English High Court adopts Singapore decision and holds that obligation to engage in “friendly discussion” before arbitration is enforceable

Emirates Trading Agency LLC v Prime Mineral Exports Private Limited [2014] EWHC 2104

In Emirates Trading Agency LLC v Prime Mineral Exports Private Limited, the English High Court considered a challenge to an arbitral tribunal’s jurisdiction to decide a dispute on the basis that a condition precedent to arbitration had not been fulfilled. In a departure from previous English decisions, the English High Court held that an obligation to seek to resolve a dispute by friendly discussion before proceeding to arbitration was enforceable. Notably, the English High Court agreed with the approach of the Singapore courts in preference to previous English decisions.

Facts

The dispute concerned a claim for liquidated damages by Prime Mineral Exports Private Limited (“Prime Mineral”) against Emirates Trading Agency LLC (“ETA”) in respect of an agreement for the sale and purchase of iron ore between ETA and Prime Mineral (the “Agreement”).

The Agreement contained a tiered dispute resolution clause which required the parties to engage in “friendly discussion” before referring any disputes to arbitration. The clause stipulated: "In case of any dispute or claim arising out of or in connection with or under this [contract] ... 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 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" (emphasis added).

After Prime Mineral commenced arbitration proceedings against ETA, ETA filed an application to the English High Court, seeking an order that the arbitral tribunal lacked jurisdiction to hear and determine Prime Mineral’s claim as the condition precedent to commencing arbitration had not been satisfied. ETA argued that the parties had not engaged in friendly discussion for a continuous period of four weeks and accordingly, the condition precedent to arbitration had not been fulfilled. Prime Mineral argued that the condition precedent relied upon by ETA was an unenforceable obligation but that, if it was enforceable, it had been satisfied such that the arbitrators had jurisdiction.

Enforceability of “friendly discussion” obligation

After reviewing the authorities in England, Australia and Singapore, the English High Court held that the tiered dispute resolution clause was enforceable.

Previous English decisions (Sul America v Enesa Engenharis [2012] 1 Lloyd’s Reports 671; Wah v Grant Thornton [2013] 1 Lloyd’s Law Reports 11) have held that agreements to settle disputes by means of ADR are unenforceable. The courts’ reasoning in those cases was influenced by the principle that an agreement to negotiate is too uncertain to be enforceable (as set out in the House of Lords decision in Walford v Miles [1992] 2 AC 128).

However, in the present case, the English High Court preferred the reasoning of the Singapore courts in International Research Corp PLC v Lufthansa Systems Asia Pacific Pte Ltd [2013] 1 SLR 973;[2012] SGHC 226 and the New South Wales Court of Appeal in United Group Rail Services v Rail Corporation New South Wales (2009) 127 Con LR 202.

The English High Court held that the agreement to engage in “friendly discussions” was complete in the sense that no essential term was lacking. The relevant clause in the Agreement obliged the parties to seek to resolve a dispute by friendly discussions and provided for four weeks to expire before arbitration could be commenced. The English High Court also held that the reference to a period of four continuous weeks ensures both that a defaulting party cannot postpone the commencement of arbitration indefinitely and that a claimant who is eager to commence arbitration must have the opportunity to consider proposals that may emerge during discussions for a period of at least four continuous weeks before he may commence arbitration.

The agreement to engage in “friendly discussions” was also sufficiently certain to be enforceable. Since it was an obligation to seek to resolve a dispute arising under the Agreement, the discussions would concern the rights and obligations arising under the Agreement. There would not be an open-ended discussion concerning each party’s commercial interests without regard to the rights and obligations under the Agreement.

In addition to holding that the tiered dispute resolution clause made obvious commercial sense, the English High Court observed that the enforcement of an agreement to negotiate is in the public interest “first, because commercial men expect the court to enforce obligations which they have freely undertaken and, second, because the object of the agreement is to avoid what might otherwise be an expensive and time consuming arbitration”.

Judgment

After reviewing the evidence, the English High Court found that there were friendly discussions between ETA and Prime Mineral and the parties were unable to reach a solution after more than four continuous weeks. The English High Court held that, although the tiered dispute resolution clause was enforceable, the clause had been satisfied. Accordingly, the arbitral tribunal had jurisdiction and ETA’s application was dismissed.

Construction of the dispute resolution clause

The English High Court also held that under the dispute resolution clause, if, notwithstanding the friendly discussions to resolve the dispute, no solution could be found for a continuous period of four weeks, then arbitration could be invoked. The English High Court rejected ETA’s argument that the clause required the friendly discussions to continue for four weeks.  The discussions may in fact last for less than four weeks, in which case the non-defaulting party must wait for a period of four continuous weeks to elapse before he may commence arbitration.

Conclusion

This decision is notable because, in upholding the agreement to engage in “friendly discussions” the English High Court specifically referred to and found support in a decision of the Singapore courts. This is noteworthy as the English High Court was persuaded to depart from previous English decisions on similar clauses and distinguished the approach of the House of Lords in Walford v Miles[1992] 2 AC 128, which has long dominated English judicial thinking in this area.