Introduction

Multi-tiered dispute resolution clauses provide for several distinct stages in resolving disputes. They typically require the parties to first attempt an amicable settlement, perhaps through negotiation or mediation, before resorting to arbitration or litigation.

The view under English law is that if the parties identify a particular procedure in sufficient detail, (e.g. mediation administered by a specific mediation institution) to be completed prior to arbitration or litigation, this particular procedure is usually considered a 'condition precedent' to arbitration. However, agreements to arbitrate that incorporate a requirement for friendly or amicable discussions have been considered too uncertain to be enforced by English courts.

However, the English Commercial Court has ruled recently that an agreement to first seek to resolve a dispute by "friendly discussion" constituted an enforceable condition precedent to arbitration.1 This judgment represents a stark change in the English courts’ position on the enforceability of agreements to negotiate in dispute resolution clauses and is something for contract drafters to consider when negotiating English law agreements.

Background

In June 2010, Prime Mineral Exports Private Limited ("PMEPL") commenced ICC arbitration proceedings against Emirates Trading Agency LLC ("ETA") under a Long Term Contract (the "LTC") between the parties.

Clause 11 of the LTC provided as follows:

“11.1 In 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 dispute to arbitration.”

The arbitrators held that clause 11.1 did not contain an enforceable obligation but that if it did, it had been complied with, such that the arbitral tribunal therefore had jurisdiction. ETA applied to the Commercial Court for an order that, on the contrary, the arbitral tribunal lacked jurisdiction to hear and determine PMEPL’s claim against ETA.

Judgment

The construction of clause 11.1

The judge, Teare J, found that the requirement to engage in "friendly discussion" was a condition precedent to referring the claim to arbitration. The effect of the last part of clause 11.1 was not that the friendly discussions must last for four continuous weeks, but that a period of four weeks must elapse before arbitration could be invoked. Thus the discussions could last for less than four weeks (as little as one day, depending on the nature of the dispute and the proposals put forward to resolve it), in which case a party would have to wait for a period of four continuous weeks to elapse before it was able to commence arbitration.

The enforceability of clause 11.1

The court acknowledged that English law does not consider "agreements to agree" to be enforceable and that requiring the parties to engage in friendly discussion was no more than an agreement to negotiate.

However, the court distinguished ETA v PMEPL from the leading case of Walford v Miles [1992] 2 AC 128 and other authorities:

  • In this case, Clause 11.1 is a dispute resolution clause within a binding contract obliging the parties to seek to settle a dispute under that contract within a time limited period. In contrast, there was no concluded contract at all in Walford v Miles.
  • The obligations in the clause in Sulamerica CIA Nacional de Seguros SA and others v Enesa Engenharia SA and others [2012] EWCA Civ 638 was to seek to have the dispute resolved amicably through mediation rather than by friendly discussions in good faith. In the judge's view, while an agreement to mediate without a named mediator, or an agreed process for appointing one, was incomplete, an agreement to seek to resolve a dispute by friendly discussions in good faith was complete.

The International Precedents

In Singapore, agreements requiring parties to negotiate in good faith will be upheld by the court as far as possible. The Singapore court has emphasised that such clauses are in the public interest and the promotion of consensus was a cultural value worthy of endorsement. This principle has been expressly extended to agreements containing dispute resolution clauses requiring that any dispute first be resolved by mediation or negotiation.2

Similarly, in Australia, the court has held that it was in the public interest to give effect to such dispute resolution clauses to encourage parties to resolve disputes without the need for expensive arbitration or litigation.3

It is an interesting feature of the Emirates Trading Agency case that the court took account of, and based his decision upon, a broad range of international case law in Australia, Singapore and the approach of ICSID tribunals on this point.

Friendly discussions

In the court’s view, amicable resolution of a commercial dispute typically involves consideration of the parties’ wider commercial interests, reference to which might enable the parties to settle disputes that might otherwise be difficult to settle. Whilst it had been thought in the past that an agreement to engage in friendly discussions was too uncertain to be capable for enforcement, Teare J was of the view that a court is likely to be able to identify a breach of such an obligation. For example, a party who refused to discuss his claim at all could easily be shown to have breached the obligation to seek to resolve disputes by friendly discussion. In appropriate cases, damages could be awarded for loss of a chance.

Further, Teare J considered that the obligation to seek to resolve disputes by friendly discussion must import an obligation to seek to do so in good faith. He disagreed with the view of previous judges that the concept of good faith is too open-ended to provide a sufficient definition of what such an agreement must, at a minimum, involve and when it can objectively be determined to be properly concluded. In his view, good faith "connoted both honesty and the observance of reasonable commercial standards of fair dealing. Where a party clearly fails to honour such standards of conduct judges and commercial arbitrators will have no particular difficulty in recognising and identifying such failures."

Comment

It remains to be seen how far the court's reasoning will be applied by other judges interpreting such clauses. Parties should be aware that the English courts may now enforce a time-limited requirement to seek to resolve a dispute by good faith negotiations as a condition precedent to arbitration.