Escalation clauses are commonplace in commercial contracts. These clauses outline ‘escalation procedures’ which may be activated when a dispute crystallises between the parties. This article aims to explain the effect of escalation clauses on the statutory right to adjudicate.
What is an escalation clause?
An escalation clause is a contractual clause which provides an ‘escalation procedure’ should a dispute arise. A common escalation procedure would be for the parties to engage in a without-prejudice meeting. This may then be followed by mediation or another form of alternative dispute resolution (“ADR”) before the matter is referred to adjudication. This is often referred to as a ‘tiered’ or ‘stepped’ escalation clause as it maps out a stage-by-stage escalation procedure.
An escalation clause may also attempt to limit the time frame within which a dispute can be referred to adjudication. For example, the clause may limit the time frame for referral to “between two and four weeks after the notification of the dispute” to one party by the other.
The HGCRA and escalation clauses
The Housing Grants, Construction and Regeneration Act 1996 (“HGCRA”) provides the statutory right to refer a dispute arising from a construction contract to adjudication “at any time”. Since the HGCRA has come into effect, there have been numerous cases which deal with the effect of the statutory right to adjudicate ‘at any time’ on escalation clauses in construction contracts.
The right to refer ‘at any time’ has been interpreted as plainly and as literally by the courts as possible. In short, the statutory right will trump the terms of the contract. The below overview of case-law developments in this area will demonstrate that whilst the courts have a strong policy which favours ADR procedures in commercial contracts, precedence is given to the HGCRA and thus many escalation clauses which seek to impose time limits on referral to adjudication fail.
The case law
Firstly, it is important to recognise the importance that the courts place on ADR mechanisms in commercial contracts. For example, in Ohpen Operations UK Ltd v Invesco Fund Managers Ltd (2019) the contract contained a tiered escalation clause which specified that the dispute could only be referred to court proceedings if mediation was unsuccessful. The parties did not attend a mediation, yet Ohpen issued court proceedings. The Court stayed these proceedings and upheld the escalation clause requiring mediation. The courts exercise a clear policy in favour of enforcing ADR mechanisms. However, it is important to note that this case did not concern a construction contract and thus the statutory right to adjudicate ‘at any time’ did not interfere with the escalation clause.
The courts have made clear that a contractually agreed pre-adjudication procedure, such as an escalation clause, cannot fetter the unqualified statutory right to adjudicate ‘at any time’, this was made clear in R.G. Carter Ltd v Edmund Nuttall Ltd (2000). Further to escalation clauses not being able to postpone or limit adjudication time frames, the Court in Herschel Engineering Ltd v Breen Property Limited (2000) confirmed that the statutory right to adjudicate ‘at any time’ means that a dispute which is already the subject of pending court proceedings can still be adjudicated on and these processes can be run concurrently.
The very literal statutory interpretation of ‘at any time’ by the courts is further seen in Connex South Eastern Ltd v MJ Building Services Group plc (2005). In this case, Connex argued that adjudication proceedings could not take place as the contract had been discharged and the intention of Parliament was that adjudication was to be a quick and cheap dispute settlement process during the course of the Works. However, the Court maintained a very plain and literal interpretation of s. 108(2) and saw no cause to impose a limitation period for adjudication. The adjudication was allowed to proceed despite the contract being discharged.
Quigg Golden Comment
Escalation clauses, particularly tiered escalation clauses which provide a cost-effective dispute-resolution roadmap, are often commercially sensible and can help to maintain relationships between parties. The courts also have a preference to uphold the terms of a contract, and a policy in favour of enforcing ADR obligations. However, disputes arising from construction contracts are governed by the HGCRA. The above case law demonstrates that the statutory right to adjudicate on construction contract disputes ‘at any time’ under s. 108(2) of the HGCRA takes absolute precedence over escalation clauses.
Quigg Golden are market-leaders in Adjudication in the UK and Ireland, should any of the above issues concern you or your business do not hesitate to contact us for further advice.
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