Agreement to negotiate in an Arbitration Clause

1. Facts

Emirates Trading Agency LLC (“ETA”) and Prime Mineral Exports Private Limited (“PMEPL”) entered into a “Long Term Contract” for the delivery of iron ore in October 2007. During the first year, ETA failed to lift all the iron ore expected to be taken up and failed to lift any iron ore in the following year. In December 2009 PMEPL terminated the contract and demanded payment of liquidated damages. PMEPL referred to arbitration in June 2010.
The dispute resolution clause provided as follows:

1.1. Dispute Resolution and Arbitration

1.1.1. In case of any dispute or claim arising out of or in connection with or under this LTC including on account of a breaches/defaults mentioned in 9.2, 9.3, Clauses 10.1(d) and/or 10.1(e) above, the Parties shall first seek to resolve the dispute or claim by friendly discussion. Any party may notify the other Party of its desire to enter into consultation to resolve a dispute or claim. If 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.

1.1.2. All disputes arising out of or in connection with this LTC shall be finally resolved by arbitration in accordance with the Rules of Arbitration of the International Chamber of Commerce (“ICC”). The place of arbitration shall be in London (“UK”). The arbitration shall be conducted in the English language.

1.1.3. The arbitration shall be referred to a tribunal of three (3) arbitrators, each Party shall appoint one arbitrator and the third shall be appointed by the ICC. Any award of a majority of the arbitrators shall be final and binding upon the parties thereto, and may be entered for enforcement in any court having jurisdiction”.

The arbitral tribunal found that it had jurisdiction to hear PMEPL’s claim. ETA did not share this view and hence filed an application before the High Court of Justice in London seeking an order that the arbitral tribunal lacked jurisdiction (2). Indeed, ETA argued that the dispute resolution clause enshrined in the “Long Term Contract” required a condition precedent – a negotiation – to be satisfied before the arbitrators would have jurisdiction over PMEPL’s claim and that said condition had not been met. Besides ETA argued that the discussions had to continue for four weeks. As for PMEPL, it argued that the suggested condition precedent was unenforceable because “it was a mere agreement to negotiate” and should it be considered as a condition precedent, it had been satisfied.

2. Obligation to negotiate

It was established that the parties had met on several occasions following the issue of the termination notice. As for clause 11.1, the court first examined its construction and went on to ascertain its enforceability. The court pointed out that the use of the word “shall” indicated that the obligation was mandatory and accepted that as a result of the construction of clause 11.1, before a party could refer a claim to arbitration, there had to be friendly discussions in view of resolving the claim which constituted a condition precedent to the right to refer a claim to arbitration. That said, the court disagreed with the argument according to which the friendly discussions had to last four continuous weeks: “I doubt that this is the meaning which could reasonably have been intended by the parties. […] In my judgment the meaning reasonably to be attributed to those words, in the context of the clause as a whole, is that if, notwithstanding the friendly discussions to resolve the dispute required by the first part of the clause […], no solution can be found for a continuous period of 4 weeks, then arbitration can be invoked” (3). The court also noted that there was “obvious commercial sense” in clause 11.1 as it aimed at avoiding expensive and time consuming arbitration by obliging the parties to seek to resolve a dispute amicably (4).

3. Enforceability

As regards the enforceability of the disputed dispute resolution clause (!), the court referred in its decision to numerous authorities (5). Thus, in the leading case Walford v Miles [1992] 2 AC 128, the House of Lords held that a bare agreement to negotiate lacked the necessary certainty and was therefore unenforceable. In a decision of 2013 (6), it was held that “[a]greements to agree and agreements to negotiate in good faith, without more, must be taken to be unenforceable: good faith is too open-ended a concept or criterion to provide a sufficient definition of what such an agreement must as a minimum involve and when it can objectively be determined to be properly concluded” (7). The High Court noted that an agreement to agree may be incomplete if it lacks essential terms of the future bargain but that by contrast an agreement to negotiate, if viewed as an agreement to behave in a particular way may be uncertain but not incomplete (8). With reference to an Australian decision, the High Court considered that difficulty in proving a breach did not mean that the obligation lacked real content (9).

