The Commercial Court has held that a dispute resolution clause requiring the parties to seek to resolve a dispute by 'friendly discussions' constituted an enforceable condition precedent to arbitration: Emirates Trading Agency LLC v Prime Mineral Exports Private Limited [2014] EWHC 2104 (Comm).
Although decided in the context of an arbitration clause, it appears from the judgment that the same conclusion would have been reached if the agreement had required such discussions before issuing court proceedings. If this approach is followed in other cases, it will represent a stark change in the English courts' position on agreements to negotiate in dispute resolution clauses - which has historically been that a bare agreement to negotiate is too nebulous and does not define the parties' rights and obligations with sufficient certainty to enable it to be enforced.
The decision is also of interest for the Court's conclusion that the obligation to seek to resolve disputes by friendly discussions 'must import an obligation to seek to do so in good faith', referring to the 2013 Yam Seng decision in which the High Court controversially implied a duty of good faith into a distribution agreement (see our post here ).
However, it is important to note that the clause being considered in this case obliged the parties to engage only in informal discussions - as distinct from a more structured ADR process, such as mediation or conciliation. The decision's relevance to the latter type of clause is worth considering, particularly as the conclusion appears at first blush to be at odds with the established line of authority regarding the enforceability of such structured ADR clauses.
Mediation (and other structured ADR) clauses distinguished
The Court of Appeal has previously confirmed (notably in the Sulamerica case - see our post here ) that, while agreements obliging the parties to engage in mediation or another formal ADR process are capable of being enforceable (and are not merely agreements to agree), they need to identify in a relatively significant degree of detail the procedures for the proposed process and what will be required of the parties - either through bespoke drafting within the clause or by importing the standard terms of an ADR institution. In Sulmerica, the parties' agreement simply to 'seek to have the Dispute resolved amicably by mediation' was held to lack the necessary detail and was unenforceable. A similarly strict approach has been applied to agreements to engage in a conciliation process (in Wah v Grant Thornton - see our post here).
The court in the present case noted those authorities but distinguished them from the case before it. The fact that the clause in Sulamerica concerned referral to mediation, rather than merely informal discussions, was considered to be a material distinction because in the absence of a named mediator or an agreed process for their appointment, the agreement was incomplete. The Court thought that the same could not be said of an agreement to seek to resolve a dispute by time-limited friendly discussions.
That distinction might be considered surprising, given that the question of what is sufficient to satisfy a requirement for 'friendly discussions' might be thought to be open to as much if not more uncertainty than the question of what constitutes participation in a mediation (indeed, whether the parties' communications in this case had constituted 'friendly discussions' was vigorously disputed). Further, it appears to disregard the fact that the basic unenforceability of bare agreements to negotiate can be clearly identified as an underlying assumption in the Court of Appeal's reasoning in Sulmerica.
However, in any event, it is clear the court in the present case intended to limit its statements of legal principle to dispute resolution clauses requiring (time-limited) informal discussions, rather than mediation or other structured ADR processes.
Accordingly, the position remains that parties wishing to include a contractual obligation to engage in such structured processes should continue to ensure that sufficient detail of the proposed process is incorporated in any dispute resolution clause. Although the authorities do not provide a definitive set of minimum ingredients that need to be contained in such a clause to ensure it is enforceable, a clause is more likely to be effective if it is clear as to the procedure of the proposed process, its mandatory nature, the steps that need to be taken by the parties and how the process will be exhausted or properly terminated.
For more on the decision see this post on our Arbitration Notes blog.
Jan O’Neill
Professional Support Lawyer,
dispute resolution, London
Email
+44 20746 62202