We are regularly asked about the enforceability of agreements to negotiate or take other steps prior to commencing formal dispute resolution procedures, often in the context of long-term contracts. Clauses frequently take the form of a requirement to ‘negotiate in good faith’ or ‘make efforts to settle’ before commencing arbitration or court proceedings. Whilst it is always desirable to resolve a dispute in this way where possible, parties should bear in mind that the inclusion of additional steps of this sort can lead to increased time and costs, before resolving the substantive dispute has even begun.

The recent English High Court decision in Emirates Trading Agency LLC (ETA) v Prime Mineral Exports Private Limited (PMEP) (1 July 2014) will therefore be of interest to parties who have existing contracts including clauses of this type, or who are negotiating them.

ETA and PMEP were parties to a long term contract for the supply of iron ore. PMEP failed to lift the contractual quantities and ETA terminated the contract, stating that they would commence arbitration within 14 days if payment was not received. ETA did not actually refer the dispute to arbitration until around six months later. In the meantime, several meetings between the parties took place.

The contract contained a dispute resolution clause, 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 disputes to arbitration.

11.2 All disputes arising out of or in connection with this LTC shall be finally resolved by arbitration in accordance with the Rules of Arbitration of the International Chamber of Commerce (“ICC”). The place of arbitration shall be in London (“UK”). The arbitration shall be conducted in the English language…”

PMEP claimed that the clause had not been complied with and disputed the Tribunal’s jurisdiction. The Tribunal decided that the clause did not contain an enforceable obligation to engage in friendly discussions, but if it did, it had been complied with. PMEP then applied to the English High Court under s.67 of the Arbitration Act 1996, challenging the Tribunal’s jurisdiction.

PMEP’s application was rejected. The Court decided that the clause was both enforceable and had been complied with. In doing so, it took into account the following factors:

  • Both English public policy and decisions of courts in other jurisdictions supported a move towards enforcing alternative dispute resolution provisions where possible. Recent Singapore1 and New South Wales2 decisions in particular had given clear and helpful guidance on giving effect to parties’ agreements to act in ‘good faith’, and to mediate or negotiate. In circumstances where they had voluntarily restricted their rights in a manner consistent with public policy, commercial parties could reasonably expect such terms to be enforced. They had “obvious commercial sense”.
  • The role of the court was not to make parties’ contracts for them but equally, the court should not refuse to enforce terms on the basis that they might be difficult to evidence. This clause was  not open-ended, incomplete or unclear. There was no requirement for further agreement in order for matters to proceed if the negotiation was unsuccessful.
  • There was no reason in principle that the court could not decide whether the parties had acted in accordance with the clause. There would be some occasions when it would be very easy to say that a party had not acted in the spirit of the clause, for example by refusing to negotiate at all, and others where it might be more difficult. In the circumstances, ETA was able to demonstrate that it had entered into “friendly discussions” for the requisite period before commencing arbitration.
  • Higher authorities which might otherwise bind the court could be distinguished. As compared with Walford v Miles3, this was not an “agreement to agree”. This was an agreed clause contained within a no doubt heavily negotiated contract between commercial parties. There was a time limit for the negotiation period and it was intended to be compulsory. As compared with Sulamerica v Enesa4, there was no failure properly to specify the terms of a tiered dispute resolution clause. In Sulamerica, the relevant clause required mediation to take place prior to arbitration but required further detail in order to operate, such as a method for selecting the mediator and a defined mediation process.
  • The term “friendly discussions” necessarily implied an obligation of “good faith”, as confirmed by the decision in Yam Seng v International Trade Corp5.

This case has attracted attention. It does not seek to depart from the generally understood position that clear words are required to make a clause enforceable. Certainty remains the key.  However, it does mark a shift in the approach of the English courts to this kind of clause. Perhaps the most striking element is that a clause couched in the relaxed language of “friendly discussions” was interpreted as importing an enforceable obligation of good faith. This may be a result of the Court’s willingness to consider decisions from Australia and Singapore, where greater store is set on resolving disputes by consensus, in reaching its conclusion.

For now, this first instance decision stands and ETA have been refused permission to appeal. Parties should keep in mind that the English courts are now more likely to enforce a time- limited requirement to seek to resolve a dispute by good faith negotiations as a condition precedent to arbitration. They should also be aware that tiered dispute resolution clauses can sometimes add to the length and cost of resolving a dispute.