English High Court: requirement to engage in time limited "friendly discussions" before arbitration is enforceable

In the 1 July 2014 decision in Emirates Trading Agency LLC v Prime Mineral Exports Private Limited [2014] EWHC 2104 (Comm), Teare J considered whether the parties' agreement to first seek to resolve a dispute by "friendly discussion" constituted an enforceable condition precedent to arbitration.

In a decision which gives more 'bite' to a "friendly discussion" clause than has previously been the case in English authorities, Teare J ruled that holding a "friendly discussion" acted as a condition precedent to arbitral jurisdiction. The English courts have so far generally not enforced an agreement to negotiate (see Walford v Miles [1992] 2 AC 128 and Cable & Wireless v IBM [2002] EWHC 2059 (Comm)) or an agreement to settle disputes amicably (see Sulamerica CIA Nacional de Seguros SA and others v Enesa Engenharia SA and others [2012] EWCA Civ 638). This judgment represents a stark change in the English courts' position on the enforceability of agreements to negotiate in dispute resolution clauses.

Background

In June 2010, Prime Mineral Exports Private Limited (PMEPL) commenced ICC arbitration proceedings against Emirates Trading Agency LLC (ETA) under a Long Term Contract (the LTC) between the parties.

Clause 11 of the LTC provided 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 consuLTCtion [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 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"). The arbitration shall be conducted in the English language..."

The arbitrators held that clause 11.1 did not contain an enforceable obligation but that if it did, it had been complied with – and that the tribunal therefore had jurisdiction.

The case before Teare J was ETA's application pursuant to section 67 of the Arbitration Act 1996 for an order that, on the contrary, the arbitral tribunal lacked jurisdiction to hear and determine PMEPL's claim against ETA.

Judgment

The construction of clause 11.1

Teare J found that friendly discussions to resolve the claim were a condition precedent to the right to refer a claim to arbitration. The effect of the last part of clause 11.1 was not that the friendly discussions must last four continuous weeks, but that a period of four weeks must elapse before arbitration could be invoked. Thus the discussions could last for less than four weeks (as little as one day, depending on the nature of the dispute and the proposals put forward to resolve it), in which case a party would have to wait for a period of four continuous weeks to elapse before it was able to commence arbitration.

The enforceability of clause 11.1

Having considered Walford v Miles and subsequent cases, Teare J acknowledged that these authorities suggested that in English law as it is presently understood the obligation in clause 11.1 was unenforceable. The obligation to seek to resolve a claim by friendly discussions was no more than an agreement to negotiate with a view to settling the dispute between the parties.

He went on to find, however, that the relevant appellate authorities could be distinguished, as follows.

• While Teare J acknowledged that the time limitation in clause 11.1 avoided the difficulty identified in Walford v Miles of having to imply a term as to the period of time during which the parties were obliged to negotiate, he did not accept ETA's argument that this was sufficient basis for distinguishing the case. In his view, Walford v Miles could be distinguished on the facts because it was not a case of a dispute resolution clause within a binding contract obliging the parties to seek to settle a dispute under that contract within a time limited period. Teare J referred to Longmore LJ's observation in Petromec Inc v Petroleo Basileiro SA Petrobas [2005] AER 209 that Walford v Miles concerned a case where there was no concluded contract at all (since it was "subject to contract"), contrasting it with a case where the agreement to agree was but one term of an otherwise concluded contract.
• The obligation in the clause in Sulamerica CIA Nacional de Seguros SA and others v Enesa Engenharia was to seek to have the dispute resolved amicably through mediation rather than by friendly discussions in good faith. Teare J considered this to be a material distinction. In his view, while an agreement to mediate without a named mediator, or an agreed process for appointing one, was incomplete, an agreement to seek to resolve a dispute by friendly discussions in good faith was not.

As for the observations by first instance judges that an agreement to seek to settle disputes arising under an existing and enforceable contract by negotiation was unenforceable, Teare J noted that he was not bound by such observations. Teare J found that he was thus not bound by authority to hold that clause 11.1 was unenforceable.

ETA relied on Australian authority in the case of United Group Rail Services v Rail Corporation New South Wales (2009) 127 Con LR 202, Singaporean authority in the case of International Research Corp. PLC v Lufthansa Systems Asia Pacific Pte Ltd. [2012] SGHC 226 and the approach of ICSID tribunals as in the case of Tulip Real Estate Investment and development Netherlands BV v Republic of Turkey (ICSID Case No. ARB/11/28) in its argument that Teare J should not follow what appeared to be the present settled state of English law on the question.

