Time limited obligations to engage in “friendly discussions” before proceeding to arbitration may be binding

[We are grateful for the following guest post from Charlotte Bamford, a Trainee Solicitor currently sitting in the Commercial Litigation Group of our London office.]

In Emirates Trading Agency LLC v Prime Mineral Exports Private Limited [2014] EWHC 2104 (Comm), the Commercial court considered whether a contractual clause requiring the parties to “first seek to resolve the dispute or claim by friendly discussion” before proceeding to arbitration was enforceable, and – if it was – whether it would constitute a condition precedent to issuing arbitration proceedings.  In a departure from the existing stance demonstrated by the courts, Teare J’s judgment proclaims that such an obligation is indeed both enforceable and likely to constitute a condition precedent.

The clause in question reads as follows:

11.1 In case of any dispute or claim arising out of or in connection with or under this [contract]… 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 consuLTCion [sic] to resolve a dispute or claim.  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.

11.2 All disputes arising out of or in connection with this [contract] 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…”.

Facts

Emirates Trading Agency LLC (“ETA”) was party to a contract with Prime Mineral Exports Private Limited (“PMEPL”) under which it purchased iron ore.  Following a failure by ETA to “lift” all of the iron ore expected to be taken up in one year, and a subsequent failure to ‘lift’ any iron ore at all in a second year, PMEPL served a notice of termination of the contract and claimed $45,472,800 in liquidated damages.  Discussions between the parties ensued, but reached no conclusion.  PMEPL accordingly issued arbitration proceedings.  ETA in turn applied (under section 67 of the Arbitration Act 1996) for an order declaring that the arbitration tribunal had no jurisdiction to hear the dispute, on the basis that it was a condition precedent of the contract that the parties engage in four continuous weeks of ‘friendly discussions’ before referring the matter to arbitration.

Interpretation of the dispute resolution clause

Teare J considered that use of the word “shall” (“in case of any dispute or claim…the parties shall first seek to resolve the dispute or claim by friendly discussion”) indicated that the parties had intended that the obligation to engage in ‘friendly discussions’ would be mandatory.  By comparison, use of the word “may” in relation to the obligation to notify (“any party may notify the other party of its desire to enter into conuLTCtion [sic]”) was held to indicate that such notification was optional.

ETA’s assertion that the clause obliged the parties to engage in four continuous weeks of friendly discussions was whole-heartedly rejected by Teare J.  He stated that “it would be unrealistic to suppose that the parties intended that they must seek to resolve such a claim by friendly discussions lasting four continuous weeks” and that it was instead apparent that the clause should be read as referring to a period of time which must elapse before arbitration proceedings could be initiated.

Enforceability of agreements to negotiate

One of PMEPL’s arguments in response to ETA’s attempt to obtain a declaration that the arbitration tribunal was without jurisdiction was that agreements to negotiate are unenforceable for want of certainty.

Such an argument has grounding in a number of English cases.  In particular, in Walford v Miles [1992] 2 AC 128, it was held that a promise to continue negotiating was unenforceable as it lacked the necessary quality of certainty.  Whilst in Cable Wireless v IBM [2002] EWHC 2059 (Comm), Colman J held that, whereas an obligation to “attempt to resolve the dispute or claim through ADR” was enforceable as the procedure to be followed would be that set by the Centre for Effective Dispute Resolution (“CEDR”) and would therefore be sufficiently certain, an obligation to attempt to settle a dispute in good faith – with no reference to alternative dispute resolution – would fail on the basis of “an obvious lack of certainty”, because the court would “have insufficient objective criteria to decide whether one or both parties were in compliance”.

Agreements to settle disputes amicably were rejected on similar basis in the cases of Itex Shipping v China Ocean Shipping [1989] 2 Lloyd’s Rep 522and Paul Smith v H&S International Holding [1991] 2 Lloyd’s Rep 127.

Despite these (and other) authorities, Teare J was reluctant to find that the ETA/PMEPL dispute resolution clause was unenforceable.  He made clear his opinion that “where commercial parties have entered into obligations they reasonably expect the courts to uphold those obligations” and accordingly found ways in which to distinguish this case from the previous cases and precedents.  Walford v Miles, for example, he distinguished on the basis that the dispute in that case did not concern a concluded contract, whereas the current dispute did.  Other cases were distinguished as incomplete for various reasons, such as the fact that they referred to mediation without identifying mediators, or because they were decided without reference to United Group Rail Services v Rail Corporation New South Wales (2009) 127 Con LR 202, an Australian case, which Teare J relied on heavily.

Conclusions

Teare J held that the clause in the ETA/PMEPL contract was complete (and certain) as it was clear what the obligation was (to attempt to resolve the dispute) and it was clear what the subject matter of discussions would be (the rights and obligations arising out of the contract).

He did not consider (as had been suggested in previous cases and as was argued by the defendants) that a resolution to negotiate in good faith was inconsistent with the position of a negotiating party.  Indeed he felt such an obligation could be legitimately expected where the parties had voluntarily resolved to act in such a manner.  Nor did he consider it impossible to identify whether performance had been effected (as was also a concern in previous cases).  In this regard he explained that “whilst it may be difficult in some circumstances to establish a breach of the obligation there will be other circumstances in which a court is likely to be able to identify conduct, if it exists, which departs from the conduct expected of parties”.  For example where a party refused to engage in any discussions whatsoever, it would be clear that the obligation had been breached.

As an overriding consideration, Teare J had regard to public policy and suggested that upholding the clause would sit well with the policy of encouraging alternative dispute resolution and enabling parties to bypass costly litigation.

On the basis of the above considerations, and a finding that “friendly discussions” had taken place in December 2009, following which more than four weeks had passed before arbitration proceedings were commenced, Teare J held for the defendants and dismissed ETA’s application.

Comment

It remains to be seen whether Teare J’s reasoning will be followed in future cases, or whether higher courts will revert to the previous (and long lasting) assumption that agreements to negotiate are null and void for uncertainty.  In the meantime, parties should consider the wording of their dispute resolution clauses and be cautious of any wording that may set conditions precedent to the initiation of arbitration proceedings.  In particular, parties should note the distinction drawn between the construction of the words “may” and “shall” and how these will impact on the application of obligations.

It should also be noted that, whilst he didn’t dwell on the point, Teare J frequently described the clause with reference to the fact that the obligation was “time limited”.  It may therefore fall to argument whether the construction seen in this case will only be applicable where certainty is aided by a time constraint being in place against the obligation to engage.

About Shaun Lee

International Dispute Resolution and Arbitration lawyer. Fellow of the Chartered Institute of Arbitration. Panel of Arbitrators and Panelist for Domain Name Dispute Resolution at the KLRCA.
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