Member Article

In commercial contracts there is often a ‘waterfall’ clause, which provides for a dispute escalation process prior to the commencement of formal legal proceedings, leaving litigation as the last resort.  Such clauses were determined to be legally binding in Cable & Wireless Plc v IBM United Kingdom Ltd [2002] EWHC 2059 (Comm).

In 2007 the High Court provided further detail in Holloway & Anor v Chancery Mead [2007] EWHC 2495 (TCC); where it was stated that the relevant obligation and process must be sufficiently clear to make the clause legally binding. This position is reinforced by the fact that agreements to negotiate or agreements to settle disputes amicably have been held to be too uncertain to enforce, partly because of the ensuing practical difficulties of monitoring and enforcing compliance.

Wah v Grant Thornton was a High Court case involving a dispute which arose when Wah (Grant Thornton’s Hong Kong entity) was expelled from Grant Thornton’s international network. Their Membership Agreement contained a waterfall clause for dispute resolution. It provided that in the first place any dispute should be referred to the Chief Executive of Grant Thornton. If this was unsuccessful, further referral to the Reconciliation Panel was specified. Only after unsuccessful completion of the conciliation process, could arbitration proceedings be instigated.

The first two stages failed, so arbitration followed. Wah challenged the jurisdiction of the tribunal in the arbitration proceedings on the basis that the steps laid down waterfall clause had not been followed. The tribunal disagreed, holding that it did have jurisdiction because the escalation steps prescribed were insufficiently certain to be legally binding.

The tribunal’s ruling was appealed to the High Court, which agreed with the tribunal.

Following Wah, it is clear that to be enforceable such clauses must unequivocally lay down the intended ADR process. They also ought to specify what obligations lie with which party during the process. It must also be clear from the pertinent provisions when or how the process can properly be considered exhausted.

Wah does not affect the legal principle that waterfall clauses can be legally binding. However, it illustrates the standard of clarity which is necessary for such clauses to be enforceable and for litigation to be avoided. The clauses in question, although very detailed, lacked the requisite clarity in terms of where obligations lay and the process to follow. This demonstrates that the temptation in drafting dispute escalation clauses to include a huge amount of detail to ‘cover all bases’ may actually detract from the key points, resulting in an unenforceable clause.