Introduction
There are various dispute resolution clauses in shipping contracts. Traditionally agreements to negotiate in good faith before referring to arbitration have not been upheld in common law jurisdictions, because they are too uncertain to enforce. However, in the recent UK case Emirates Trading Agency LLC v Prime Mineral Exports Private Ltd [2014] EWHC 2104 (Comm), the High Court upheld a clause requiring the parties to negotiate their dispute in good faith as a condition precedent to the commencement of arbitration.

Background
The Claimant in this case, Emirates Trading Agency LLC, entered into a contract on 20 October 2007 to purchase iron ore from the Respondent, Prime Mineral Exports Private Ltd. The Claimant failed to lift all of the iron ore in the first year, so the Respondent claimed liquidated damages of US$1.5 million. The Claimant again failed to lift any iron ore in the second year, so the Respondent terminated the contract on 1 December 2009 and claimed liquidated damages of US$45 million.

The contract provided that “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… If no solution can be arrived at between the parties for a continuous period of four weeks then the non-defaulting party can invoke the arbitration clause and refer the disputes to arbitration.”

The parties had discussions on the dispute but ultimately the claim was referred to arbitration in June 2010. The Claimant applied to the High Court under section 67 of the English Arbitration Act 1996 that the arbitration tribunal lacked substantive jurisdiction to adjudicate the Respondent’s claims because the Respondent did not engage in friendly discussion to comply with the condition precedent to arbitration. For reasons stated in the subsequent paragraphs, the Court dismissed the Claimant’s application.

Construction of the clause
The Court decided that the obligation for the parties to seek to resolve a claim by friendly discussion was mandatory due to the use of the word “shall”. The Court held that arbitration could be invoked as long as the parties had had any friendly discussion, and a solution had not been found after a continuous period of four weeks had lapsed.  Therefore, friendly discussions are a condition precedent to the referral of a claim to arbitration.

Enforceability of the clause
The Respondent submitted that the obligation to seek to resolve a claim by friendly discussions was a mere agreement to negotiate. An obligation to negotiate was uncertain because the court had no objective criteria to enable it to decide whether a party was in breach or not. An obligation to negotiate was also inherently inconsistent with the position of a negotiating party because each party should be entitled to pursue his own interest by threatening to withdraw from further negotiations in the hope of receiving a better offer from the opposite party. This agreement to negotiate should therefore be unenforceable.

The Court rejected this submission and upheld the clause to be enforceable. The clause obliged the parties to seek to resolve a dispute by friendly discussions and provided for four weeks to expire before arbitration could be commenced. Such an agreement was complete in the sense that no essential term was lacking. Thus the agreement had sufficient certainty to be enforceable. This conclusion would also be consistent with the public policy of encouraging parties to resolve disputes without the need for expensive arbitration or litigation.

The Court further commented that, in the field of dispute resolution clauses, the Court ought not to regard an obligation to seek to resolve a dispute in good faith as inherently inconsistent with the position of a negotiating party. It is not inconsistent where there was a material, voluntarily accepted, restraint on the parties’ freedom of action, namely, a promise to seek to resolve a dispute by friendly discussion in good faith.

The Court considered that good faith connoted both honesty and the observance of reasonable commercial standards of fair dealing. Where a party clearly failed to honour such standards of conduct, judges and commercial arbitrators would have no particular difficulty in recognizing and identifying such failures.

The Decision
The Court decided that the friendly discussions aimed at resolving the Respondent’s claim lasted from 1 December 2009 until, at least, 9 March 2010. Therefore, more than four continuous weeks had elapsed since the meeting on 1 December 2009. The condition precedent to arbitration was satisfied, so the arbitrators had jurisdiction to decide the dispute between the Claimant and the Respondent. The Claimant’s application was therefore dismissed.

Implications
It has long been established that the courts rejected clauses which failed to state precisely actions to be done as conditions precedent to arbitration. However, the English Court has concluded that a clause requiring “friendly discussion” is an enforceable condition precedent to arbitration.  

The implications of this case can be far-reaching. Any parties should exercise caution when drafting obligations to comply with before arbitration. If parties intend to oblige each other to engage in friendly discussions before arbitration, the terms must be certain to be held to be enforceable. Parties to arbitration should also beware of the conditions precedent to arbitration and ensure they have been strictly complied with before arbitration, even for those provisions which are arguably a pre-condition to starting arbitration.  Failure to do so may otherwise lead to a successful challenge to the jurisdiction at the outset of the arbitration or challenge to the tribunal’s jurisdiction at the enforcement stage and trying to have the arbitration award set aside.

For enquiries, please contact our Litigation & Dispute Resolution Department:

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.