C&W is demanding compensation of between £31m and £45m from IBM for allegedly overcharging the telecoms company for providing IT services to its UK operations.
In a landmark judgement that will have repercussions for other major outsourcing deals, the commercial court ruled that both parties must comply with a clause in their contract to refer disputes on charging to mediation.
The case is the first in which a court has recognised mediation - negotiating a settlement through third parties appointed by each company - as a legally enforceable alternative to litigation, said Tony Allen, director at the Centre for Effective Dispute Resolution.
"We have always thought that if someone had signed up to a mediation clause and did not follow it they could still take a case to court and win, though they might not get costs. But in the C&W case, you have a judge saying 'I am going to enforce this mediation provision,'" Allen said.
The dispute centres on an outsourcing deal signed by IBM and C&W's UK arm in December 2000 as part of a $3bn (£1.9bn) framework agreement between the two companies signed in 1998.
Under the contract, IBM had agreed that an independent consultant would benchmark the quality of its services and assess its charges against IT suppliers offering similar services.
But the supplier refused to accept the findings of Compass Management Consulting, which concluded that IBM is charging more than its competitors. The report is "fundamentally flawed", IBM claimed.
C&W tried to obtain summary judgement against IBM last month, arguing that the supplier failed to meet its obligation to produce a plan to improve the quality of its service. But, in what is likely to become an important legal precedent, Justice Coleman ruled that the parties must attempt to solve the dispute through the mediation clause written in the contract.
The mediation process, which is expected to take a matter of weeks, could save the firms tens of millions of pounds in legal costs, Allen said.
Arbitration, in which an independent third party rules on a dispute after examining evidence from both sides, has been recognised by the courts for some time. But the status of mediation, which is being written into IT contracts with increasing frequency, has been legally unclear until now.
IBM and C&W refused to comment on the dispute.