Arbitration update: English High Court finds enforceable, an agreement between parties to resolve disputes by “friendly discussion” as a pre-condition to arbitration.

by Reed Smith
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Introduction

On 1 July 2014 the Honourable Mr Justice Teare handed down an important judgment in the case of Emirates Trading Agency LLC v Prime Mineral Exports Private Limited [2014] EWHC 2104 (Comm) following an appeal by Emirates Trading Agency LLC (“Emirates”) challenging the jurisdiction of a tribunal.

The judgment is important as it takes one step further, the thus far reluctant support of the courts (at least at home) to hold parties to agreements or obligations to negotiate disputes in good faith as a pre-condition to arbitration.

Emirates applied, pursuant to s.67 of the Arbitration Act 1996, for an order that the arbitral tribunal lacked jurisdiction to hear and determine a claim brought by Prime Mineral Exports Private Limited (“Prime Mineral”) on the basis that the condition precedent to arbitration, namely an agreement to enter into time limited negotiations, had not been satisfied.

Mr Justice Teare (overturning the tribunal’s finding on the point) found that an obligation on the parties to seek to resolve disputes by “friendly discussion” was legally enforceable. However, on the facts, the Court decided that the pre-condition to arbitration had, in fact, been complied with and therefore the Tribunal did have jurisdiction in any event.

The judgment provides a review of the obligations on parties in relation to pre-conditions to arbitration and the distinction between those agreements to negotiate in good faith which are enforceable and those which are merely “agreements to agree”.

Brief facts of the case

Emirates agreed to purchase iron ore from Prime Mineral pursuant to the terms of a Long Term Contract dated 20 October 2007 (the “LTC”). Emirates failed to lift the required quantity of iron under the LTC as a result of which Prime Mineral claimed liquidated damages.

On 1 December 2009 Prime Mineral served a notice of termination under the LTC. The claim was referred to arbitration in June 2010 pursuant to clause 11 of the LTC which provided as follows:

“In case of any dispute or claim arising out of or in connection with or under this LTC including on account of [any] breaches/defaults … 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 consuLTCtion 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 dispute to arbitration.”

Parties’ arguments

In arguing for the enforceability of the clause, Emirates submitted that the condition precedent was “a requirement to enter into time limited negotiations”, and that the time limit made all the difference. On the basis that the parties had not negotiated for the requisite period of four weeks, the tribunal lacked jurisdiction.

Prime Mineral argued that the condition precedent was unenforceable, because it was a mere agreement to negotiate, but that even if it was enforceable then it had been satisfied and therefore the Tribunal had jurisdiction in any event.

The tribunal held that the pre-condition was not enforceable but, even if it was, the parties had complied with it in any event. It was common ground that the application was a re-hearing of the jurisdictional challenge.

The Court’s analysis

Construction

In relation to the construction of the dispute resolution clause, the Court found and made the following observations:

  1. The use of the word “shall” in clause 11 denoted a mandatory obligation on the parties to seek to resolve claims by “friendly discussion”.
  2. This obligation constituted a condition precedent to the right to refer a dispute or claim to arbitration.
  3. The parties were only obliged to wait for a period of four weeks before the matter could be referred to arbitration (as opposed to the friendly discussions having to actually last for four weeks).

In line with the sentiments of recent decisions in other common law jurisdictions, the Court observed that it is to the advantage of all parties if arbitration can be obviated by pre-emptive negotiation by the parties.

Enforceability

Relying on Lord Ackner’s judgment in Walford v Miles [1992] 2 AC 128, Prime Mineral submitted that the obligation to seek to resolve a claim by “friendly discussion” was a mere agreement to negotiate and therefore unenforceable.

Having reviewed a number of authorities concerning agreements to negotiate and agreements to agree, including Cable & Wireless v IBM [2002] EWHC 2059 and Wah v Grant Thornton [2013] 1 Lloyd’s Law Reports 11, the Court stated that:

“The authorities to which I have referred suggest that in English law as it is presently understood, the obligation in clause 11 of the LTC is unenforceable. The obligation to seek to resolve a claim by friendly discussions is no more than an agreement to negotiate with a view to settling the dispute between the parties.”

