Contractual Alternative Dispute Resolution ("ADR") provisions

Arguably the most effective way of encouraging, even mandating, ADR procedures is for the parties to agree this in their contractual documentation, before any dispute arises. There are differing views, however, as to the extent to which binding ADR clauses should be included in contracts, essentially to take account of the fact that a party may wish to keep as many options open as possible for the proper resolution of the dispute and may not wish, when the dispute arises, to refer it to the mediation process i.e. to keep the process voluntary.

There has also been considerable doubt expressed as to whether an agreement to mediate will be binding, or whether it will be construed simply as an agreement to negotiate and will therefore lack the necessary certainty to be enforceable. Different approaches to the question of enforceability can be seen in different jurisdictions, particularly in the United States and Australia, as well as this jurisdiction.

Upholding contractual clauses

In the United States, by 1991 the courts had held in several cases that, although a contract to arbitrate would be enforced, they would traditionally refuse to enforce agreements to mediate. However, since then, there has been a complete shift towards an understanding and appreciation of consensual methods of ADR and a consequential upholding of agreements to mediate.

Although the cases on the enforceability of ADR clauses in the United States are still not all consistent, there appears to be a reasonable amount of support for upholding as enforceable an agreement to negotiate in good faith, including the case of Channel Home Centres Division of Grace Retail Corp -v- Grossman (1996) 795 F 2d 291. The United States courts have also upheld alternative dispute resolution clauses where they are part of a contract between the parties as a necessary first step prior to any litigation or arbitration. For example, in the somewhat earlier case of Haertl Wolff Parker Inc. -v- Howard S Wright Construction Company (Unreported 4 December 1989), the Court stated that "a contract providing for alternative dispute resolution should be enforced and one party should not be allowed to evade the contract and resort prematurely to the courts."

The United States courts now enthusiastically enforce statutes, rules and agreements for consensual ADR. This approach is seen to have done more than any other single factor to encourage the expansion of judicial power to compel participation in consensual ADR, notwithstanding that this almost appears to be a contradiction in terms.

In Australia, in the case of Coal Cliff Collieries Pty Limited -v- Sijehama Pty Limited (1991) 24 NSWLR 1, the court concluded that a contract to negotiate in good faith was known to the law and in some circumstances would be enforceable - the proper approach to be taken in each case would depend upon the construction of the particular contract. In many contracts it will be plain that a promise to negotiate is intended to be a binding legal obligation to which the parties should then be held. In a small number of cases, the court may be able to remedy an otherwise unacceptably vague or uncertain provision. In many cases, however, the court accepted that a promise to negotiate in good faith will occur in the context of an arrangement which, by its nature, purpose, context or otherwise makes it clear that the agreement is too vague or uncertain to be enforceable.

By contrast, the position in England and Wales is that agreements to negotiate in good faith have been regarded as too uncertain to have any binding force. This view was made clear by Lord Denning MR in Courtney and Fairburn Limited -v- Tolaini Brothers (Hotels) Limited [1975] 1WLR 297, notwithstanding the earlier decision of Hillas & Co Limited -v- Arcos Limited [1932] 147 LT 503, in which Lord Wright had expressed the opinion that an agreement to negotiate would be binding.

Lord Denning's approach was followed in this jurisdiction in a number of subsequent cases, including in the case of Paul Smith Limited -v- H&S International Holding Inc [1991] 2 Lloyd's Rep 121. In this case Steyn J. said that it had been rightly conceded that provisions that the parties should strive to settle a dispute amicably, and that the dispute should in the first place be submitted for conciliation, did not create enforceable obligations.

The House of Lords then upheld the restrictive Lord Denning approach in the case of Walford -v- Miles [1992] 2AC 128, which case is often referred to as authority for the position that such agreements will not be legally binding. This case concerned the sale of a business and business premises. Negotiations for the sale were taking place between the vendor defendants and the plaintiffs as potential purchasers. An agreement was made in principle for the sale of the property and it was further agreed that, provided the plaintiffs provided a comfort letter from their bank confirming that facilities were available, the vendors "would terminate negotiations with any third party or consideration of any alternative with a view to concluding agreements with [the plaintiffs]" and that, even if the vendors received a satisfactory proposal from any third party before then, they "would not deal with that third party nor would they give further consideration to any alternative". The plaintiffs duly provided the comfort letter, but the vendors, notwithstanding the agreement, subsequently chose to deal with a third party and completed a sale which excluded the plaintiffs. The House of Lords held that although a lock-out agreement (whereby one party for good consideration agreed for a specified period of time not to negotiate with anyone except the other party to that agreement) could constitute an enforceable agreement, an agreement to negotiate in good faith for an unspecified period was not enforceable.

