Dispute Resolution Briefing August 2014 Contents How enforceable is an obligation to negotiate? Introduction 01 The issue 01 The background facts 02 The decision 03 Conclusion 04 Contacts 05 Introduction Since the decision of the House of Lords in Walford v Miles (1992), it has been a truism in English law that our courts will not enforce a mere agreement to negotiate. However, in the recent case of Emirates Trading Agency LLC v Prime Mineral Exports Private Ltd (2014) the Commercial Court has found that a time limited obligation to seek to resolve a dispute by friendly discussion was an enforceable condition precedent to referring the dispute to arbitration. The issue Multi tiered dispute resolution clauses, wherein the parties agree to attempt to resolve their dispute using some form of alternative dispute resolution procedure before resorting to arbitration or litigation, play an important role in transactions of all types, and particularly in the context of complex agreements. When properly drafted, such clauses provide parties with the opportunity to avoid the time and expense that formal proceedings can involve, as well as enabling them to preserve ongoing commercial relationships more easily. However, historically multi tiered dispute resolution clauses have proved problematic. This is particularly because one of the essential requirements for the formation of a contract is that terms must be certain and the agreement complete. Thus, if the parties reach an agreement in principle but leave fundamental points unsettled, their contract will not amount to a binding agreement. An agreement to agree will therefore often be held to be unenforceable for uncertainty, although where the terms of the contract clearly indicate that the parties intend it to be enforceable, the court will generally seek to give effect to that intention. Agreements to negotiate have similarly been held to be too uncertain to have any binding force. In the leading case of Walford v Miles (1992), the owner of a business undertook 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. The House of Lords held that wfw.com
02 DISPUTE RESOLUTION BRIEFING the claimant s promise was unenforceable, that a bare agreement to negotiate lacks the necessary certainty and that a duty to negotiate in good faith is inherently inconsistent with the position of a negotiating party (who must be free to threaten to withdraw or actually withdraw from negotiations as part of the negotiation process). This decision has been followed in various subsequent cases heard by the English courts, including: Cable & Wireless v IBM (2002), in which it was held that an obligation to attempt in good faith to settle a dispute would have been unenforceable but that an obligation to attempt in good faith to settle a dispute through alternative dispute resolution was sufficiently certain to be enforced because the procedure to be followed was that recommended by the Centre for Alternative Dispute Resolution; and The House of Lords held...that a bare agreement to negotiate lacks the necessary certainty and that a duty to negotiate in good faith is inherently incosistent with the position of a negotiating party. Sulamérica CIA Nacional De Seguros SA & Ors v Enesa Engenharia SA & Ors (2012), in which the Court of Appeal held that a clause which provided that, before parties referred a dispute to arbitration, they would seek to have it resolved amicably by mediation, was insufficiently certain and thus unenforceable as it failed to set out a defined mediation process or refer to the services of a specific mediation provider. However, the courts of other common law jurisdictions have taken a different view. In particular, in Australia in the case of United Group Rail Services v Rail Corporation New South Wales (2009), the New South Wales Court of Appeal held that an obligation that the parties should meet and undertake genuine and good faith negotiation with a view to resolving the dispute before going to arbitration was enforceable. The judge in that case emphasised that the public policy in promoting efficient dispute resolution required that where possible real and enforceable content be given to agreements to negotiate to encourage parties to resolve disputes without expensive litigation. The Singapore courts and some ICSID tribunals have similarly held agreements to negotiate in good faith to be enforceable. The background facts Emirates Trading Agency LLC v Prime Mineral Exports Private Ltd concerned two parties who had entered into a long term agreement for the purchase of iron ore. However, the purchaser, Emirates Trading Agency, had failed to lift all of the iron ore in the first shipment year, and failed to lift any in the second shipment year. The seller, Prime Mineral Exports, terminated the agreement and sought over US$45 million in respect of liquidated damages. The claim was referred to arbitration but Emirates contended that the tribunal lacked jurisdiction on the grounds that the agreement required the parties to engage in time limited negotiations as a condition precedent to arbitration. The relevant clause of the agreement provided as follows: 11.1 In case of any dispute or claim arising out of or in connection with or under this [agreement], 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 claim. 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 and refer the disputes to arbitration. The tribunal held that this clause was not enforceable but that, in any event, it had been complied with, and therefore found that it had jurisdiction. Emirates then applied to the
