Long-term, complex or high value logistics contracts such as Warehousing or Customer Framework Agreements often contain a provision obliging the parties to engage in certain steps before the commencement of proceedings in the event of a dispute under the Agreement. Must parties comply with a clause requiring them to engage in “friendly discussion” before commencing arbitration? In light of the recent English High Court decision in Emirates Trading Agency LLC v Prime Mineral Exports Private Limited1, which boldly departs from the approach normally taken by the English courts, they may now be obliged to do so.
In 2010, Prime Mineral Exports Private Limited (PMEPL) commenced ICC arbitration proceedings against Emirates Trading Agency LLC (ETA) under a long-term contract (LTC) relating to the purchase of iron ore. ETA subsequently applied to the High Court under s.67 of the Arbitration Act 1996 challenging the tribunal’s jurisdiction based on the contention that the LTC contained a dispute resolution clause requiring the parties, as a condition precedent, to engage in time-limited friendly negotiations before referring the dispute to arbitration.
The LTC clause in question stated as follows: “In the case of any dispute or claim arising out of or in connection with or under this LTC...the Parties shall first seek to resolve the dispute or claim by friendly discussion. Any Party may notify the other Party of its desire to enter into consultation to resolve a dispute or claim. If no solution can be arrived at between the Parties for a continuous period of 4 (four) weeks then the non-defaulting party can invoke the arbitration clause and refer the disputes to arbitration.”
ETA contended that the condition precedent to engage in time-limited negotiations had not been satisfied before arbitration proceedings were issued. PMEPL in turn argued that the dispute resolution clause was a mere agreement to negotiate, rather than a condition precedent, and too incomplete and uncertain to be enforceable. But if it was enforceable, it was PMEPL’s position that it had been complied with.
The Court held that the LTC dispute resolution clause was enforceable, but that it had been satisfied by the parties’ pre-issue negotiations. Having distinguished a number of English authorities, which would otherwise have bound the Court, the Judge found the clause to be complete (with negotiations subject to the “identifiable standard” of good faith, namely fair, honest and genuine discussion), certain (due to the inclusion of a time frame and clear terms), and, overarchingly, in the public interest.
Interestingly, the Court appeared to be persuaded by international case law relied upon by ETA in support of their argument that the condition precedent was enforceable, most notably the Australian case of United Group Rail v Rail Corporation New South Wales2, which concerned a similar clause requiring the parties to undertake“genuine and good faith negotiation with a view to resolving the dispute”.
Emirates Trading Agency LLC v Prime Mineral Exports Private Limited will clearly be of interest to all parties with contracts containing tiered dispute resolution clauses requiring pre-emptive friendly negotiations in good faith, and within a limited period of time. The judgment demonstrates that an agreement to discuss settlement can be binding, although it remains to be seen whether the Court’s reasoning will be adopted by other judges interpreting similar dispute resolution clauses.
Nevertheless, what is clear from this judgment is that certainty in the parties’ intentions and the wording of the clause is key. (For example, the Judge drew a distinction between the inclusion of the words “may” and “shall”in the clause and the parties’ obligations in relation to the dispute resolution process as a result.) Therefore, a party seeking to negotiate a clause which starts the dispute resolution process with “friendly” (and potentially time-limited) discussions should try to agree clear wording setting out a straightforward procedure and unambiguous time frame. Parties to existing contracts which contain time-limited dispute resolution clauses need to be aware that such clauses may now impose condition precedents to be satisfied before issuing legal proceedings.