An enforceable agreement to negotiate

Summary

In Emirates Trading Agency LLC v Prime Mineral Exports Private Limited [2014] EWHC 2104 (Comm), the English High Court held that an agreement to negotiate was an enforceable condition precedent to the referral of a dispute to arbitration. As the condition precedent had been satisfied, the arbitral tribunal had jurisdiction to hear and determine the claim.

Background

The applicant (“ETA”) agreed to purchase iron ore from the respondent (“PMEPL”) pursuant to the terms of a long-term contract (the “Contract”) dated 20 October 2007.

Clause 11.1 of the Contract provided that in the event of a dispute arising out of or in connection with the Contract, the parties “shall first seek to resolve the dispute or claim by friendly discussion” and further that “[i]f no solution can be arrived at in between the Parties for a continuous period of 4 (four) weeks then the non-defaulting party can invoke the arbitration clause and refer the disputes to arbitration.”

A dispute arose regarding ETA’s performance of the Contract and PMEPL served a notice of termination on ETA on 1 December 2009. “Friendly discussions” aimed at resolving the dispute apparently took place on 1 and 2 December 2009, as well as during February and March 2010. As the discussions did not successfully resolve the dispute, PMEPL referred the dispute to arbitration in June 2010.

ETA submitted that the Clause 11.1 requirement to negotiate was a condition precedent that had to be fulfilled before arbitrators would have jurisdiction to hear and determine the claim, and the condition precedent had not been fulfilled as negotiations had not taken place for a continuous period of four weeks.

In response, PMEPL submitted that the Clause 11.1 agreement to negotiate was unenforceable or, alternatively, if it was enforceable, had been satisfied.

Decision

The English High Court accepted ETA’s submission that “friendly discussions” were a condition precedent to the right to refer the claim to arbitration. However, the court rejected the idea that such discussions had to last for four continuous weeks given that it was unrealistic to expect the parties to do so and the clause did not require the parties to continue discussions for four continuous weeks. The court therefore concluded that if, notwithstanding “friendly discussions” to resolve the dispute, no solution had been arrived at for a period of four continuous weeks, the dispute could then be referred to arbitration. As “friendly discussions” had begun in December 2009, and the dispute was not referred to arbitration until June 2010, the arbitral tribunal had jurisdiction to hear the dispute.

Comment

A key finding by the court in this case was that, contrary to (but distinguishable from) the relevant English case law examined, the agreement to negotiate in Clause 11.1 was sufficiently certain such that it was enforceable. Taking account of the reasoning set out in the Australian case United Group Rail Services v Rail Corporation New South Wales (2009) 127 Con LR 202, the court concluded that in relation to the Clause 11.1 agreement to negotiate, no essential term was lacking; the subject matter of the “friendly discussions” was limited to disputes arising out of and in connection with the Contract, and the duration of the discussions was limited to four weeks. Clause 11.1 was therefore sufficiently certain to be enforceable. In arriving at its conclusion, the court noted that “where commercial parties have entered into obligations they reasonably expect the courts to uphold those obligations”. Further, the court acknowledged that there was a public interest in giving effect to dispute resolution clauses requiring the parties to negotiate settlement of disputes prior to commencing proceedings.