“Friendly Discussion” Clauses – giving ADR clauses a new perspective
Published: June 01, 2015
“Arbitration can be expensive and time consuming. It is far better if it can be avoided by friendly discussions to resolve a claim[1]”
Last year the English Commercial Court delivered an interesting decision enforcing a dispute resolution clause that required “friendly discussion” as a condition precedent to commencing arbitrations. This appears to be contrary to previous decisions where the English courts have taken the view that an “agreement to agree” or “agreement to negotiate” or “to settle disputes amicably” are unenforceable because they lack certainty and are too difficult to police.
Given the fact that both arbitration and court proceedings are becoming increasingly expensive, and with courts encouraging parties to settle their disputes by alternative resolution means, does the decision in Emirates Trading Agency LLC (“ETA”) v Prime Mineral Exports Private Ltd (“PMEPL”) [2014] EWHC 2014 (Comm) signal a change in approach to the enforceability of “agreements to agree” (or similar type of agreements)?
Background Facts
ETA had entered into a long term contract with PMEPL for the purchase of iron ore. During the first year of shipments ETA failed to lift all of iron ore which they had been expected to ship with the result that PMEPL claimed damages of US$1.5 million. Nothing was shipped in the second year and PMEPL terminated the contract claiming US$45.5 million in damages and stated that if their claim was not paid within 14 days they reserved the right to start arbitration in accordance with clause 11.2 of the contract without further notice. Clause 11 of contract read as follows:
11. Dispute Resolution and Arbitration
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 consultation to resolve a dispute or a claim. If no solution can be arrived at ...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 International Chamber of Commerce. The place of arbitration shall be London (UK). The arbitration shall be conducted in the English language.”
There were several meetings between the parties after the claim for US$1.5 million was served as well as after the contract was terminated prior to PMEPL starting arbitration.
Arbitration
ETA argued that clause 11.1 was a condition precedent to be satisfied before the arbitrators would have jurisdiction to hear and determine the claim and that where such condition precedent was not satisfied the tribunal did not have jurisdiction. The condition precedent was “a requirement to engage in time limited negotiations” and that requirement was not satisfied because there had not been “a continuous period of four weeks of discussions to resolve the case”.
PMEPL on the other hand argued the suggested condition precedent was unenforceable because it was a mere agreement to negotiate and if it was enforceable it had been satisfied and, therefore, the arbitrators had jurisdiction.
The arbitrators found that the clause was not an enforceable obligation requiring the parties to engage in friendly discussions but that, even if it was, that obligation had been complied with by virtue of the parties’ discussions. Accordingly the arbitrators had jurisdiction.
ETA filed an application sought an order from the English High Court that the arbitrators lacked jurisdiction to hear the dispute due to PMEPL’s alleged failure to comply with s11.1 of the contract.
High Court Decision
The court decided that the obligation on the parties to seek to resolve disputes by “friendly discussions” was an enforceable condition precedent to arbitration on the facts, had been satisfied.
In reaching this view Teare J said “where commercial parties have agreed a dispute resolution clause which purports to prevent them from launching into an expensive arbitration without first seeking to resolve their dispute by friendly discussions the courts should seek to give effect to the parties' bargain. Moreover, there is a public interest in giving effect to dispute resolution clauses which require the parties to seek to resolve disputes before engaging in arbitration or litigation.”
And interestingly that an “obligation to seek to resolve disputes by friendly discussions must import an obligation to seek to do so in good faith”, where “good faith connotes an honest and genuine approach to settling a dispute as Alsopp P said in United Group Rail Services v Rail Corporation New South Wales.
In reaching his decision Teare J. was able to distinguish a House of Lord’s decision in Walford v Miles [1992] 2AC 128 where it was decided that “agreements to agree” (or similar type of agreements) are unenforceable as they generally lack any objective certainty. Instead the court was persuaded by case law from other jurisdictions, in particular the Australian case of United Group Rail v Rail Corporation New South Wales [2009] NSWCA 117, which held that good faith agreements to negotiate (as distinct from to agree) should be given the enforceability which they deserve, and concluded that clause 11.1 was not incomplete or uncertain and that “…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”.
As such the clause was enforceable and provided both for "friendly discussions" to resolve disputes and a period of time within which to do so before which arbitration could be started. Those discussions could last for four weeks or less but arbitration could not be before that period of four continuous weeks had elapsed.
Comment
Subsequent to the decision in ETA v PMEPL another “friendly discussion” provision has made its way to the Court; Emirates Trading Agency LLC vs Sociedade de Fomento Industrial Private Limited[2]. The dispute resolution provision stated that the parties were to seek to resolve any dispute by “friendly discussions” failing which the arbitration clause could be invoked (dispute resolution provisions were similar with the above referred case). Although in this case Popplewell J decided the jurisdictional issue – that is whether or not the "friendly discussions" requirement was an enforceable condition precedent to the tribunal's jurisdiction - had been disposed of in the partial award, which was final and binding on the parties and the tribunal, and therefore that there was no need for him to comment, he did provide some interesting points as to what discussions might fall under the “friendly discussion” provision. For example discussions that sought to resolve a dispute or claim prior claimant’s putting forward a quantified claim should be sufficient and these did not need to refer to legal rights or the parties’ obligations
Although the attitude of the courts to these types of clauses may have changed, and a commercial view of what amounts to “friendly discussions” may be taken if these clauses are condition precedents to arbitration, it remains to be seen whether the ETA v PMEPL case will be followed. Accordingly contracting parties who wish to agree a contractual requirement that seeks to conclude disputes prior to arbitration or court proceedings should consider carefully and define the process through which this is to be achieved in clear and unambiguous language. Ultimately, whether such an agreement will be enforceable will be a matter of construction but if there is an agreement to negotiate and that is clearly defines the discussion process and time period in which negotiations should be conducted, such a clause may now be enforceable.
Article by Elli Marnerou, Syndicate Executive
