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Cable & Wireless v IBM

In circumstances where parties to a global IT Services Agreement had fallen into dispute, the court stated they were obliged to participate in the ADR Procedure they had agreed and included in the Agreement before proceeding with litigation.

Cable & Wireless PLC v IBM United Kingdom Limited

  • MCLR December 2002
  • [2002] EWHC 2059 (Comm)
  • [2002] 2 All ER (Comm) 1041
  • [2002] NLJR 1652
  • [2003] BLR 89
  • [2002] All ER (D) 277 (Oct)

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Facts

The Claimant (“C&W”) and the Defendant (“IBM”) entered into a Global Framework Agreement (“GFA”) pursuant to which IBM was to supply C&W with information technology services for a 12 year period.  These proceedings arose out of a dispute over the operation of a price benchmarking clause.  IBM’s obligation was to deliver at prices “equal or better than that achieved by the top 10%” of other organisations receiving similar services.  The benchmarking process described the procedure for comparing the quality and the price of services to those being delivered to comparable organisations.  Since the two sides could not agree on pricing, they engaged a third party, Compass Management Consulting, to prepare a report under the benchmarking process.  Compass concluded that IBM’s charges had been higher than those of its competitors.  On this basis, C&W said that it was entitled to compensation at something between £31.5m and £45m based on the difference between the amounts actually charged and Compass’ benchmark figures.  IBM disputed the validity of Compass’ report, saying that its conclusions were so fundamentally flawed that they did not amount to benchmark results as required by the GFA.  In addition, IBM said the terms of the GFA entitled C&W to compensation only in respect of the period after a valid benchmark report had been produced.

C&W issued proceedings for a declaration as to the meaning of certain terms of the Agreement regarding the pricing process and its entitlement to compensation.  IBM applied for a stay of the proceedings on the basis that C&W had failed to follow the dispute resolution process set out in the GFA.

The relevant clauses were Clauses 40 and 41.  Clause 40 set out a dispute escalation process, as is commonly seen in Agreements such as the GFA.  It required the parties to escalate any dispute through various levels of management.  Clause 40 concluded:

“neither Party nor any Local Party may initiate any legal action until the [dispute escalation] process has been completed, unless such Party or Local Party has reasonable cause to do so to avoid damage to its business or to protect or preserve any right of action it may have.”

Clause 41 provided:

“the Parties shall attempt in good faith to resolve any dispute or claim arising out of or relating to this Agreement or any Local Services Agreement promptly through negotiations between the respective senior executives of the Parties who have the authority to settle the same pursuant to Clause 40. 

If the matter is not resolved through negotiation, the Parties shall attempt in good faith to resolve the dispute or claim through an Alternative Dispute Resolution (ADR) procedure as recommended to the Parties by the Centre for Dispute Resolution.  However, an ADR procedure which is being followed shall not prevent any Party or Local Party from issuing proceedings.”

On the basis of this provision, IBM said that there should be a stay of proceedings, such that the parties would have the opportunity to attempt settlement using ADR.

Judgment

C&W put forward 3 arguments in response to IBM’s application.  C&W’s first argument was that the clause was unenforceable because it was an agreement to agree.  It is a long standing principle that an agreement to agree is contractually unenforceable because the subject matter of the supposed agreement is, by definition, uncertain.  C&W relied on the Court of Appeal’s decision in Courtney & Fairbairn Limited v Tolanini Brothers (Hotels) Limited ([1975] 1WLR 297).  Colman J. rejected this argument.  He drew a distinction between an agreement to negotiate, which is unenforceable for uncertainty because the outcome of the negotiations is unknown, and an agreement to follow a particular dispute resolution procedure.  In the latter instance, what the parties are agreeing is not what the outcome of their negotiations will be, but rather that they will engage in a process which may or may not bring about a resolution to their differences.  Colman J. thought that the latter type of agreement was not void for uncertainty because the parties’ contractual obligations could be distilled from the Centre for Dispute Resolution (CEDR’s) Model Mediation Procedure.  These included, at a minimum, co-operation in the appointment of a mediator; submission of documents to the mediator; and, attendance at the mediation.  Accordingly, Colman J. held that an agreement to participate in ADR was valid, at least to the extent that the party in question could be required to attend the mediation, even if that party withdrew thereafter.  Colman J. said that:

“for the Courts now to decline to enforce contractual references to ADR on the grounds of intrinsic uncertainty would be to fly in the face of public policy as expressed in the [Civil Procedure Rules] and as reflected in the judgment of the Court of Appeal in Dunnett v. Railtrack [2002] 1 WLR 2434.”

