Hugs All Round: Have You Been Sufficiently Friendly to the Other Side?

In a recent decision, the Commercial Court held that a clause requiring the parties to seek to resolve any disputes by engaging in 'friendly discussions' before commencing arbitration proceedings was enforceable: it prevented anyone from commencing formal proceedings unless and until they had, in effect, had a sufficiently friendly discussion with the other side. These kinds of provisions, requiring discussions or negotiations or attempts to reach an 'amicable' settlement, are sometimes found in tiered dispute resolution clauses as the first step in the contractual mechanism. Until fairly recently, the received wisdom was that English law tended to be against treating such clauses as imposing binding conditions precedent - though, as ever in the law of contract, everything depends on the wording of the clause in question.

However, in Emirates Trading Agency Llc v Prime Mineral Exports Private Ltd [2014] EWHC 2104, Teare J upheld such a clause, disagreeing with a number of decisions at first instance that went the other way. The judge reviewed the conduct of the parties during negotiations about their claims, to see whether they had been sufficiently 'friendly' before calling in the arbitrators. One may ask how this can be. Isn't English commercial law supposed to be cold-blooded, rational and unimpressed by warm and fuzzy notions of this sort? The answer lies in the resurgence of the duty to act in good faith. Such a duty can be legally binding even in commercial contracts if it is expressly incorporated. The question, however, is whether the Commercial Court in Emirates went too far in applying this concept to a dispute resolution provision.

The old school of thought - certainty is key

English law requires contracts and their terms to be (sufficiently) certain for them to be enforceable. It has often been said that an agreement to negotiate, or an agreement to agree something in the future, lack such certainty. In the words of Lord Denning (Courtney & Fairbairn Ltd v Tolaini Bros. (Hotels) Ltd [1975] 1 WLR 297):

“If the law does not recognise a contract to enter into a contract (when there is a fundamental term yet to be agreed) it seems to me it cannot recognise a contract to negotiate. The reason is because it is too uncertain to have any binding force. No court could estimate the damages because no one can tell whether the negotiations would be successful or would fall through: or if successful, what the result would be. It seems to me that a contract to negotiate, like a contract to enter into a contract, it is not a contract known to the law.”

Consistent with this approach, English law generally accepts that in commercial negotiations, the parties are essentially trying to get the best deal they can for themselves and owe no duties to their counterparty. Short of fraud and dishonesty, 'anything goes' in negotiations. In a famous decision by the House of Lords (Walford v Miles [1992] 2 AC 126), Lord Ackner noted that:

“While negotiations are in existence either party is entitled to withdraw from those negotiations at any time and for any reason. There can thus be no obligation to continue to negotiate until there is a proper reason to withdraw. Accordingly, a bare agreement to negotiation has no legal content.”

The decision of the House of Lords in Walford v Miles has frequently been referred to as confirming the principle that there can be “no agreement to agree”. So if final drafts of agreements are on the table, ready for signature following months of protracted, expensive negotiations, and you do not like the colour of the tie worn by the other party's CEO to the completion meeting, feel free to walk out on the deal. There should be no legal consequences under English law.

The first subtle signs of changes to come?

Such statements of principle are, however, all concerned with the question whether there is a binding contract at all. As the Court of Appeal noted almost 10 years ago, an agreement to negotiate in good faith contained in a fully drafted contract is likely to be enforceable (Petromec Inc v Petroleo Brasileiro SA Petrobras [2005] EWCA Civ 891). That case concerned a clause under which the parties had agreed to negotiate in good faith as regards the reasonable costs that one of them would incur in relation to upgrade works to a chartered vessel. The provision was part of a 'complex agreement' drafted by well-known City of London solicitors. The intention behind the clause was that, once the reasonable costs had been agreed or established, the party incurring these costs ought to be compensated appropriately by the counterparty. English law has, of course, never had any trouble with identifying reasonable costs. The Court of Appeal noted that it would not be unduly difficult to determine to what extent the party seeking to recover the reasonable costs of the upgrade works in question might be entitled to any uplift. Equally, a judge could also determine whether negotiations were terminated in bad faith. Mance LJ perhaps sowed the first seeds of the change in approach that we will come on to, by hinting that Walford v Miles might eventually be reconsidered at the highest level of the English Courts:

“It would be a strong thing to declare unenforceable a clause into which the parties have deliberately and expressly entered. I have already observed that it is of comparatively narrow scope. To decide that it has “no legal content” to use Lord Ackner's phrase would be for the law deliberately to defeat the reasonable expectations of honest men, to adapt slightly the title of Lord Steyn's Sultan Azlan Shah lecture delivered in Kuala Lumpur on 24th October 1996 (113 LQR 433 (1977)). At page 439 Lord Steyn hoped that the House of Lords might reconsider Walford v Miles with the benefit of fuller argument. That is not an option open to this court. I would only say that I do not consider that Walford v Miles binds us to hold that the express obligation to negotiate as contained in clause 12.4 of the Supervision Agreement is completely without legal substance.”

Three examples of dispute resolution clauses that failed for want of certainty

English law draws no distinction between contractual obligations relating to the...