'Emirates’ is a name that executives will come to remember. Not the airline, nor the football stadium, but a recent High Court case. The Emirates case1 emphasises that parties in a contractual relationship will be held to negotiate as the primary means of resolving a dispute – where both parties had agreed when entering into the contract.

This case concerned a claim for liquidate damages under a commodity contract, followed by its termination. It has implications for commercial contracts in the food and drink sector.

After an initial round of inconclusive discussions, an arbitration was commenced by Prime Mineral Exports. But Emirates argued that the arbitration should be stopped as it had been commenced prematurely, relying on the terms of the parties’ contract.  This stated: “In case of any dispute or claim arising out of or in connection with or under this [Agreement] … the parties shall first seek to resolve the dispute or claim by friendly discussion. If no solution can be arrived at between the parties for a continuous period of four weeks, then the non-defaulting party can invoke the arbitration clause and refer the disputes to arbitration”.

The main issue was whether this was an enforceable commitment to talk? A second question involved the meaning of the curious reference to the ‘continuous period of four weeks’ for the discussions to take place.

Since a well-known case in the early 1990s, it has been clear that agreements to negotiate are not enforceable in the English courts if there is not sufficient evidence that steps had been taken. On the other hand, an agreement to refer a dispute to a named mediation body (which incorporated its rules) was viewed as acceptable in a 2002 case. Last year, the Commercial Court said that an agreement to negotiate in good faith was “too open-ended”. But a positive obligation requiring disputes to be resolved amicably before litigation, and that it is clearly defined to enable a court to decide what had to be done by the parties, would be given effect.

The clause in the Emirates case lies in the middle of these two positions. Many lawyers would not have expected the Emirates negotiation clause to be enforced. What constitutes a ‘friendly discussion’? It’s a vague term. But the judge said there was a public interest in giving effect to the agreement made by commercial parties to prevent either launching expensive litigation or arbitration. Especially where this was a time-limited obligation. The agreement in the relevant clause was, the judge decided, ‘not incomplete’ so it could be enforced. The clause did not require a continuous period of negotiation; it just meant that purposeful discussions should take place over at least that short period of time. The word ‘continuous’ in the clause was effectively ignored.

A much clearer negotiation clause than in Emirates is preferable. Some courts will consider ‘friendly discussions’ too nebulous a concept – for example, is holding hotly-contested negotiations compliant?

Away from the specifics of this case, the message is that where contracts between parties include ‘negotiation-first, litigation second’ clauses it should be assumed they will be held to holding such discussions. Occasionally, such a clause is viewed as a good idea at the point of entering the contract, but later regretted. If that’s likely in your case, don’t agree to having the clause in the contract. Negotiations or a mediation to resolve a dispute can take place without a prior arrangement – assuming the other party agrees to that when it’s in dispute.