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How enforceable are your ADR clauses?

29 January 2013

Alternative dispute resolution (ADR) is the collective term given to certain methods used to resolve disputes as an alternative to court proceedings.

The most common form of ADR is mediation, with surveys often showing very high success rates of referred disputes resulting in settlement. Generally, ADR can often lead to disputes being settled in a way that is cheaper, quicker, less formal and usually more confidential than the use of court proceedings.

When parties enter into a contract they often take the precaution of including an ADR clause. The purpose of such a clause is to ensure that in the event of a dispute the parties first try to settle it through an ADR process before taking any formal court action. However these clauses need to be drafted carefully, otherwise they may not have the effect that the parties intended.

English law does not recognise an agreement to negotiate or an agreement to settle disputes amicably. Generally speaking these types of agreements are too uncertain to enforce. However, where there is a clause which provides for a negotiation or mediation procedure that is sufficiently and clearly described in a contract, the courts have made it clear that they will enforce them.

The leading case is Cable & Wireless Plc – v- IBM, where the court ruled that the relevant ADR clause was enforceable and suggested that the clause had satisfied the following tests:

  • it made clear that there needed to be no prior agreement at any stage before the ADR process could start
  • the method of selecting and paying the mediator was defined, and
  • the process to be followed (or a model of it) was clearly set out.

By contrast in the 2012 case of WAH (aka Alan Tang) and Another – v – Grant Thornton International Limited and Others the High Court refused to uphold an ADR clause. The court ruled that the process was not properly described and the parties’ commitment to the process was equivocally expressed.

This all adds up to the fact that parties should ensure that if they want to include ADR provisions in their contracts then they ought to take legal advice, failing which they may find that the provisions are unenforceable if challenged.

As always, if you need commercial and pragmatic advice, we’re here to help so please get in touch.

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Nick Cox LLB (Hons)
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