The House of Lords were referred to the US Channel Home case, as well as to the decision in Courtney & Fairbairn. However, Lord Ackner concluded that an agreement to negotiate, like an agreement to agree, is unenforceable simply because it lacks the necessary certainty. The House of Lords did not consider the same argument would apply to an agreement to use best endeavours. The chief difficulty the House of Lords identified in upholding a general agreement to negotiate was as to the duration of the obligation and the circumstances in which negotiations might be terminated. These issues could, of course, be resolved by the parties agreeing some procedure for the negotiation. However, Lord Ackner also concluded that any duty to negotiate in good faith was considered to be unworkable and inherently inconsistent with the position of the parties in negotiation, since "... good faith is inherently repugnant to the adversarial position of the parties when involved in negotiations" and negotiating parties were always at liberty to terminate such negotiations at any time and for any reason.

However, that the decision of the House of Lords in Walford -v- Miles may constitute the "high water mark" of such cases was clearly indicated by a review of the issue by Court of Appeal in the case of Pitt -v- PHH Asset Management Limited [1995] 1 WLR 327. In this case, which related to the sale and purchase of a dwelling house, the parties had agreed a "lock in" arrangement, by which the plaintiff was given the opportunity to exchange contracts within two weeks of receipt of the draft contact, during which period the defendant was to refrain from negotiating with third parties. The Court of Appeal upheld this arrangement. The case could be distinguished from that of Walford -v- Miles because it was for a finite period and therefore not uncertain.

Mediation clauses

The specific issue as to whether an agreement to conciliate or to mediate is enforceable was considered in Australia by the Common Law Division of the Supreme Court of New South Wales in the case of Hooper Bailie Associated Ltd -v- Natcon Group Pty [1992] 28 NSWLR 194. In this case the parties had agreed to conciliate certain aspects of a building dispute that had been referred to arbitration in order to accelerate the resolution of the dispute. It was also agreed to adjourn the balance of the arbitration pending the outcome of the conciliation. This agreement was held to be enforceable. There was a certain amount of assistance given to the court in reaching this conclusion since, in this case, the agreement gave precise details as to how the mediation/conciliation was to be conducted, identifying the proposed conciliator, the issues which the conciliator should deal with and the order in which they should be addressed, with details as to the absence of lawyers, presence of experts and as to the general procedure to be followed. The court held that it had power to order a stay of the arbitration until the conclusion of the conciliation procedure. As part of the judgment, Mr Justice Giles noted that the value of conciliation and mediation for dispute resolution, as an alternative to the court process, was now increasingly recognised in Australia.

The judgment draws a distinction between (1) the enforcement of co-operation and consent and (2) enforcement of participation in a process from which co-operation and consent might come.

"Conciliation or mediation is essentially consensual and the opponents of enforceability contend that it is futile to seek something which requires the co-operation and consent of a party when co-operation and consent cannot be enforced; equally, they say that there can be no loss to the other party if for want of co-operation and consent the consensual process would have led to no result. The proponents of enforceability contend that this misconceives the objectives of alternative dispute resolution, saying that the most fundamental resistance to compromise can wane and turn to co-operation and consent if a dispute is removed from the adversarial procedures of the courts and exposed to procedures designed to promote compromise, in particular where a skilled conciliator or mediator is interposed between the parties. What is enforced is not co-operation and consent, but participation in a process from which co-operation and consent might come"

In reaching his conclusion that the agreement to conciliate or mediate was, in these circumstances, sufficiently certain to be enforceable, Mr Justice Giles acknowledged that in some cases there may still be uncertainty in an agreement to mediate as to what the parties are required to do by way of participation and that an agreement to conciliate may not give rise to a legally binding agreement.

