In a recent controversial decision* the Court held that a dispute resolution clause, which required the parties to the contract to enter into ‘friendly discussion’ before arbitration proceedings were started, was enforceable.
The reason that this decision is controversial is that it is seemingly at odds with the existing English Law. In general, English Law does not recognise an agreement to negotiate or an agreement to settle disputes amicably. In previous cases, such agreements have been held ‘too uncertain’ to enforce. As such, this case appears to mark a turning point in the enforcement of such clauses under English Law.
The background facts of the dispute are not particularly relevant. It is sufficient to simply say that a dispute arose between the parties and the contract contained a clause that they should seek to resolve any dispute by ‘friendly discussion… for a continuous period of four weeks’. If a resolution was not achieved, the dispute could then be referred to arbitration.
Various meetings took place between the parties during which settlement options were discussed but, ultimately, no settlement was reached.
In the arbitration that followed, the arbitrators decided that they had jurisdiction (in other words they were able to decide the dispute referred to arbitration) because the obligation to enter into ‘friendly discussions’ was not enforceable, but even if it was enforceable, it had been complied with. This position was challenged once the arbitrators made an award. The argument raised was that the ‘friendly discussions’ clause was a condition precedent (i.e. something that had to be done before arbitration proceedings were started) that had not been satisfied. Therefore, the arbitrators did not have jurisdiction to deal with the dispute.
The Judge rejected this challenge to the arbitrators’ award. He concluded that the arbitrators did have jurisdiction to decide the dispute because the “friendly discussion” clause, although a condition precedent, was satisfied because friendly discussions had taken place.
The Judge commented that the Court should seek to give effect to parties’ agreed dispute resolution clauses. He noted that:
“enforcement of such an agreement when found as part of a dispute resolution clause is in the public interest, first, because commercial men expect the Court to enforce obligations which they have freely undertaken and, second, because the object of the agreement is to avoid what might otherwise be an expensive and time consuming arbitration”.
We will watch with interest to see how other Judges interpret such clauses. However, in the meantime, it is well worth being aware of the very real possibility that, following this case, where such ‘friendly discussion’ clauses are included within dispute resolution provisions of a contract, the Courts may now treat these as being a condition precedent. Whether you are looking to resolve disputes without recourse to arbitration or wishing to ensure there is no barrier to arbitrating, it is a good time to check that the dispute resolution clauses in your contracts/standard terms and conditions work for you.
For more information, email firstname.lastname@example.org.
*Emirates Trading Agency LLC v Prime Mineral Exports Private Limited