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Legal Developments in The Legal 500 United Kingdom 2011

Dispute resolution clauses in IT contracts

January 2010 - IT & telecommunications. Legal Developments by SJ Berwin LLP.

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Given the relatively frequent occurrence of disputes over contracts for the supply of software and IT services, dispute resolution provisions are an important feature. In the recent case of Ericsson AB v Eads Defence and Security Systems Ltd [2009], the High Court had an opportunity to consider such provisions and their relationship with rights of termination and remedies under the contract.

Facts

Ericsson AB (Ericsson) entered into a contract with EADS Defence and Security Systems Ltd (EADS) to supply various software and support services. Under the agreement, there was a dispute resolution clause which provided that if a dispute arose the parties must first consult in good faith in an attempt to resolve it and that:

‘If Ericsson and EADS fail to resolve the dispute through such consultation within ten business days, either party may give notice of its intention to proceed to mediation… or to refer the matter to adjudication.’

Separately, there was a fairly standard termination clause that allowed EADS to terminate for unremedied material default.

Before long, the parties were in dispute over Ericsson’s alleged delay in delivering part of the software. Both parties blamed the other for the delay. On 29 September 2009, after much correspondence, Ericsson served notice under the dispute resolution clause, referring the dispute to mediation. Two days later, Ericsson served a further notice, this time referring the matter for adjudication and on that same day EADS served notice of material default requiring remedy as required by the contract as a precursor to actual termination.

EADS agreed to the mediation but refused adjudication on the grounds that the dispute resolution clause allowed for mediation or adjudication, but not both simultaneously. Ericsson rejected EADS’ notice of default on various grounds.

On 12 and 13 October 2009, Ericsson and EADS issued applications for injunctions. EADS sought an injunction to stop Ericsson from enforcing the adjudication clause and Ericsson sought an injunction to prevent EADS from terminating the agreement, at least before the adjudication had run its course or until trial.

Judgment

Akenhead J refused both parties’ applications for injunction. He held that it was not appropriate to restrain Ericsson from pursuing remedies in adjudication, even though it had also started mediation procedures. The dispute resolution clause did not limit the parties from using both procedures despite use of the word ‘or’, and this was ‘underline[d]’ by the inclusion of the word ‘may’ in that clause, as contrasted with the use of the word ‘shall’ in the immediately preceding clause, requiring the parties to first consult in the event of a dispute. Akenhead J also noted that the two procedures are not mutually exclusive and are exercised for different reasons. Mediation, while binding on the parties if notice of it is given, is ultimately a consensual arrangement – either party can refuse to agree to any proposed compromise – while adjudication leads to a binding result, subject to any appeal procedures. Akenhead J therefore considered that it was the intention of the parties that both could be used in the course of a dispute, with adjudication to produce a binding ruling should mediation fail to be effective.

Ericsson’s application was refused on the grounds that it was not appropriate to grant an injunction that precludes a party’s right to terminate. Akenhead J held that the dispute resolution clause did not suspend a party’s contractual rights. It was not a breach of contract to terminate while a dispute as to whether termination was justified had been referred to adjudication. He also noted that the effect of Ericsson’s injunction would be to force the parties to continue to work together even though their relationship had broken down. Ericsson argued that the termination of the contract would not remedy the delay, but only make it worse, and for that reason there was no justification for such a termination. However, Akenhead J ruled that this was purely a commercial matter and therefore one for EADS to decide on alone. Applying the classic principles of American Cyanamid Co (No 1) v Ethicon Ltd [1975], which set out the criteria on which courts will grant interim injunctions, Akenhead J found that EADS’ argument for termination was not untenable and was not satisfied that damages would not be an adequate remedy for Ericsson if it was refused an injunction, but subsequently succeeded on the substantive issue.

Comment

Akenhead J’s finding that the dispute resolution clause permitted simultaneous references to both mediation and adjudication seems somewhat surprising. The use of the word ‘may’ was surely intended to indicate that a party was not obliged either to mediate or to have the matter adjudicated, ie that it could elect to simply not take a dispute any further following a failure to resolve it via consultation. Once a mediation procedure has been invoked, it is thought that this procedure should have been exhausted prior to any binding adjudication. However, the judge’s interpretation of the provision does illustrate the need for extremely clear drafting in this type of clause.

The finding that no injunction will be given to prevent termination is less surprising. Vertex Data Science Ltd v Powergen Retail Ltd [2006] shows that the courts are reluctant to grant injunctions that force parties to work together in agreements with a continuing service theme. While it may seem that notice to terminate before or during mediation would render the mediation process redundant, the mediation may still assist in resolving the dispute, regardless of the termination of the contract (which may in any event be reversed by further agreement at the mediation). If the matter is not resolved by mediation, damages will be available if the purported termination turns out to be unlawful, subject to any enforceable exclusion or limitation clauses.

In this context, Akenhead J went on to state that, partly as a result of exclusion and limitation clauses, which mutually prevented the parties from recovering most types of economic loss, such as loss of profit and loss of production, the recoverable damages were presumably not difficult to quantify and for that reason (among others) an injunction was not appropriate. This raises the interesting question of the application to such a case of the principles in Internet Broadcasting Corporation Ltd (t/a Nettv) & anor v MAR LLC (t/a MARHedge) [2009]. In NETTV a party was unable to rely on its exclusion clause where it deliberately refused to perform its contractual obligations, in the absence of extremely clear wording that the clause applied in such circumstances. It may be arguable that the same should apply in any case where a party deliberately terminates and such termination turns out to be wrongful. However, a court might only apply the NETTV criteria where a party knows that its purported termination is wrongful.

Despite the finding that an injunction was not appropriate to prevent termination during the dispute resolution process, it is open to the parties to expressly provide that invocation of a dispute resolution procedure, such as mediation, would suspend any right to terminate in the meantime. A supplier may well wish to include such a provision in its contracts, although it may be difficult to persuade a customer to accept it unless there are provisions tightly timeboxing the procedure.

By Andrew Shindler, partner, and Greg France, associate, SJ Berwin LLP.

E-mail: andrew.shindler@sjberwin.com; greg.france@sjberwin.com.

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