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.
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.
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 litigation and arbitration
- commercial parties should be held to their promises, and
- the clause provided for discussions within a specific time period, and on that basis could be distinguished from prior case law.
Emirates is not the first English case to chip away at the Walford approach. In recent years, English courts have held that parties will be bound by agreements to mediate, provided the process is sufficiently certain. Australian courts have also shown a willingness to enforce negotiation and mediation provisions where there is sufficient certainty.
The New Zealand position
In New Zealand, the Court of Appeal has previously held that:
- a mere agreement to negotiate in good faith will not be enforceable because of the uncertainty involved in trying to reconcile parties’ legitimate self-interest with an obligation to act in good faith, however
- so long as a contract to negotiate specifies the way in which the negotiations are to be conducted with enough precision for the Court to be able to determine what the parties are obliged to do, then it will be enforceable.
Specificity is therefore the key to enforceability. An example of this is the Court of Appeal decision of Porter v Gullivers Travel Group Ltd, where the parties contracted to use their best endeavours to resolve disputes by negotiating in good faith, and to attend at least one meeting to discuss resolving their disputes.The Court held that the provision was enforceable and that, on the facts, the parties had complied with its terms.
Emirates reinforces an unmistakeable trend towards upholding contractual terms obliging parties to negotiate and mediate in good faith. Contracting parties should be alert to the likelihood that such clauses may be given progressively greater effect in future cases. It is only a matter of time before the New Zealand Supreme Court is called upon to consider this issue.
The short point for now is that parties which wish to require good faith negotiation or mediation as preliminary steps before arbitration or litigation should strive to express those steps with specificity and clarity.
Ways to do so include:
- defining the processes to be used (for example selecting a particular set of mediation rules)
- including objectively-measurable criteria (for example, specifying the anticipated attendees at any negotiation meeting), and
- specifying the time period before binding dispute resolution mechanisms can be invoked.