DISPUTE RESOLUTION BRIEFING 03 High Court pursuant to section 67 Arbitration Act 1996 for an order the tribunal lacked jurisdiction. The decision Construction of the clause The first issue for the judge to determine concerned the construction of the clause. Mr Justice Teare accepted that the first part of the clause provided that, before a party could refer a claim to arbitration, there had to be friendly discussions to resolve it, and that such discussions were a condition precedent to the right to refer a claim to arbitration. However, although Emirates contended that these discussions had to continue for four weeks, the judge doubted that this was the meaning which could reasonably have been intended by the parties. Moreover, the clause did not provide in terms that the friendly discussions must last four continuous weeks. Instead the judge considered that the clause meant that, if no solution could be found for a continuous period of four weeks, notwithstanding the fact that friendly discussions had taken place for some or all of that time, then arbitration could be invoked. Enforceability of the clause The judge then turned to the issue of the clause s enforceability. Having reviewed the relevant authorities, including United Group Rail Services, he commented that, where commercial parties have agreed a dispute resolution clause which purports to prevent them from launching into arbitration without first seeking to resolve their dispute by friendly discussions, the courts should seek to give effect to the partiesʹ bargain and moreover there is a public interest in so doing. In the judge s view, such an obligation to seek to resolve disputes by friendly discussions must import an obligation to seek to do so in good faith. He noted that such an agreement would not be incomplete and that, although it might be difficult to establish that a party has not sought to resolve a dispute in good faith, there will be cases where that can be shown, such as where a party refuses to negotiate at all and instead commences arbitration immediately. Although in Wah v Grant Thornton (2012) the English court stated that 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, Mr Justice Teare disagreed, noting that good faith connotes an honest and genuine approach to settling a dispute, and commenting that where a party clearly fails to honour such standards of conduct judges and commercial arbitrators will have no particular difficulty in recognising and identifying such failures. The judge went on to determine whether, despite these comments, he was nevertheless bound by English authority to hold that the relevant clause was unenforceable. He noted that Walford v Miles could be distinguished on the facts, on the basis that the obligation to negotiate in that case was not time limited, and Sulamérica could be distinguished on the basis that an agreement to mediate which fails to name a mediator or set out an agreed process by which a mediator can be appointed is incomplete, whereas an agreement to seek to resolve a dispute by friendly discussions in good faith is not incomplete. Mr Justice Teare thus concluded that there was no appellate authority which obliged him to hold that the agreement in this case was unenforceable and further, although other first instance judges have observed that an agreement to negotiate is unenforceable, the observations were not necessary for the relevant decisions. In the judge s view, such an obligation to seek to resolve disputes by friendly discussions must import an obligation to seek to do so in good faith. The judge therefore held that the dispute resolution clause in this case, which was a clause in an existing and enforceable contract which required the parties to seek to resolve a dispute by friendly discussions in good faith and within a limited period of time before Watson, Farley & Williams August 2014
04 DISPUTE RESOLUTION BRIEFING the dispute could be referred to arbitration, was enforceable on the following grounds: The agreement was not incomplete no term was missing. Similarly, it was not uncertain since 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 was not appropriate to suggest that the obligation to negotiate in good faith was inconsistent with the position of a negotiating party as the court had stated in Walford v Miles. Enforcement of such an agreement when found as part of a dispute resolution clause was in the public interest because: Commercial men expect the court to enforce obligations which they have freely undertaken; and Because the object of the agreement was to avoid what might otherwise be an expensive and time consuming arbitration. His judgment nevertheless represents a significant development in the English courts approach to such clauses. In this case, however, it was clear that there had been friendly discussions between the parties in an effort to resolve Prime Mineral s claim, which took place more than four