The Court cited, as examples of where such agreements had been held to be unenforceable, the authorities of Itex Shipping v China Ocean Shipping [1989] 2 Lloyd’s Reports 522 and Paul Smith v H&S International Holding [1991] 2 Lloyd’s Reports 127.

The Court’s decision

The Court decided that the obligation on the parties to seek to resolve the dispute by “friendly discussion” was enforceable, stating that there is much to be said for the view that a time limited obligation to seek to resolve a dispute in good faith should be enforceable.

In coming to its decision, the Court relied heavily on recent Australian, Singaporean and ICSID decisions. In particular, the Court found the reasoning of Alsopp P in the Australian case of United Group Rail Services v Rail Corporation New South Wales (2009) 127 Con LR 202 to be persuasive and echoed the reasoning in that case by stating that:

“The agreement is not incomplete; no term is missing. Nor is it uncertain; an obligation to seek to resolve a dispute by friendly discussions in good faith has an identifiable standard, namely, fair, honest and genuine discussions aimed at resolving a dispute.”

The Court also referred to the Singaporean judgment of Menon CJ in International Research Corp. PLC v Lufthansa Systems Asia Pacific Pte Ltd [2012] SGHC 226 in which the High Court overturned a tribunal’s finding that a clause referring to arbitration disputes “which cannot be settled by mediation” too uncertain to be unenforceable. That case, in turn, followed a Court of Appeal decision in which it was made clear that the Singapore courts were supportive of “negotiate in good faith” agreements. The Court stated these were in the public interest as they promoted the consensual disposition of potential disputes.

In coming to its decision, Teare J confirmed that he did not consider himself bound by the English appellate authorities of Walford v Miles and Sul America v Enesa Engenharis [2012] 1 Lloyd’s Reports 671, as these authorities could be distinguished on the facts.

In relation to previous non-binding first instance decisions in which the Courts had been reluctant to enforce agreements to negotiate, Teare J specifically noted that none of those decisions had considered the cogent arguments expressed by Alsopp P in the Australian case of United Group Rail Services v Rail Corporation New South Wales.

Comment

The judgment provides guidance to litigants as to how the English Courts will now interpret and enforce time limited agreements to negotiate before allowing parties to proceed to arbitration.

The English Courts appear to be shifting towards an approach adopted by other common law jurisdictions, most notably the approach of the Courts in Australia and Singapore as referenced in the judgment.

There is no doubt that any shift in approach which both gives effect to the free contract will of the parties and the public benefit of encouraging resolution of disputes before legal or arbitral proceedings incept is to be welcomed. However, has this come at the cost of legal certainty in this case? In the English High Court Case of Wah v Grant Thornton, the Court stated that:

“In the context of a positive obligation to attempt to resolve a dispute … amicably before referring a matter to arbitration … the test is whether the provision prescribes, without the need for further agreement: (a) a sufficiently certain and unequivocal commitment to commence a process; (b) from which may be discerned what steps each party is required to take to put the process in place; and which is; (c) sufficiently clearly defined to enable the court to determine objectively: (i) what under that process is the minimum required of the parties to the dispute in terms of their participation in it; and (ii) when or how the process will be exhausted or properly terminable without breach.”

[Our emphasis]

As was considered by Hildyard J in Wah v Grant Thornton, in our view there is much to be said for the requirement of legal certainty that pre-conditions to arbitration contain a sufficiently clear and defined process by which the Courts can determine whether the parties have complied with that process.

Although the clause in Emirates was time limited to four weeks, the modality by which the parties were obliged to resolve disputes or claims, namely by “friendly discussion” does seem a nebulous standard and to be missing any form of meaningful “process” as considered in Wah v Grant Thornton.

Clearly the process in this case was not sufficiently clear that the parties could agree on the jurisdictional status of the tribunal, which was finally referred to the courts. We have no doubt that time limited and structured agreements to negotiate as pre-conditions to arbitration are surely to be encouraged. However, we wonder whether the courts’ willingness to find enforceable, such nebulous standards of pre-conditions to arbitration (such as “friendly discussion”) is likely to encourage the very evil that those pre-arbitral obligations seek to quell, namely further litigation in the form of jurisdictional challenges.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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