The English courts have historically shown some reluctance to enforce agreements to “negotiate” or engage in “discussions” where these are conditions precedent to commencing arbitration or litigation. In the leading authority Sulamerica v Enesa the Court of Appeal considered that a clause requiring the parties to "seek to have the dispute resolved amicably by mediation" was not sufficiently precise to be binding.
However, by contrast, the July 2014 decision in Emirates Trading v Prime Mineral Exports may well signal a shift towards the enforceability of such clauses. In that case, the High Court held that the parties' agreement to first seek to resolve disputes by way of "friendly discussion" over four weeks (prior to arbitral proceedings) was enforceable.
This case highlights the following:
- Parties entering into contracts that contain draft escalation clauses should be alive to the possibility that, where such clauses contain a time limit, the courts may be more inclined to view these as enforceable conditions precedent.
- In the event of a dispute, parties should read their existing dispute resolution clauses with care to ensure they follow any conditions precedent before commencing litigation or arbitration
- In practice, the time period specified for negotiation or discussion may be no more than a cooling off period before proceedings. However, it is still advisable that parties demonstrate some degree of engagement with the mechanism provided for. Any failure to do so may be bad faith.
The Claimant, Emirates Trading Agency LLC (ETA), and the defendant, Prime Mineral Exports Private Limited (PMEPL), entered into a Long Term Contract (LTC) for the sale and purchase of iron ore. After ETA's failure to take up the requisite quantity of iron ore, the parties entered into talks and several meetings took place where the dispute was discussed. Ultimately, the discussions failed and the matter was referred to arbitration.
The dispute resolution clause of the LTC provided that “In case of any dispute or claim… the Parties shall first seek to resolve the dispute or claim by friendly discussion... if no solution can be arrived at in 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 brought an application under section 67 of the Arbitration Act 1996 for an order that the arbitral tribunal lacked jurisdiction to hear the claim brought by PMEPL. Following a review of the relevant authorities includingSulamerica, the High Court held that the condition precedent to engage in "friendly discussions" for a defined period of time (ie four weeks) before the parties may commence arbitration was sufficiently certain in order to be enforceable.
The Court was willing to uphold this clause (despite previous caselaw going the other way) in part because the escalation clause provided for a mechanism with a timeframe and an identifiable standard (ie friendly discussions implying good faith). Enforcing such an obligation was also in the interests of commercial parties and within the public policy of encouraging parties to resolve disputes without the need to resort to expensive and time-consuming litigation or arbitration. In this case, the judge held that the parties had complied with the provisions of their escalation clause and the arbitral tribunal did not lack jurisdiction to hear the dispute.
Abdul Sattar and Annabel Hayday