Is an agreement to have ‘friendly discussions’ before going to arbitration or litigation enforceable? (It can be…)

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Emirates Trading Agency LLC v Prime Mineral Exports Private Ltd [1] is another case (like Kruppa v Benedetti [2]) where the court had to examine the dispute resolution procedures agreed by the parties in their contract.

In this case, a dispute resolution clause which required the parties to seek to resolve a dispute by friendly discussions, in good faith and within a limited period of time before the dispute could be referred to arbitration, was enforceable. As it happened, the court found that the parties had in fact complied with the clause but the decision is an interesting demonstration that agreements to hold settlement discussions can be binding – if drafted properly.

∫The claimant, (Emirates) had entered into a long term contract with the defendant (Prime Mineral) for the purchase of iron ore. However, Emirates failed to lift all of the iron ore expected to be taken up during the first shipment year and, under the terms of the contract, Prime Mineral sought liquidated damages in respect of the breach. Emirates continued to fail in its performance of the contract and on 1 December 2009, Prime Mineral served notice of termination and claimed liquidated damages in the sum of $45,472,800. In its notice, it stated that if this sum was not paid, it reserved the right to refer the claim to arbitration in accordance with the contract.

The contract provided the following in respect of the dispute resolution procedure:

“In case of any dispute or claim arising out of or in connection with or under this [contract] … 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.”

Some meetings took place to discuss the dispute but Prime Mineral went ahead and commenced arbitration proceedings. Emirates argued that the arbitration tribunal had no jurisdiction but the tribunal disagreed. Emirates therefore applied to the High Court for an order that the tribunal lacked jurisdiction to determine the claim brought by Prime Mineral. It argued that the dispute resolution clause required a condition precedent to be satisfied before referring the dispute to arbitration which involved the parties negotiating in good faith for a continuous period of 4 weeks. Emirates claimed that this condition had not been met.

The court first had to interpret the dispute resolution clause.

Prime Mineral argued that the agreement to try to resolve the dispute by friendly discussion was an agreement to agree or negotiate and therefore unenforceable. They relied on well established authorities such as Walford v Miles [3]. The court however distinguished the Walford case explaining that it was a material fact in the present case that the period for the agreed discussions was time limited [4]. The court went on to hold that the clause, properly construed, provided that if no solution could be found for a continuous period of four weeks, notwithstanding the friendly discussions, then arbitration could be invoked. The court then considered whether the dispute resolution clause was enforceable and held that it was: it was complete, certain and the obligation to negotiate had an identifiable standard namely a fair, honest and genuine discussion aimed at resolving a dispute. Moreover, the court found that enforcement of such a clause was in the public interest as commercial people expect the court to enforce obligations which have been freely undertaken and which have an objective of avoiding expensive and time consuming arbitrations.

While the clause was held to be enforceable, the court nonetheless found that the condition precedent had been complied with as the parties had met on a number of occasions over the course of several months following termination to try to resolve their differences. Emirates were therefore unsuccessful in their application: the arbitration tribunal did have jurisdiction.

Practical points
This case reinforces the practical issues arising from Kruppa, that multi-tier dispute resolution clauses must be used with care. An agreement to start a dispute resolution procedure with discussions (friendly or otherwise!) can be enforceable but must be clearly and precisely drawn up. Adding in a time limited period for compliance with the initial procedures may be practical depending on your circumstances. You might also want to consider adding exceptions to allow for proceedings to be started swiftly, if for example, there is little time left before the statutory limitation period expires.

Those who include multi-tiered dispute resolution clauses in their contracts must also ensure they follow them if a dispute arises. Failure to do so may result in any consequent arbitration award being unenforceable.

One final note, this case is a further example of the courts’ continuing trend to uphold the concept of good faith obligations between contracting parties and it is interesting that the Court found that an obligation to undertake “friendly discussions” was an identifiable standard.

[1] Emirates Trading Agency LLC v Prime Mineral Exports Private Ltd [2014] EWHC 2104 (Comm)
[2] For our review of Kruppa v Benedetti, click here
[3] Walford v Miles [1992] 2 AC 128
[4] See Paragraph 59 of the judgment at [1]