UK: English Commercial Court Enforces Obligation To Resolve Disputes By Friendly Discussion Prior To Arbitration

Last Updated: 19 November 2014
Article by Chris Kidd

Emirates Trading Agency LLC v. Prime Mineral Exports Private Limited [2014] EWHC 2104

The English courts have previously grappled with the extent to which agreements to negotiate are unenforceable.

The previous authorities

In Walford v. Miles [1992] 2 AC 128, it was held that an agreement by the owner of a business to terminate negotiations to sell the business to a third party in exchange for the Claimant's promise to continue negotiations to buy the business lacked the necessary certainty and was unenforceable. How would the court police such an agreement?

This thinking underpinned later cases relating to dispute resolution clauses. In Cable & Wireless v. IBM [2002] EWHC 2059, the Court commented that an obligation to attempt in good faith to settle a dispute would have been unenforceable because of an obvious lack of certainty, but the contractual obligation to attempt in good faith to settle a dispute through alternative dispute resolution (ADR) was sufficiently certain to be enforced because the procedure to be followed was that recommended by the Centre for Effective Dispute Resolution (CEDR).

Also in Holloway v. Chancery Mead Limited [2007] EWHC 2495, the Court reviewed authorities concerning the enforceability of ADR agreements and agreements to agree, concluding that to be enforceable they had to be sufficiently certain, administrative procedures for selecting a party to resolve the dispute should be defined, and a process to be followed should be defined or sufficiently certain.

In Sul America v. Enesa Engenharis [2012] 1 LLR 671,the Court of Appeal had no doubt that a clause stipulating that prior to arbitration the parties would seek to resolve disputes amicably by mediation was enforceable and a clause that did not set out a defined mediation process or refer to the services of the specific mediation provider would not amount to an enforceable obligation to mediate. Also in WAH v. Grant Thornton [2013] 1 LLR 11, it was held that obligations in the dispute resolution clause were too nebulous to be given legal effect as an enforceable condition precedent to arbitration. To be enforceable, an obligation to attempt to resolve a dispute amicably before referring to arbitration needed to be:

"(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."

However, what if the multi-tiered dispute resolution clause does not require mediation but simply requires that the parties "shall first seek to resolve the dispute or claim by friendly discussion"?  Is it also no more than an unenforceable agreement to negotiate? 

At least two judges have previously taken that view on similar clauses. Others have, however, been taking the view that Walford v. Miles arguably frustrates the reasonable expectation of parties that the courts will uphold what they have agreed (see, for example Petromec Inc v. Petroleo Brasilerio [2005] All ER 209).  Likewise, the courts in other countries, notably Singapore and Australia, have also supported this approach.

Emirates Trading Agency v. Prime Mineral Exports

It appears that the English Commercial Court is also now willing to apply this reasoning.  In this recent case, the Court considered the following dispute resolution clause:

"....the Parties shall first seek to resolve the dispute or claim by friendly discussion.... 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...."

The Court held that it was enforceable:

"Such an agreement is complete in the sense that no essential term is lacking.... There would not be an open-ended discussion concerning each party's commercial interests without regard to the rights and obligations under the LTC [long term contract]. Thus the agreement has sufficient certainty to be enforceable...Concluding that the obligation was enforceable would be consistent with the public policy of encouraging parties to resolve disputes without the need for expensive arbitration or litigation..."

More surprisingly, the Court went on to say that the obligation to seek to resolve disputes by friendly discussions must import an obligation to seek to do so in good faith. Whilst recognising that it might be difficult to establish that a party has not acted in good faith, there might be cases where that can be shown e.g. where a party refuses to negotiate. The Court did not accept that good faith is too open ended a concept to provide a sufficient definition of what such an agreement must involve: good faith meant "both honesty and the observance of reasonable commercial standards of fair dealing".

Comment

How this is to be applied in practice remains to be seen, particularly in light of the observation in Walford v. Miles that a party is "entitled to pursue his ... own interest" and to "advance that interest he must be entitled, if he thinks it appropriate, to threaten to withdraw from further negotiations or to withdraw in fact in the hope that the opposite party may seek to reopen the negotiations by offering him improved terms".

To introduce an obligation of good faith may be easy to state but turn out to be unworkable in practice and will almost certainly introduce uncertainty and difficulties for those involved in "friendly discussions" and giving effect to multi-tiered dispute resolution clauses.

We understand that permission to appeal has been refused by the Court of Appeal.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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