Mr Justice Giles distinguished the House of Lords decision in Walford -v- Miles, in essence by concluding that an agreement to conciliate or mediate is different from both an agreement to agree and an agreement to negotiate in good faith. This is on the basis that, depending on its terms, an agreement to conciliate or mediate requires a party to participate in the process by conduct of sufficient certainty for legal recognition of the agreement. Certain agreements are enforceable in principle, but specific enforceability will depend on the precision with which the agreement to mediate is drafted. If the conduct needed to participate in the process is sufficiently clearly defined, the agreement will be enforceable. If it remains vague, the agreement will not. Accordingly, this brings us back to the apparent need for some procedural framework before an agreement to conciliate, mediate or negotiate will be upheld. The importance of a properly drafted ADR clause or agreement is, perhaps, the most important message from all these cases.

The latest position in the UK

About a year after the House of Lords decision in Walford -v- Miles, the House of Lords had occasion to consider the enforceability of an agreement to refer disputes or differences to a panel of experts and final settlement by arbitration in Brussels. The fact that the agreement was upheld may indicate a move in this jurisdiction towards upholding contractual dispute resolution clauses. In the case of Channel Tunnel -v- Balfour Beatty [1993] AC 334 the clause in the contract between the parties provided for an initial reference of disputes or differences to a panel of experts and provided for final settlement by arbitration in Brussels. The parties proved unable to agree on the price payable in relation to a variation under the contract. When negotiations failed to reach agreement, Balfour Beatty threatened to suspend work. The Channel Tunnel Group issued proceedings in the Commercial Court for an injunction to restrain Balfour Beatty from carrying out their threat. Balfour Beatty issued an application in the Commercial Court seeking to stay all further proceedings in the Commercial Court action. This stay was sought on two bases: first on the basis that the dispute between them, under the contract, was required to be submitted to arbitration and, second, that the court should exercise its inherent jurisdiction to stay proceedings which had been brought in breach of an agreement to decide disputes by some other way. The application for a stay of the action was refused at first instance but granted before the Court of Appeal. The House of Lords upheld the Court of Appeal decision and concluded that a stay was appropriate. The court not only possessed a discretion to grant a stay in cases such as the present, but this was a remedy which ought to be exercised in this particular case. It was considered legitimate to use the discretionary general powers of the court to enforce a dispute resolution agreement which, in this case was, "nearly an immediately effective agreement to arbitrate, albeit not quite". The parties were large commercial enterprises, negotiating at arm's length in the light of long experience of construction contracts, and with experience of the type of disputes which typically arise out of them and of the various means which can be adopted to resolve such disputes. The relevant clause had been carefully drafted and it was plain that all concerned must have recognised the potential weakness of the two stage dispute resolution procedure and concluded that, despite these weaknesses, there was a balance of practical advantage in having agreed this.

In the case of Halifax Financial Services Ltd v Intuitive Systems Ltd [1999] 1 All ER (Comm) 303, the judge had to consider a dispute resolution clause which obliged the parties to submit any dispute to meetings between the parties' senior representatives and then "structured negotiations … with the assistance of a neutral adviser or mediator". There were provisions for the appointment of the neutral adviser or mediator, but no further detailed terms as to the process to be adopted. The parties had entered into direct negotiations but had not attempted mediation. On the particular wording of this clause, the court considered that the clause was not effective and that it did no more than to make provision for the parties to negotiate hopefully towards an agreement. The judge took the view that forced negotiations between the parties would be futile at that particular time.

By contrast, in the case of Cable & Wireless plc v IBM United Kingdom Ltd [2002] EWHC Ch 2059, the agreement provided for negotiation between the parties and, if this was unsuccessful, for the parties to "attempt in good faith to resolve the dispute" through an ADR procedure "as recommended to the parties by the Centre for Dispute Resolution" ("CEDR"). The claimant argued that this provision was unenforceable as it lacked certainty and imposed no more than an agreement to negotiate. The court concluded that it was clear that the parties' mutual intention was for litigation to be embarked upon only as a last resort. The parties had not simply agreed to attempt to negotiate a settlement in good faith. They had identified a particular ADR procedure as recommended to the parties by CEDR – one of the best known and experienced dispute resolution service providers in the country. The courts should not encourage uncertainty to be accentuated: "There is now available a clearly recognised and well developed process of dispute resolution involving sophisticated mediation techniques provided by trained mediators in accordance with procedures designed to achieve settlement by the means most suitable for the dispute in question."

