Dispute resolution clauses in commercial agreements often contain a requirement to negotiate in good faith or to enter into a form of alternative dispute resolution (ADR) process before starting court or arbitration proceedings.  Parties are likely to rely upon them when arguing that a court or arbitral tribunal does not have jurisdiction to hear a dispute where the negotiation/ADR requirement was not complied with by the party bringing the claim.  However, such clauses are potentially problematic as the requirement to enter into ADR prior to starting more formal (court or arbitration) proceedings is often considered by the courts (both in England and Hong Kong) as being too uncertain to create an enforceable condition precedent to commencing court or arbitration proceedings.  Two recent English judgments have expanded on the requirements that conciliation clauses have to meet to be enforceable.

The general principle

It is an accepted principle in both English and Hong Kong contract law that agreements to agree and agreements to negotiate in good faith are (without more) generally unenforceable for lack of certainty. This principle extends to obligations to enter into negotiations or mediation prior to arbitration or litigation which are often found in commercial dispute resolution clauses. Courts have pointed out that, in order to be enforceable, ADR clauses have to be sufficiently certain.  However, it is not always entirely clear what is required to make such clauses sufficiently certain, and many clauses used in practice still only provide for a simple obligation to mediate or negotiate without providing for more detail.

The English cases

The most recent case of Wah (aka Tang) v Grant Thornton International (GTIIL) Ltd [2012] EWHC 3198 (Ch) is one of a string of  proceedings brought in England and Hong Kong in relation to the expulsion of the Hong Kong member firm from the world-wide accounting group operating under the name “Grant Thornton”.  At the centre of the dispute is an arbitration award granted in London which some of the members of the expelled firm have been challenging both in London and Hong Kong where the award is to be enforced.  One of the grounds on which the members challenged the award in the London courts was that the arbitral tribunal did not have jurisdiction, as the claimants in the arbitration failed to comply with requirements contained in the dispute resolution clause to refer the dispute for conciliation first to the Chief Executive and subsequently to a panel of three board members of the Group prior to resorting to arbitration.

The earlier case is Sulamerica CIA Nacional de Seugros S.A. v Enesa Enenharia S.A. [2012] EWCA Civ 638, which is more famous for its ruling on the law applicable to an arbitration clause (for details on this aspect please see are arbitration blog post here).  However, the Court of Appeal also had to consider whether the fact that the dispute resolution clause contained an obligation to mediate prior to arbitration constituted an effective condition precedent to arbitration.

The key considerations that can be distilled from these recent cases and earlier case law are as follows:

  • For an ADR clause to be effective in law it must define the parties’ rights and obligations with sufficient certainty to enable the clause to be enforced, either by way of a stay of proceedings or an injunction.
  • It is difficult to define a set of minimum ingredients that are necessary to give such clauses legal effect, as each case will need to be considered on its own terms.
  • However, clauses that are more likely to be effective are those which:
  1. contain an unequivocal commitment (without the need for further agreement) to enter into ADR before proceeding to litigation or arbitration;
  2. set out with sufficient detail and certainty the steps each party is required to take to initiate the process (eg, stating what needs to be done, when and how);
  3. set out, where applicable, the process for the selection of a mediator;
  4. set out what is expected of each party by way of participation in the process, either by setting out a defined mediation process or by referring to the procedure of a specific mediation provider which contains the required detail; and
  5. set out how the process will be determined (eg, by providing for a maximum period in which the mediation or negotiation needs to be concluded before the parties may proceed to arbitration or litigation

As the Hong Kong courts have tended to follow English case law in relation to the enforceability of conciliation clauses (eg, Hyundai Engineering & Construction Co Ltd and another [2005] 3 HKLRD 723), it can be expected that these most recent English cases will also be followed in Hong Kong.

Key take away points

  • Whether or not a conciliation clause is effective is relevant to the question whether the court or arbitral tribunal which is to determine the dispute if the conciliation fails has jurisdiction. This may be relevant to the enforceability of any judgment or award which is made in breach of an effective conciliation clause.
  • Clauses that simply provide for an obligation to mediate prior to litigation or arbitration, without providing more detail, are likely to be unenforceable both under English and Hong Kong law.
  • Although the courts have declined to provide a definitive set of minimum ingredients which need to be contained in an ADR clause to ensure that it is enforceable, a clause is more likely to be effective if it provides for a clear negotiation or mediation procedure which sets out the steps to be taken by the parties, including when and how those steps are to be taken and what is to be done in the case of a deadlock.
  • An ADR clause should also make it clear that the conciliation process is mandatory and provide a long-stop date or event which signals escalation to the next stage of dispute resolution (eg, litigation or arbitration).