Clauses providing for "dispute escalation" - i.e. compulsory participation in conciliation, mediation and other alternative dispute resolution ("ADR") processes prior to beginning formal legal proceedings - are increasingly common, but a new judgment highlights the scrutiny these clauses face and the risk they will not be enforced if challenged.

Typically, dispute escalation clauses are deployed in long term, high value contracts such as outsourcing and technology contracts and joint venture agreements.   The clauses commit parties to participate in pre-agreed processes in order to address issues consensually, before resorting to formal litigation or arbitration, with the aim of resolving disputes quickly, cheaply and before they irreparably damage the parties' wider relationship.

Agreements to negotiate of this type were not, historically, considered enforceable.  However, in the 2002 High Court case of IBM v Cable & Wireless and the 2007 High Court case of Holloway & Anor v Chancery Mead, it was established that agreements to participate in a dispute escalation process are legally binding, provided that the obligation and the process in question are sufficiently certain.

Similar provisions were recently considered again in the High Court in Tang Chung Wah & Anor v Grant Thornton International & Ors.  They were included in an agreement governing the terms of membership of accountancy firm Grant Thornton's international network.  The agreement referred disputes to LCIA arbitration.   However, it also recited that it governed a "long term relationship between professional firms" as a result of which disputes required "special treatment", and then provided for a dispute escalation process.  This required the CEO of the network to facilitate a conciliation process, which if unsuccessful would be followed by a reference to a panel of three board members for another round of conciliation.  The agreement stated that only once that conciliation process had occurred could any party begin arbitration.

The dispute arose when Grant Thornton's Hong Kong entity was expelled from the network.  This resulted in arbitration proceedings under the membership agreement.   The Hong Kong entity challenged the jurisdiction of the tribunal in these proceedings, on the basis that the dispute escalation provisions in the agreement had not been followed.  The tribunal rejected this argument and held that it had jurisdiction, on the basis that the dispute escalation steps prescribed did not constitute a detailed process sufficiently certain to be legally binding.

The Hong Kong entity appealed the tribunal's ruling to the High Court.  In his judgment, Mr Justice Hildyard reviewed the membership agreement's terms in light of IBM v Cable & Wireless and the subsequent authorities, and concluded he agreed with the tribunal that the dispute escalation provisions were not sufficiently clear and certain to be given legal effect.

The judgment in Tang Chung does not affect the legal principle that dispute escalation provision can be legally binding.  However, it is striking that the court refused to uphold provisions which were detailed, expressly stated to be required because of the nature of the contract, and agreed between sophisticated parties.  This reinforces the need to take care when drafting disputes escalation clauses - it will often be sensible to adapt clauses recommended by the LCIA, CEDR, JAMS and other ADR providers - and to check the language against the existing case law.