Court holds that an agreement to negotiate in good faith within a limited period is enforceable

Clyde & Co for claimant

The dispute resolution clause in the agreement entered into between the parties contained the following wording (in relevant part): “In case of any dispute....the Parties shall first seek to resolve the 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”.

The parties did have a dispute, arbitration was commenced and the claimant applied to court for an order under section 67 of the Arbitration Act 1996 that the tribunal lacked jurisdiction to determine the claim because the condition precedent set out in the clause above (i.e. a requirement to engage in time limited negotiations) had not been fulfilled and hence arbitration could not take place.

There is prior caselaw to the effect that an agreement to negotiate is unenforceable, on the basis that it lacks certainty (see Walford v Miles [1992]). A further reason advanced for this stance is that an obligation to negotiate is inherently inconsistent with the position of a negotiating party (e.g. a negotiating party should be able to threaten to withdraw from negotiations in the hope that better terms are offered by the other side).

Teare J reviewed this prior caselaw but concluded, (relying on Australian caselaw), that prior caselaw can be distinguished from this case because of the time-limited nature of the provision here. He held that:

  1. The provision here was complete, in the sense that no essential term was lacking.
  2. An obligation to seek to resolve disputes by friendly discussions must import an obligation to seek to do so in good faith.
  3. A time limited obligation to seek to resolve a dispute in good faith should be enforceable.
  4. An agreement to seek to resolve a dispute by discussion or negotiation does not prevent the parties considering their wider commercial interests. They were not limited “by faithfulness and fidelity to the existing bargain”. The matters which can be raised in such discussions are “unlimited”.
  5. An argument that a party has not acted in good faith  is not too uncertain. It may be difficult to establish, but an example would include a party refusing to negotiate at all. Teare J said that: “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”.

Teare J went on to distinguish this case from the Court of Appeal decision in Sulamerica v Enesa Engenharis (see Weekly Update 17/12, where a mediation clause was held to be unenforceable because it failed to define the parties’ rights and obligations with sufficient certainty), on the following basis: “Since the obligation in that case was to seek to have the dispute resolved amicably through mediation rather than by friendly discussions in good faith I have considered whether this is a material distinction given that mediation is merely a supervised form of discussion or negotiation with a view to resolving a dispute. However, I consider that it is a material distinction because in the absence of a named mediator or an agreed process whereby a mediator could be appointed the agreement was incomplete.An agreement to seek to resolve a dispute by friendly discussions in good faith is not incomplete”.

He went on to find that the condition precedent had been met here. He did not believe it was necessary to show that the friendly discussions lasted for four continuous weeks, but even if this was necessary, that condition had been met: “Although no meetings lasted for four continuous weeks, the discussions can fairly be regarded as doing so”.

COMMENT: Although this case is noteworthy as a departure from the general principle that an agreement  to negotiate is unenforceable, Teare J’s belief that “wider commercial interests” can be taken into account when assessing if the negotiations have been conducted in good faith might, in practice, weaken the impact of his decision.

Examples of bad faith were given in the Australian  case referred to in the judgment: “A party, for instance, may well not be entitled to threaten a future breach of contract in order to bargain for a lower settlement sum than it genuinely recognises as due. That would not, in all likelihood, reflect a fidelity to the bargain. A party would  not be entitled to pretend to negotiate, having decided not to settle what is recognised to be a good claim, in order to drive the other party into an expensive arbitration that it believes the other party cannot afford. If a party recognises, without qualification, that a claim or some material part of it is due, fidelity to the bargain may well require its payment. That, however, is only to say that a party should perform what it knows, without qualification, to be its obligations under a contract. Nothing … prevents a party, not under such a clear appreciation of its position, from vindicating its position by self-interested discussion as long as it is proceeding by reference to an honest and genuine assessment of its rights and obligations”.

However, that view was expressly rejected by Teare J: “The scope of the negotiations contemplated by Alsopp P. appears to me to be unrealistically narrow. He states that the negotiations will be “anchored” in the parties’ assessment of their rights and obligations under their contract. … But amicable resolution of a commercial dispute (whether by the parties themselves or by mediation, that is, discussions led, encouraged or facilitated by a mediator) typically involves consideration, not only of the contractual rights and obligations which parties have assumed, but also of the parties’ wider commercial interests.”

Although Teare J did come up with one example of potential lack of good faith (ie a blank refusal to negotiate at all), that might prove problematic in practice. For example, what if the refusing party wishes to force an arbitration in the belief that the other side could not afford to pursue that more expensive route? Would that be a valid commercial reason and hence justify a finding of good faith?

There was also no discussion in the case as to what the position would be should a limitation period be about to expire before the end of the period specified for negotiations. It is unclear whether a party would be able to commence arbitration and then seek a stay whilst negotiations take place.