The judge concluded that the clause indicated a sufficient defined mutual obligation upon the parties to go through the process of initiating a mediation, selecting a mediator and at least presenting that mediator with its case and its documents and attending upon him. Even contractual references to ADR, which did not include provision for an identifiable procedure, would not necessarily fail to be enforceable by reason of uncertainty. Much would depend upon whether the obligation to mediate was expressed in terms which were either unqualified and mandatory or qualified.

The courts appear likely to continue to develop this approach, rather than reverting to that followed in the Walford -v- Miles case. The combination of the recent moves in the English courts to advocate the use of ADR procedures, together with the decisions in United States and Australia, suggest that any ADR clause which provides some framework for the chosen process, would now be likely to be upheld. Particularly in the light of the Overriding Objective contained in Part 1 of the Civil Procedure Rules and the growing acceptance of ADR as a means of resolving disputes, it is increasingly likely that the courts will seek to uphold an agreement for ADR. It is clear, however, that any clause which provides for compulsory reference to some form of ADR procedure must include a mechanism for the chosen procedure with which the court feels comfortable, so as to avoid the risk of not being upheld for uncertainty, as being a mere agreement to negotiate. The danger here is that, by requiring some mechanism or procedure to be identified in order to deal with the problem of upholding an agreement to mediate in good faith, the courts will be formalising a process which may work best in a relatively informal and flexible setting. Parties must also be aware that they will be tying themselves to a particular organisation.

Examples of Mediation Clauses

Negotiation

If a dispute arises out of or relates to this Agreement or the breach thereof, within twenty (20) days of receipt of written notice of a dispute, the Purchaser and the Sellers' Representative shall attempt in good faith to resolve such dispute by negotiation;

Mediation

If the dispute cannot be settled through such negotiations, the parties agree to try in good faith to settle the dispute by mediation within 20 days immediately following the 20 day period set forth in Clause

Agreement between Purchaser and Seller

If any dispute arises out of this agreement, the parties will attempt to settle it by mediation in accordance with the Centre for Dispute Resolution (CEDR) Model Mediation Procedure.

CEDR Model Mediation Clause

The parties will consider using alternative dispute resolution ("ADR") techniques for any dispute or difference arising out or in connection with this contract. The parties may consult the City Disputes Panel Limited ("CDP") for assistance in selecting the most appropriate technique. If [either/any] party does not wish to use or continue to use ADR techniques, or such techniques do not resolve the dispute, the parties shall refer the dispute to arbitration under the Arbitration Rules of CDP enforced at the date the dispute or difference arises.

City Disputes Panel Clause B

The parties will consider using mediation/conciliation in accordance with the City Disputes Panel Limited ("CDP") procedures then in force for any dispute or difference arising out of this or in connection with this [contract]. If [either/any] party does not wish to use, or continue to use, mediation/conciliation or mediation/conciliation does not resolve the dispute, the parties shall refer any such dispute or difference to arbitration under the Arbitration Rules of CDP in force at the date the dispute or difference arises.

City Disputes Panel Clause C

Any dispute or difference arising out of or in connection with this contract shall be referred to [mediation/conciliation] in accordance with the City Disputes Panel Limited (CDP) procedures then in force before resorting to arbitration.

The [mediation/conciliation] process will be commenced by a service by one party on the other(s) of a written notice that the dispute is referred to [mediation/conciliation] "the Commencement Notice". The parties will then participate in good faith in the [mediation/conciliation]. The [mediator/conciliator] shall be a member of CDP. In the event that the parties are unable to agree to a [mediator/conciliator] within [ ] days of the date of service of the Commencement Notice, the parties shall accept a [mediator/conciliator] nominated by CDP.

If, and only if, the dispute is not resolved within [ ] days of the date of service of the Commencement Notice (or such longer period as the parties may agree) the parties shall refer the dispute to arbitration under the Arbitration Rules of CDP in force at the date the dispute or difference arises.

City Disputes Panel Clause D

For further information please contact Susan Barty at [email protected] or on +44(0)20 7367 2542 or contact Ben Horton at [email protected] or on +44(0)20 7367 3747.