C&W’s second argument was based on the wording of Clause 41.  The clause expressly contemplated the issue of proceedings even where the ADR Procedure was being followed, and C&W said that this showed that the parties did not intend to fetter either side’s right to commence litigation.  Colman J. disagreed.  He said that it was evident from the clause as a whole that the parties were agreeing to a procedure which was intended to keep them out of litigation and that litigation was contemplated under the agreement only as a last resort.  Colman J. considered that the reference in Clause 41 to neither party being prevented from commencing legal proceedings was akin to the provisions of Clause 40 which stated that, during the escalation procedure, either party could commence proceedings to avoid damage to its business or to preserve a legal right of action.  Colman J. was effectively saying that the right to commence proceedings before the ADR Procedure had been followed was limited to cases where an injunction was required and to cases where a claim would be statute barred unless proceedings were commenced.

C&W’s third argument was that to stay proceedings would amount to forcing C&W to participate in ADR which was similar to ordering specific performance.  C&W said that, for this reason, a stay should be ordered only if it was equitable to do so.  This issue turned on the facts of the case, C&W’s position essentially being that the application for a stay was inconsistent with other aspects of IBM’s conduct.  Colman J. rejected this submission.  He did so on the basis that there was a clear agreement between the parties to follow the ADR procedure.  In addition, he relied upon the Court’s power to stay under Rule 26.4 of the Civil Procedure Rules, by which the Court is empowered to stay proceedings as part of its overall case management powers.

Commentary

This decision is the latest in a line of authorities in which the Courts have endorsed ADR as a means of avoiding or curtailing litigation.  The most notable of these cases are Cowl v Plymouth ([2002] 1 WLR 803, ACD 74), Dunnett v Railtrack and Hurst v Leeming ([2002] CILL 1892).  Dunnett was specifically referred to by Colman J.  In that case, Mrs Dunnett’s claim against Railtrack failed.  The judge at first instance, in giving his judgment, encouraged the parties to participate in mediation, rather than to continue litigating through the appeal process.  The Court of Appeal criticised Railtrack for failing to follow this suggestion.  Accordingly, the Court of Appeal refused to award Railtrack its costs, notwithstanding the fact that it was successful in relation to the appeal. 

The case extends these principles to contractual agreements to follow ADR.  In the past the Courts would probably have been unwilling to compel parties to mediate, on the basis that, if one side was not interested, there was really no point in requiring the parties to follow the procedure.  The Court’s new approach reflects the fact that litigating parties which are cynical or sceptical about mediation frequently find that it is in fact an effective method of resolving disputes.  This new approach is driven by public policy rather than any great legal principle.  It can be compared to the increasing willingness of the Courts to enforce arbitration agreements which culminated in the Arbitration Act 1996 and reflects a general push towards party autonomy in the resolution of disputes and the avoidance of litigation, where possible.

The case raises questions about what a party is obliged to do in order to comply with an agreement to follow ADR.  In the GFA the specific reference to CEDR made the judge’s task easier, in that he was able to find the “detail” of the parties’ agreement in CEDR’s model procedure.  However, even an agreement to seek to resolve disputes by mediation is likely to be construed as having contractual force.  By analogy, parties to commercial agreements should recognise that participation in dispute escalation procedures is also likely to be contractually enforceable.

This case also highlights some practice points for those drafting agreements.  Dispute resolution provisions should be considered carefully and should not be dismissed as mere “boilerplate”.  Mediation and other forms of ADR are effective methods of resolving many disputes.  However, contracting parties should appreciate that participation in a mediation is not a soft option, and, if it is to be done properly, will involve time and expense.  In some instances, it may be more appropriate to make any reference to ADR optional rather than mandatory.