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Friendly discussions

Generally speaking, English courts will not enforce a contractual obligation to agree something in the future (a so-called “agreement to agree”)

, unless the key terms are already documented and the terms which remain to be agreed are relatively minor.  The rationale for this is that the courts are not prepared to second guess the parties intentions in order to “fill in the gaps”.  But what about an obligation for the parties to enter into discussions for a minimum period for the purpose of resolving their dispute before resorting to formal proceedings?  Would such an obligation be enforceable?

Emirates Trading Agency LLC v Prime Minerai Exports Private Limited

The dispute resolution clause in the parties’ contract required the parties to seek to resolve any dispute or claim by “friendly discussion” for “a continuous period of four weeks” before referring the dispute to arbitration.  A dispute arose and, following some discussions, Prime Minerai referred the dispute to arbitration.  The arbitration tribunal agreed with Emirates Trading that the obligation to try to resolve the dispute by friendly discussions did not constitute an enforceable obligation, and that the tribunal accordingly had jurisdiction to determine the claim.

Prime Minerai applied to the court for a declaration that the arbitration tribunal did not have jurisdiction on the grounds that the obligation to enter into four weeks’ of friendly discussion first had to be satisfied (ie completion of the friendly discussions was a “condition precedent” to the tribunal’s jurisdiction).

The High Court decided that the obligation to enter friendly discussions was enforceable, since the agreement was not missing any key terms. Furthermore, in the words of the Mr Justice Teare, “an obligation to seek to resolve a dispute by friendly discussions in good faith has an identifiable standard, namely, fair, honest and genuine discussions aimed at resolving a dispute”.

Comment

The High Court’s decision has caused surprise in some quarters, principally because it diverges from previous decisions which have declined to enforce contractual obligations on the basis that the parties’ obligations in those cases were too uncertain.

But in Emirates, Mr Justice Teare considered that the obligation to participate in “friendly discussions” imported a duty of good faith, and that a dispute resolution clause which contained a time-limited (ie four week) obligation to seek to resolve a dispute in good faith should be enforceable.

In my view the decision should be welcomed as it provides more scope for contracting parties to include an enforceable obligation to try to resolve their dispute before resorting to costly and time consuming litigation.  But to reduce the risk of challenge, the following practical steps should be taken:

  1. Include the obligation to try to resolve the dispute by discussion in a specific dispute resolution clause.
  2. Put a time limit on the parties’ obligations to participate in discussions.
  3. Ensure that the parties are required to try to resolve the dispute “in good faith”.

 

 

(2014J EWHC (Cornrn)