It is an interesting feature of the case that Teare J took account of, and based his decision upon, this broader range of international case law on the point. Teare J was persuaded in particular by the "cogent reasoning" in the Australian case, and considered it significant that this had not been considered in any of the relevant English first instance cases. In particular, Teare J echoed the views of Alsopp P in United Group Rail Services v Rail Corporation New South Wales in reasoning that: "[t]he 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. Difficulty of proving a breach in some cases should not be confused with a suggestion that the clause lacks certainty."

Teare J considered that judges and commercial arbitrators would have no particular difficulty in recognising when a party had clearly failed to seek to resolve a dispute in good faith. In some cases, in the words of Alsopp P, it will be "blindingly obvious" – for example where a party completely refuses to discuss its claim before seeking to commence arbitration. In such a case, if the obligation to seek to resolve the dispute was found unenforceable, "that would mean that a party could ignore his apparent obligation".

Teare J further echoed the views of Alsopp P in reasoning that it was in the public interest to give effect to such dispute resolution clauses: "first, because commercial men expect the court to enforce obligations which they have freely undertaken and, second, because the object of the agreement is to avoid what might otherwise be an expensive and time consuming arbitration". On this point, Teare J disagreed with the principal reason underlying Lord Ackner's judgment in Walford v Miles, namely that an obligation to negotiate is inherently inconsistent with the position of a negotiating party – in his view, it was not appropriate to suggest this when the parties had voluntarily accepted the restriction on their freedom in the dispute resolution clause.

Friendly discussions

Teare J expressed concern at Alsopp P's statement in the Australian judgment that the negotiations would be "anchored" in the parties' assessment of their rights and obligations under their contract. In Teare J's view, the type of matter which could legitimately be raised in such friendly discussions was unlimited. He noted that amicable resolution of a commercial dispute typically involves consideration of the parties' wider commercial interests, reference to which might enable the parties to settle disputes which might otherwise be difficult to settle.

Teare J's finding on the facts was that the parties had ongoing "friendly discussions" in which they sought in good faith to resolve PMEPL's claim. He noted that it must have been obvious to those attending the meetings that the parties were seeking to find a solution which avoided the need for PMEPL to take their claim to arbitration, even if such claim may not have been mentioned in terms. The giving of a notice to enter into friendly discussions was not a mandatory requirement.

Further, if contrary to his view on the construction of clause 11.1 it was necessary to show that the friendly discussions lasted for four continuous weeks, then the friendly discussions did last for the required period.

Comment

It is often the case that agreements to arbitrate which incorporate a "friendly discussion" clause give rise to jurisdictional wrangles at the outset of the arbitration, first as to whether the clause has legal effect, and second as to whether the obligation (if any) has been discharged. So it was here. In such cases, the arbitral tribunal will often answer the point by finding it has jurisdiction on the basis that if there is a legal obligation, there is enough in the factual record to show that it has been satisfied.

Teare J's finding on the enforceability of the requirement to seek to resolve a dispute by friendly discussions in good faith before the dispute can be referred to arbitration represents a stark departure from the general position in English law – which, as he acknowledged, is that an agreement to settle disputes amicably is unenforceable.

On the one hand, it can fairly be argued that there is good sense in holding parties to their agreement to have some form of discussion before having recourse to arbitration; after all, if the parties may simply disregard the "friendly discussion" wording, then this denudes that element of the contract of any effect. Against this, commercial parties and their advisers will be troubled to see that reference to the uncertain concept of "friendly discussions", particularly when informed by the sometimes nebulous standard of "good faith", may preclude them from proceeding to arbitration at the time of their choosing. Moreover, the case will provide encouragement for reluctant Respondents to challenge the commencement of arbitration for tactical reasons – and this will likely happen in situations where the merits of the jurisdictional point are much weaker than on these facts.

It remains to be seen how far Teare J's reasoning will be applied by other judges interpreting such clauses. In the meantime, as Teare J ultimately dismissed ETA's application under section 67 of the Arbitration Act 1996 on the basis of his finding on the facts that the condition precedent to arbitration was satisfied, and has since refused ETA permission to appeal, parties should be aware that the English courts may now enforce a time-limited requirement to seek to resolve a dispute by good faith negotiations as a condition precedent to arbitration.

For further information, please contact Craig Tevendale, Partner, Naomi Lisney, Associate, or your usual Herbert Smith Freehills contact.