Court of Appeal finds mediation clause in insurance contract did not give rise to a binding obligation

In Sulamerica CIA Nacional de Seugros S.A. v Enesa Enenharia S.A. [2012] EWCA Civ 638 the English Court of Appeal was asked (amongst other things) to determine the enforceability of a contractual mediation clause.  The clause (condition 11) was contained in an insurance policy, directly before an arbitration clause, and required the parties to mediate before proceeding to arbitration. The insurer had not sought to mediate prior to instituting arbitration. The insured submitted that the mediation and arbitration clauses were part of a single dispute resolution regime, and that mediation was a condition precedent to arbitration. The Lord Justices of Appeal concurred with Cooke J, the trial judge, that these did not give rise to a binding obligation to mediate (and so there was no requirement to comply with the mediation clause in order to be permitted to commence arbitration). Lord Justice Moore-Bick noted that the relevant condition did not set out any defined mediation process, nor did it refer to the procedure of a specific mediation provider.

Decision

In finding that the mediation clause was not sufficiently precise to be create an obligation to commence mediation, the Court of Appeal further observed that the “...first paragraph contains merely an undertaking to seek to have the dispute resolved amicably by mediation. No provision is made for the process by which that is to be undertaken and none of the succeeding paragraphs touch that question."The Court concluded that, at most, it might impose on a party who is contemplating referring a dispute to arbitration an obligation to invite the other to join in an ad hoc mediation, but even this obligation was so uncertain as to render it impossible to enforce.

Historically, ADR clauses were attacked as being no more than agreements to negotiate and therefore too uncertain to be enforceable at law.  However, the question was laid to rest in Cable & Wireless plc v IBM United Kingdom [2002] EWHC 2059 (Comm) where it was held that the ADR clause contained an enforceable obligation to participate in ADR procedures recommended by CEDR.  The court found that it was the mutual intention of the parties when negotiating the agreement that litigation was a last resort and the clause was more than an agreement to negotiate as it had identified a particular procedure.  However, the court added that ADR clauses which do not include an identifiable procedure would not necessarily fail to be enforceable due to uncertainty.  An important consideration would be whether or not the obligation to mediate was expressed in unqualified and mandatory terms.  Colman J. stated that, in principle, "where there is an unqualified reference to ADR, a sufficiently certain and definable minimum duty of participation should not be hard to find".

In Sulamerica, however, an unqualified reference to mediation did not suffice as it did not constitute a legally effective pre-condition to mediation. Moore-Bick LJ declined to prescribe the ingredients required to make such an agreement to mediate enforceable, as he considered that each case must be considered on its own terms. It appears fatal that condition 11 failed to set out  any defined mediation process or refer to any specific mediation provider's procedure. As such condition 11 did not create an obligation to commence or participate in a mediation process.  

Comment

The decision raises a number of points:

• It would appear that in order to contain “sufficient certainty” a mediation clause will have to refer the mediation to an ADR provider or institution, or contain detailed provisions regarding mediator appointment and the procedure for the mediation. Simple agreements to engage in ad hoc mediation may be very difficult to enforce.
• Special care must be taken when drafting escalation dispute resolution clauses, to ensure that each stage is effective and enforceable. A mediation provision should refer, at the very least, to a defined mediation process.
• Condition 11 of the contract ran to 31 lines and included detailed provisions regarding confidentiality and termination of the mediation, as well as costs. This, combined with the undertaking to seek to have the dispute amicably resolved by mediation prior to a reference to arbitration, however, was not sufficient. It is clear that a mechanism for the appointment of the mediator, as well as the process to be followed, will be required.  

The Court of Appeal's decision in Sulamerica is more famous for confirming that the law of the arbitration clause is legally distinct from the contract of which it forms a part.