In a departure from previous case law indicating that "agreements to negotiate in good faith" are unenforceable, Teare J in EmiratesTrading Agency LLC v Prime Mineral Exports Private Limited (2014) held that a contractual clause requiring the parties to engage in "friendly discussion" before commencing arbitration proceedings was enforceable.Background and facts
Pursuant to a long term contract ("LTC") dated 20 October 2007, the Claimant, Emirates Trading Agency LLC ("ETA"), agreed to purchase iron ore from the Defendant, Prime Mineral Exports Private Limited ("PMEPL"). After ETA failed to lift all of the iron ore it was contracted to take up during the first and second shipment years, PMEPL served notice of the termination of the contract claiming the sum of $45 million in liquidated damages under the terms of the LTC. The notice stated that if this amount was not paid by ETA within 14 days, PMEPL had the right to refer the claim to arbitration in accordance with clause 11.2 of the LTC and without further notice to ETA. Clauses 11.1 and 11.2 concerning dispute resolution and arbitration were constructed 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").
Several meetings between the parties were held following the service of the termination notice in December 2009 in which ETA requested more time to find buyers for the un-lifted iron ore and attempted to persuade PMEPL to preserve and continue the LTC. In January 2010, ETA responded formally to PMEPL's termination notice claiming that the reasons for the non-performance of their obligations under the LTC were "beyond their control" and, therefore, invalid grounds for terminating the LTC. Further attempts at reaching a settlement between the parties proved unfruitful and the matter was arbitrated in June 2010. In considering the contractual provision under clause 11.1 that the parties must first seek to resolve the dispute by friendly discussion, the arbitrators found that this obligation was unenforceable and that, even if it was enforceable, it had been complied with by the parties during meetings held after December 2009. The arbitrators, therefore, found that they had jurisdiction.
ETA subsequently applied for an order under section 67 Arbitration Act 1996 (the "Arbitration Act"), that the arbitral tribunal lacked jurisdiction. ETA argued that clause 11.1 of the LTC was a condition precedent which had to be satisfied before any party had the right to refer the matter to arbitration. As this condition precedent had not been satisfied due to the lack of friendly discussion over the stipulated continuous four week period of negotiations (under clause 11.1), the arbitral tribunal lacked jurisdiction. PMEPL argued conversely, that the condition precedent in question was an "agreement to negotiate" and, therefore, unenforceable. Consequently, PMEPL claimed that the arbitrators had jurisdiction to resolve the dispute without the requirement to engage in friendly discussion.
The leading case on this matter is Walford v Miles where the House of Lords held that the Defendant's promise to continue negotiations in good faith, for a reasonable time, to buy the Claimant's business was unenforceable as the undertaking lacked the necessary certainty. Moreover, the Judge in that case held that the concept of negotiation in good faith was irreconcilable with the position and purpose of a negotiating party; that is, to get the best deal for themselves. The Court also commented on the difficulty of policing such an agreement.
Teare J dismissed ETA's application under the Arbitration Act as he found that, although the condition precedent was enforceable, it had been satisfied, and, therefore, the arbitrators had jurisdiction. The reasoning behind his judgment can be broadly split into three central arguments:
- While a bare agreement to agree is unenforceable, an obligation to resolve a dispute in good faith within a specified period of time should be enforceable, because it is not necessarily incomplete since no essential term is lacking. Just because breaches of such agreements would be difficult to police or prove, it does not mean the clause lacks real content or merit. There are conceivable cases where a party, despite the existence of this type of clause, could refuse to negotiate and seek to commence arbitral proceedings. In such cases, Teare J held that it would be unfortunate for the court to deem the contractual obligation to attempt to resolve the dispute as "uncertain" and, therefore, unenforceable as it would enable a party to ignore the obligation in the contract which they initially agreed to.
- Teare J disagreed with Hildyard J's observation in Wah v Grant Thornton that good faith is too open-ended a concept to provide sufficient definition of what such an agreement involves. Instead he preferred the Australian decision in United Group Rails Services v Rail Corporation New South Wales, which provides that good faith connotes an honest and genuine approach to settling a dispute. Therefore, an obligation to negotiate in good faith can be certain enough to be enforceable as there exists a standard against which the conduct of the parties can be measured.
- There are important public policy reasons for encouraging parties to resolve their disputes by making such clauses enforceable, as it can potentially avoid expensive and time-consuming proceedings in litigation or arbitration. Moreover, where commercial parties enter into obligations, they reasonably expect the court to uphold those obligations. Deeming such clauses as unenforceable frustrates the expectation that courts will generally give effect to parties' bargains.
Teare J was able to distinguish Walford v Miles on the facts because, unlike in Emirates, Walford was not a case of a dispute resolution clause within an otherwise binding contract obliging parties to settle a dispute within a specific time period.
On the issue of the construction of the clause, Teare J held that there was no obligation to continue friendly discussions for the four- week period continuously (as argued by ETA), rather that the parties had four weeks within which to find an amicable solution to the matter, and that if no settlement had been reached after four weeks, despite concerted attempts by the parties, the matter could go to arbitration.
This case marks a departure from the way in which the English court has previously dealt with agreements to negotiate in good faith. In this case, Teare J decided that he was not bound by English case law, but preferred to follow the decision of the Australian court in United Group Rail Services; that such agreements to engage in friendly discussion are enforceable. However, although the Judge in that case limited the scope of the good faith negotiations arising out of such clauses to an assessment of the parties' rights and obligation under the contract, Teare J averred that the negotiations could go further to include considerations of the parties' wider commercial interests. He stated that good faith connoted both honesty and the observance of reasonable commercial standards of fair dealing and that where a party clearly fails to honour such standards, judges and arbitrators will have no particular difficulty in recognising and identifying such failures.
Parties providing undertakings in agreements to negotiate in good faith to settle disputes before entering arbitration proceedings, should, therefore, be sensitive to the fact that courts may now view these clauses as a condition precedent which must be satisfied before the matter can be taken further.