Agreement to negotiate held to be an enforceable condition precedent to arbitration

by Reed Smith
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This Alert looks at “tiered” dispute resolution clauses (i.e. clauses which purport to provide for a process to be followed before the dispute can be referred to arbitration/litigation). They are commonly found in commercial contracts in numerous guises. Some seek to provide for mediation, some for expert determination and some for negotiation. We look at the recent Emirates Trading Agency LLC v. Prime Mineral Exports Private Ltd. [2014] EWHC 2104 (Comm) case under English law.

Whether or not such clauses are enforceable (i.e. whether or not a party can ignore the tier(s) and proceed straight to arbitration/litigation) is an issue that has been considered by the English courts a number of times in recent years. Although invariably a question of construction, it is clear that, provided the clause is sufficiently certain, it will be enforceable. For example, in Sulamerica Cia Nacional De Seguros S.A. v. Enesa Engenharia S.A. [2012] EWCA Civ 638 a clause purportedly providing for mediation “prior to a reference to arbitration”, but failing to define the meditation process/a specific mediation provider, lacked this certainty and was held not to create an enforceable obligation to mediate.

The Emirates Trading case

In Emirates Trading, the clause in question provided as follows:

“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 consuLTCtion [sic] 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.”

In construing what was meant by the phrase “friendly discussion”, Teare J. held that these imported an obligation to seek to resolve the dispute in good faith and that such an agreement was not incomplete/too vague to be enforced. Support for this conclusion was drawn from the recent decision in Yam Seng Pte Ltd. v. International Trade Corp. Ltd. [2013] EWHC 111 (QB) (contract for a licence to distribute/supply branded goods held to contain an implied term of good faith in its performance having significance in the context of not knowingly providing false information on which the other party was likely to rely).

After a review of the authorities, Teare J. held at [63] that he was not bound to (emphasis added):

“hold that a dispute resolution clause in an existing and enforceable contract which requires the parties to seek to resolve a dispute by friendly discussions in good faith and within a limited period of time before the dispute may be referred to arbitration is unenforceable.”

Thus the clause was held to be enforceable.1 All that was required was “friendly discussion” (which might last for a day or a week). Arbitration could only be commenced if no solution could be found for a continuous period of four weeks. An argument that the “friendly discussion” had to last “for a continuous period of 4 (four) weeks” was rejected.

On the facts it was found that the arbitrators had jurisdiction i.e. friendly discussions had taken place, no solution had been found for a continuous period of four weeks and, if necessary, such discussions had lasted for four continuous weeks.

Practical guidance

  • The decision serves as the latest warning to parties that if they do wish to create an enforceable condition precedent to be satisfied before a dispute can be referred to arbitration/litigation they would be well advised to ensure that the clause clearly specifies the procedure to be undertaken.
  • Even if the clause is unclear, given the relatively basic nature of the clause in Emirates Trading, a party looking to arbitrate/litigate a dispute would be well advised to ensure they take steps to comply with the requirements of any such clause to avoid incurring the time/cost of having to rebut arguments that they have failed to do so before a tribunal/judge.
  • Such “tiered” clauses should be avoided in cases where there are strict contractual time limits for commencing court action or arbitration – they make the application of the time limits more difficult in practice and are a trap for the claimant.
  • Close regard should be given to any contractual time bars (where there is a tiered clause), to ensure that any “procedure” can be embarked upon and completed to give sufficient time to commence arbitration/issue a claim form if necessary. Otherwise the intended respondent/defendant may well look to exploit the clause to its commercial advantage, or in more extreme cases act in what some might describe as “bad faith” (it being recognised in Emirates Trading at [52] that “it may well be difficult to establish that a party has not sought to resolve a dispute in good faith”). 

  1. The reference to “existing and enforceable contract” allowing for the decision of the House of Lords in Walford v. Miles [1992] 2 AC 128 (agreement to negotiate held to be unenforceable on the basis that it was unworkable and a duty to negotiate in good faith inconsistent with the position of the negotiating party) to be distinguished.

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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