Bound to be friendly – enforcing tiered dispute resolution clauses

In a departure from the orthodox English approach, the English High Court recently held that an agreement to participate in "friendly discussions" was enforceable as a condition precedent to arbitration. This more closely aligns English law with decisions from New Zealand's Court of Appeal. It is only a matter of time before the New Zealand Supreme Court is called upon to consider similar contractual terms.

The decision

In Emirates Trading Agency v Prime Mineral Exports, the High Court boldly side-stepped a 1992 House of Lords decision that agreements to negotiate in good faith will not be enforced by the courts.1

The background to the dispute was that Emirates had failed to take a contracted level of iron ore supply from Prime Mineral Exports (PME), which then terminated the supply contract and began arbitration proceedings seeking US$45 million in damages.

The supply contract obliged the parties to invest a specified period of time in seeking to resolve claims and disputes by "friendly discussion" before resorting to arbitration. Emirates challenged the jurisdiction of the arbitral tribunal under s 67 of the UK Arbitration Act 1996 on the basis that PME had failed to satisfy this requirement.

On the facts, Justice Teare held that PME had satisfied the condition and the arbitral panel had jurisdiction to proceed. But the fact that the "friendly discussion" provision was held to be enforceable indicates a further erosion of the traditional English resistance to such clauses.

A gradual chipping away of the traditional approach

In 1992's Walford v Miles, their Lordships unanimously held that agreements to negotiate in good faith were unworkable, and as such unenforceable, on the basis that they lacked certainty, would be difficult to police, and were inherently irreconcilable with the position of a negotiating party.

Lord Ackner saw the threat to withdraw from negotiations, or actual withdrawal, as a useful tool in the pursuit of obtaining more favourable terms from the other party.

But in Emirates, Teare J concluded that the provision to participate in friendly discussions was enforceable because:

no essential term was lacking being difficult to police did not make the clause unmeritorious good faith is not inherently uncertain, but rather connotes an honest and genuine approach to settling disputes there are public policy reasons for preferring friendly dispute resolution, including avoiding expensive and time-consuming processes such as...