“Friendly discussions” could be valid precondition to arbitration

Could a first instance Judge in England, rule that a time-limited obligation in a dispute resolution clause, to seek to resolve a dispute by friendly discussions, is enforceable, or would he or she be obliged by precedent to rule that it is unenforceable?

The requirement to try to settle a claim by friendly discussions might be considered, by the law, a mere agreement to negotiate and therefore unenforceable.

As an unenforceable condition precedent to arbitration it may be that, notwithstanding the commercial sense underlying the clause, a party was free to commence arbitration without having sought to resolve his claim by friendly discussions.

In Emirates Trading Agency Llc v Prime Mineral Exports Private Ltd (“PMEPL”) [2014] a clause obliged the parties to seek to resolve a dispute by friendly discussions and provided for the parties to see if they could resolve it within 4 weeks before arbitration could be commenced.

The court decided that precedent did not bind it to rule to be unenforceable a dispute resolution clause which required the parties to seek to resolve a dispute by friendly discussions, in good faith, and within a limited time, before the dispute might be referred to arbitration.

Such an agreement was complete – no essential term was lacking. Since it is an obligation to seek to resolve a dispute arising under the Long Term Contract dated 20 October 2007 (“LTC”) the discussions would concern the rights and obligations under the LTC so as to try to reach a compromise of the dispute which reflected the bargain the parties had entered into. It would not entail an open-ended discussion of each party’s commercial interests without regard to their rights and obligations under the LTC.

So the agreement had sufficient certainty to be enforceable.

A court should be able to identify behaviour at variance with the conduct anticipated of parties who had agreed to seek to resolve contractual disputes by friendly discussions. For example, a party who refused to discuss his claim at all could easily be shown to have breached the obligation to seek to resolve his claim by friendly discussion.

Problems proving breach, sometimes, did not mean that the clause lacked substance.

If a party sought damages for breach of the obligation it might be difficult to establish what the result of the discussions would have been, had they taken place, in accordance with the clause, but damages could be awarded for “loss of a chance”.

Besides, concluding that the obligation was enforceable would match the public policy of encouraging parties to resolve disputes without costly arbitration or litigation.

The obligation to seek to resolve disputes by friendly discussions must imply an obligation to try to do that in good faith. Conventionally such an obligation went without saying and was necessary to be implied to give “business efficacy” to the contract.

Friendly discussions had taken place in Goa on 1 and 2 December 2009 in which the parties sought to resolve PMEPL’s claim for US$45 million. The giving of a actual notice to enter into friendly discussions was not a mandatory requirement here. If notice to resolve the dispute by friendly discussions had been a mandatory requirement in this case enough notice must have been given in circumstances where the parties had assembled in Goa to discuss the issues between the parties. If the relevant clause of the LTC had required a written notice such requirement must (in those circumstances) have been waived.

So the arbitrators had jurisdiction to decide the dispute between the parties because the condition precedent to arbitration, although enforceable, had been satisfied.

This blog has been posted out of general interest. It does not remove the need to get bespoke legal advice in individual cases.