weeks prior to the commencement of the arbitration. The arbitrators thus had jurisdiction to determine the dispute as the condition precedent, although enforceable, was satisfied. Conclusion Although Mr Justice Teare s decision that the agreement to negotiate was enforceable was, in this case, not determinative of the outcome, and the application for an order that the arbitration tribunal lacked jurisdiction failed, his judgment nevertheless represents a significant development in the English courts approach to such clauses. Mr Justice Teare clearly found the Australian court s decision in United Group Rail Services convincing, and indeed the fact that none of the English first instance judges had considered it in the cases he considered was a key distinguishing point as far as he was concerned. However, Mr Justice Teare did depart from the reasoning of the Australian court in one way. In United Group Rail Services it was held that an agreement to seek to settle a contractual dispute by negotiation would require the parties to be faithful to their existing bargain and not negotiate by reference to their wider commercial interests, save where the parties are proceeding by reference to an honest and genuine assessment of their rights and obligations. Mr Justice Teare considered this approach was unrealistically narrow, and that the types of matter which could be legitimately raised in the course of friendly discussions was unlimited. In accepting that a broad approach may be taken to negotiations Mr Justice Teare thus took a more commercial and arguably more realistic view of the way that parties seek to resolve their disputes. The decision is also notable for its approach to the concept of good faith, which has been the subject of recent discussion in the English courts, not least following the decision in Yam Seng Pte Ltd v International Trade Corp Ltd (2013), in which Mr Justice Leggatt advocated the recognition of a general duty of good faith. Although the English courts appear to maintain the view that there is no general obligation of good faith when it comes to reaching agreement as to the formation of a contract, there appears to be a gradual acceptance that obligations of good faith may be acceptable in the context of performance of a contract. Although Emirates concerned good faith obligations to negotiate, such
05 DISPUTE RESOLUTION BRIEFING obligations nevertheless formed part of the machinery of an existing agreement and the case could, therefore, be said to continue the trend. Parties will no doubt welcome the fact that, with this judgment, the court appears more willing to enforce their contractual intention when it come to agreements to negotiate in good faith. However, the extent to which it will be followed by other courts remains to be seen. Further, if it is followed, one key question which remains to be resolved is what relief will be available in circumstances where an agreement to negotiate has not been complied with. In this case the defendants were mainly arguing that the arbitration tribunal had no jurisdiction until the precondition of having friendly discussions for the required period of time had been satisfied. However, the court did comment on the possibility of claiming damages. While it may be difficult to determine what the outcome of negotiations might have been, it has been suggested that in appropriate circumstances damages may be awarded for loss of a chance. There are clearly many complex arguments yet to be had and these are unlikely to be resolved by friendly discussion. Regardless of the unanswered questions to which this case gives rise, now that the courts appear to be prepared to recognise a time limited duty to negotiate in good faith these provisions of multi tiered dispute resolution clauses should be carefully drafted and considered. Once agreed and should a dispute arise, these provisions should be carefully adhered to prior to commencing court proceedings or arbitrations. Generally the more specific these provisions are in relation to the requirements for negotiations (for example, as to the number of meetings and required attendees) the more likely they are to be given effect by the courts. Should you like to discuss any of the issues raised in this Briefing, please get in touch with the author below, or your regular contact at Watson, Farley & Williams. Contacts Andrew Hutcheon Partner London ahutcheon@wfw.com +44 20 7814 8049 All references to Watson, Farley & Williams and the firm in this publication mean Watson, Farley & Williams LLP and/or its affiliated undertakings. Any reference to a partner means a member of Watson, Farley & Williams LLP, or a member of or partner in an affiliated undertaking of either of them, or an employee or consultant with equivalent standing and qualification. This publication is produced by Watson, Farley & Williams. It provides a summary of the legal issues, but is not intended to give specific legal advice. The situation described may not apply to your circumstances. If you require advice or have questions or comments on its subject, please speak to your usual contact at Watson, Farley & Williams. This publication constitutes attorney advertising. Watson, Farley & Williams 2014 100 000 2683 LON FG 15/08/2014 wfw.com