In recent years there has been an increasing frequency of commercial contracts that include provisions requiring disputes to be the subject of amicable discussion before being the subject of arbitration or litigation. Such provisions may in part be intended to reflect the tone of the relationship between the parties at the time when the contract is concluded and their aspirations for the future. However there is a question whether, aside from the tone, such provisions give rise to any obligations that are legally enforceable.
The recent case of Emirates Trading Agency LLC v Prime Mineral Exports Private Limited in the English High Courts[1] offers some new insights on this subject. The case concerned a long term contract for the supply of iron ore. The dispute resolution clause in the contract containing the following wording:
In case of any dispute or claim arising out of or in connection with or under this (long term contract) ……….. the Parties shall first seek to resolve the dispute or claim by friendly discussion.
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.
Was this clause enforceable?
The legal background
The starting point is the 1992 decision of House of Lords (as the predecessor to the Supreme Court) in Walford v Miles [2] which held that a bare agreement to negotiate lacked the necessary certainty and was therefore unenforceable. In addition it was said that a duty to negotiate in good faith was inherently inconsistent with the position of a negotiating party and such an agreement was unworkable in practice.
Since then there have been a number of judgements[3] in which clauses requiring discussion or mediation have been considered and in most of these such clauses have held to be unenforceable. In one such case[4] the judge stated:
Agreements to agree and agreements to negotiate in good faith, without more, must be taken to be unenforceable: good faith is too open-ended a concept or criterion to provide a sufficient definition of what such an agreement must as a minimum involve and when it can objectively be determined to be properly concluded. That appears to be so even if the provision for agreement is one of many provisions in an otherwise binding legal contract.
For a clause to be enforceable it must define the parties’ rights with sufficient certainty.
The decision in Emirates Trading Agency LLC v Prime Mineral Exports Private Limited
The judge in this case held that the clause (as stated above) was enforceable. In arriving at this conclusion he appears to have been strongly influenced by the rationale of an earlier Australian decision[5] .
He stated:
In my judgement such an agreement is enforceable. My reasons ……… may be summarised as follows. 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. Difficulty of proving a breach in some cases should not be confused with a suggestion that the clause lacks certainty. In the context of a dispute resolution clause pursuant to which the parties have voluntarily accepted a restriction upon their freedom not to negotiate it is not appropriate to suggest that the obligation is inconsistent with the position of a negotiating party. Enforcement of such an agreement when found as part of a dispute resolution clause is in the public interest, 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.
Comment
- There is a distinction between agreement to agree and an agreement to negotiate. It remains the position that an agreement to agree is unenforceable. In order to be potentially enforceable any clause on this subject should be expressed an obligation to negotiate. In other words the obligation is as to behaviour and not as to outcome.
- In order to be enforceable an agreement to negotiate must be certain and complete. If expressed as a positive obligation then the procedure should be clear. If expressed as a negative obligation preventing arbitration or legal action until the occurrence of an event then such event would need to be expressly and clearly defined.
- There remains an issue as to how the performance of an obligation to negotiate is to be measured where good faith or honesty is expressly or implied required. There is no general duty of good faith under English law (in contrast to the position under the law of the United States and certain civil law jurisdictions)[6]. As stated above the earlier English judgements have expressly doubted whether good faith obligations are sufficiently certain to be enforceable. This latest case described good faith obligations as, “fair, honest and genuine discussions aimed at resolving a dispute” but this still leaves open what this means precisely and just how this is to be proved in any given case.
[1] Emirates Trading Agency LLC v Prime Mineral Exports Private Limited [2014]
[2] Walford v Miles [1992] 2 AC 128
[3] e.g. Sul America v Enesa Engenharis [2012] 1 Lloyd’s Reports 671
[4] Wah v Grant Thornton [2013] 1 Lloyd’s Law Reports 11
[5] United Group Rail Services v Rail Corporation New South Wales (2009) 127 Con LR 202
[6] See earlier item Good faith and the exercise of discretion in contracts
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