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.