The High Court concluded “[t]here is, it seems to me, much to be said for the view that a time limited obligation to seek to resolve a dispute in good faith should be enforceable. Such an agreement is not incomplete. Whilst it may be difficult to establish that a party has not sought to resolve a dispute in good faith there will be cases where that can be shown, for example where a party asserts his claim, refuses to negotiate and seeks to commence arbitration. In such a case it would be unfortunate were the court to say that the obligation to seek to resolve the dispute was uncertain and therefore unenforceable. For that would mean that a party could ignore his apparent obligation. In the field of dispute resolution clauses in commercial contracts, the court ought not to be […] “astute to accentuate uncertainty”” (10). The High Court further stressed that an obligation to seek to resolve a dispute in good faith was not inconsistent where there is a material, voluntarily accepted, restraint on the parties’ freedom of action (11). In other words, parties are free to contract unless prohibited by law. Lastly, the High Court considered that enforcement of a clause requiring the parties to seek to resolve their dispute by friendly discussions in good faith was in the public interest for two reasons: firstly, commercial men expect the court to enforce obligations which they have freely undertaken; secondly, the object of the agreement was to avoid what might otherwise be an expensive and time consuming arbitration.

Accordingly, based on the above, the High Court held that the obligation to negotiate before starting arbitration was enforceable. Interestingly and as already mentioned, the arbitral tribunal itself had reached the opposite conclusion (12).

4. Swiss law

What about Swiss law? First and foremost, the freedom of contracts prevails under Swiss law. As a consequence, parties to a contract may freely agree to restrict their freedom (within the limits of the law (13)). The parties may accordingly restrict their access to justice by making it subject to the fulfilment of a condition in the form of an obligation to negotiate. The Swiss jurisprudence held for a long time that a negotiation clause did not prevent a party from referring a dispute to a judge (14). However, in a decision handed down in 2007, the Federal Tribunal ascertained the parties’ will with regard to a dispute resolution clause which provided that any dispute which would not have been resolved amicably (including in a mediation) would be referred to an arbitral tribunal and, even if it dismissed the recourse, reckoned that a dispute resolution clause providing for a prior negotiation could – if the parties had so wished – have a mandatory effect among them (15). It is worth noting that, while dismissing the claim, our supreme court pointed out in particular that the disputed dispute resolution clause at stake did not contain any indication with regard to the deadline within which a mediation had to be started or even had to succeed (16).

Should parties disagree on the meaning of a dispute resolution clause providing for a negotiation phase, their real intent would have to be ascertained by going beyond the text of the clause: “[w]hen assessing the form and terms of a contract, the true and common intention of the parties must be ascertained without dwelling on any inexact expressions or designations they may have used either in error or by way of disguising the true nature of the agreement” (17). According to a constant jurisprudence, problems related to the conclusion of agreements must first be addressed with regard to what the parties subjectively wanted in a concordant manner. If the parties’ real intent cannot be ascertained, the judge must then examine what they objectively declared but understood otherwise. In so doing, the judge may notably take into account the parties’ experience as well as interpret the clause contra stipulatorem.

Thus, as in the recent English case, a dispute resolution clause enshrined in a contract governed by Swiss law which renders access to tribunals subject to a prior negotiation (or alternative dispute resolution mechanism) may be regarded as compulsory between the parties and prevent them from referring their dispute to a tribunal without first negotiating a settlement (or using a chosen alternative dispute resolution mechanism).

As a conclusion, parties who intend to insert a dispute resolution clause in their agreement and who wish to force the other party to enter into negotiations before the matter may be referred to a tribunal ought to make their intent very clear to the other and draft – or rather have their lawyer(s) draft! – such a clause unequivocally as well as limit the duration of the agreed negotiations (or alternative dispute resolution mechanism).

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(1) Emirates Trading Agency LLC v Prime Mineral Exports Private Limited, [2014] EWHC 2104 (Comm)
(2) As per section 67 of the Arbitration Act 1996
(3) Emirates Trading Agency LLC v Prime Mineral Exports Private Limited, § 26
(4) Emirates Trading Agency LLC v Prime Mineral Exports Private Limited, § 27
(5) Inter alia Walford v Miles [1992] 2 AC 128, United Group Rail Services v Rail Corporation New South Wales (2009) 127 Con LR 202
(6) Wah v Grant Thornton [2013] 1 Lloyd’s Law Report 11
(7) Wah v Grant Thornton, § 57
(8) Emirates Trading Agency LLC v Prime Mineral Exports Private Limited, § 43
(9) Emirates Trading Agency LLC v Prime Mineral Exports Private Limited, § 45
(10) Emirates Trading Agency LLC v Prime Mineral Exports Private Limited, § 52
(11) Emirates Trading Agency LLC v Prime Mineral Exports Private Limited, § 52
(12) Emirates Trading Agency LLC v Prime Mineral Exports Private Limited, § 6
(13) Art. 19 of the Swiss Code of Obligations
(14) Sylvain Marchand, Clauses contractuelles, Basel, 2008 and references
(15) Decision of the Federal Tribunal 4A.18/2007, ground 4.3.2. in fine
(16) Decision of the Federal Tribunal 4A.18/2007, ground 4.3.2.
(17) Art. 18 of the Swiss Code of Obligations