"Friendly discussion": an enforceable condition precedent to arbitration?

Speed read

A section 67 challenge on the basis that the Tribunal lacked substantive jurisdiction has failed, as the court concluded that an obligatory pre-arbitration "friendly discussion" had occurred. However, the court found that participation in such discussion had been a condition precedent to arbitration, and had obliged the parties to conduct good faith negotiations before commencing proceedings. The case is, to some extent, surprising given previous English case law, and may reflect a growing interest among English judges in implied obligations of good faith, such as appear in the law of certain other jurisdictions.

In practical terms, the case means that parties to arbitration should exercise caution if their clauses contain obligations to comply with pre-arbitration steps, especially if such steps are expressly stated to be conditions precedent to arbitration. Failure to comply may result in a successful challenge to an award, or the refusal of enforcement. It may be prudent to include wording addressing a situation where proceedings must be commenced promptly, despite mandatory pre-arbitration ADR, such as where a limitation period is about to expire.

Background

The English Arbitration Act 1996 prescribes limited grounds upon which an award made in England can be challenged. Section 67 provides that a challenge may be brought on the basis of the Tribunal lacking substantive jurisdiction, which includes where matters have not been submitted to arbitration in accordance with the arbitration agreement.

Facts of the case

Prime Mineral Exports Private Limited (PMEPL) entered into a long-term contract to sell iron ore to Emirates Trading Agency LLC (ETA) in October 2007. ETA failed to lift all of the iron ore which it was obliged to acquire during the first two years of the contract. PMEPL sought liquidated damages from ETA and, on 1 December 2009, served notice of termination of the contract.

The contract provided for ICC arbitration in London. However, it also stipulated:

"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 claim. 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".

Discussions took place between the parties but, in June 2010, PMEPL commenced arbitration. ETA contested jurisdiction but the tribunal decided that it did have jurisdiction to decide the dispute.

ETA applied to the English High Court under section 67 on the basis that the Tribunal lacked substantive jurisdiction to adjudicate PMEPL's claims due to the failure of PMEPL to comply with the condition precedent to arbitration of participation in friendly discussion.

The judgment

The principal issues which fell for consideration by Mr Justice Teare were:

1. How should the "friendly discussion" clause be interpreted?
2. Was the clause enforceable under English law?
3. Had the clause, in fact, been complied with?

Interpretation of the clause

Mr Justice Teare concluded that the requirement to seek to resolve the claim by friendly discussion was mandatory - the parties had used the word "shall" in recording the obligation. By contrast, the requirement to give notice of a desire to enter into consultation was not mandatory - the parties had used the word "may".

In the judge's view, the obligation to seek to resolve the dispute by friendly discussion was a condition precedent to arbitration. The four week period referred to in the clause could comprise continuous discussions, or discussions for less than four weeks - either way proceedings could not be brought until its expiry.

The enforceability of the clause

Mr Justice Teare then considered the parties' competing submissions in respect of the enforceability of the clause.

PMEPL submitted that the obligation to participate in discussion was a mere agreement to negotiate, following the line of reasoning in the case of Walford -v- Miles¹ in which the House of Lords declined to enforce an obligation to continue negotiations for the acquisition of a business as it was too uncertain.

That case did not concern an obligation to negotiate prior to commencing litigation. However, in Cable & Wireless -v- IBM², the High Court considered that an obligation to attempt in good faith to resolve a dispute through Centre for Effective Dispute Resolution (CEDR) ADR was sufficiently certain to be enforceable. The parties' agreement to proceed to CEDR ADR provided an objective criterion by which compliance could be policed. By contrast, a bare obligation to negotiate in good faith would not have satisfied this test.

Mr Justice Teare also considered two recent English cases concerning pre-arbitration ADR. In Sul America -v- Enesa Engenharis³ the Court of Appeal refused to enforce an obligation to resolve amicably a dispute by mediation in the absence of a defined mediation process or reference to the services of a specific mediation provider. Similarly, in Wah -v- Grant Thornton⁴, an agreement to refer disputes to a panel of three board members prior to arbitration was too nebulous to be enforced. The mechanism did not enable the court to determine objectively what the parties' minimum obligation was, and when the process would be exhausted or terminable by either party.

