parties agreed to enter into a binding contract, waiving reliance on the 'subject to [written] contract' term or understanding will again depend upon all the circumstances of the case, although the cases show that the court will not lightly so hold." In this case the court said that the agreement was made on the basis of a common understanding between the parties that it would not be binding until reduced into writing and signed as a contract. The issue to be decided was whether the parties had agreed to enter into a binding contract (a new contract) without the need for all terms to be reduced to writing.
The court concluded they had not, for a number of reasons, in particular that the case was a paradigm example of why the court "will not lightly hold" that a condition that negotiations and agreements are "subject to contract" has been superseded. The parties set their own rules of engagement. They agreed that there would be no binding contract until the terms were reduced to writing and signed off. They clearly envisaged an agreement would be reached but that it would not be enforceable until the formalities had been observed. The presence of an agreement that was acted on, is not therefore, without more, enough to indicate that the parties intended to be bound.
It was obvious that the agreement would be acted upon before it became binding. Payments would be made and work would be done. Once "banked" those sums would need to be accounted for, whether or not there was a binding contract. Everything that happened during the course of the parties' dealings with one another happened at a time when the ground rules applied.
Aqua Leisure International Ltd v Benchmark Leisurel Ltd [2020] EWHC 3511
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