ETA referred Mr Justice Teare to Australian, and Singaporean authority, and awards from International Centre for the Settlement of Investment Disputes (ICSID) tribunals to support its position that effect should be given to the discussion obligation. The judge found the Australian case of United Group Rail Services -v- Rail Corporation New South Wales⁵ of particular assistance. In that case, an obligation to undertake genuine good faith negotiations to resolve a dispute was deemed enforceable. The New South Wales Court of Appeal considered that the obligation to negotiate was sufficiently constrained by the obligations of genuineness and good faith for it be enforced. The court also referred to the public policy in favour of resolution of disputes without recourse to arbitration or litigation as influencing it.

In the light of this case, and authority to similar effect from Singapore and from ICSID awards, Mr Justice Teare concluded that the friendly discussion obligation was enforceable. He considered that public interest militated in favour of giving effect to such an obligation, and that the requirement of "friendly discussion" did not lack any element which would give rise to uncertainty. The judge also considered that the obligation required negotiation in good faith, which the judge took to mean taking an honest and genuine approach to settling a dispute. Mr Justice Teare distinguished the Court of Appeal cases of Walford -v- Miles, as it did not relate to a dispute resolution clause, (and so did not give rise to the same public interest considerations) and did not specify a time period for negotiations, and Sul America -v- Enesa Engenharis as the agreement in that case was an incomplete referral to mediation, omitting a defined mediation process or a named mediator.

Friendly discussions

As a matter of fact, Mr Justice Teare concluded that the obligation of friendly discussion had been satisfied, and therefore PEMPL had been entitled to commence arbitration, having satisfied the condition precedent. The challenge to the award was therefore dismissed.

Comment

Mr Justice Teare's judgment is, to some extent, surprising. The English courts have traditionally declined to enforce provisions which do not set out precisely what a party must do as a condition precedent to arbitration. While an obligation not to arbitrate for a period of four months should readily be enforceable, amounting to little more than a "cooling off period", the enforceability of an obligation to participate in friendly discussion is potentially more problematic, especially, as the judge found, such an obligation requires participation in genuine and good faith discussions. English law has traditionally been resistant to the implication of a duty of good faith, reasoning that such a duty is uncertain, and contrary to the entitlement of parties to pursue their commercial self-interest in negotiations. However, in recent years, there has been evidence of a weakening of that position, with a duty of good faith found in a commercial context in the case of Yam Seng PTE Ltd -v- International Trade Corporation Ltd⁶. The judge in that case, like Mr Justice Teare, conducted a survey of jurisprudence from other jurisdictions in reaching his conclusion: reflecting that English law is at odds with that of some other countries in its approach to good faith.

It remains to be seen to what extent Mr Justice Teare's approach is followed in England. However, in terms of the practical implications of the decision:

• Parties to arbitration should exercise caution if their clauses contain obligations to comply with pre-arbitration steps, especially if such steps are expressly stated to be conditions precedent to arbitration. Failure to comply may result in a successful challenge to an award, or the refusal of enforcement.
• At the drafting stage, parties should consider carefully what obligations they want to impose on each other prior to arbitration. An issue which sometimes arises is that of limitation periods. If it is necessary to commence arbitration within a short time period, but the arbitration clause requires a period of negotiation, a claimant may find itself timed out from bringing a claim. This can be avoided by including a carve-out that entitles either party to disregard the negotiation obligation and commence arbitration in cases of urgency (perhaps with an obligation in such circumstances to stay the arbitration, once commenced, and then participate in ADR).
• The distinction drawn by the judge between "may" and "shall" illustrates the importance of selecting the appropriate verb when drafting obligations, so as to ensure that a requirement is enforceable, if that is the intention.

Emirates Trading Agency Llc -v- Prime Mineral Exports Private Ltd [2014] EWHC 2104 (Comm)

_Notes

_{^1.[1992] 2 AC 128.
^2.[2002] EWHC 2059.
^3.[2012] 1 Lloyd's Reports 671.
^4.[2013] 1 Lloyd's Law Reports 11.
^5.[2009] 127 Con LR 202.
^6.[2013] EWHC 111 (QB).}