Is an agreement to engage in “friendly discussions” before commencing arbitration enforceable?
Tiered dispute resolution clauses
Tiered dispute resolution clauses, also known as ‘escalation’ clauses, require the parties to undertake one or more forms of alternative dispute resolution (ADR), typically negotiation and/or mediation, before commencing formal litigation or arbitration proceedings.
The idea behind this is that formal dispute resolution proceedings should be a last resort. By providing for initial stages of more informal methods of dispute resolution, a tiered dispute resolution clause encourages settlement at an early stage which can save significant amounts of time and expense (when compared with litigation and arbitration), and may also help to maintain commercial relations between the parties by providing them with the opportunity to resolve disputes in a less adversarial setting. Importantly, where the matter is ultimately to be referred to arbitration (if the initial dispute resolution steps are unsuccessful), an arbitral tribunal will not have jurisdiction to hear the dispute until all the conditions precedent (i.e. the initial steps) in the clause have been complied with.
The question has therefore arisen as to when a tiered dispute resolution clause establishes enforceable conditions precedent such as to delay or prevent reference to the arbitral panel. The House of Lords’ decision in Walford v Miles  2AC 128 laid down the fundamental proposition that an agreement to agree or to negotiate in good faith is not enforceable. Accordingly, the English courts have generally been reluctant to recognise tiered dispute resolution clauses as giving rise to enforceable agreements to engage in informal dispute resolution before recourse to formal proceedings.
An example of this is in the case of Sulamerica CIA Nacional De Seguros SA v Enesa Engenharia SA  EWHC 42 (Comm) where the Court of Appeal held that an obligation on the parties to “seek to have the Dispute resolved amicably by mediation” was unenforceable on the basis that the clause did not define the parties’ rights and obligations with sufficient certainty to enable it to be enforced. The clause did not set out any defined mediation process or refer to the procedure of a specific mediation provider and, as such, failure to mediate was no bar to commencing arbitration.
A shift in the Court’s approach?
However, the recent case of Emirates Trading Agency LLC v Prime Mineral Exports Private Limited  EWHC 2104 (Comm) indicates a shift in the Court’s approach. In this case, the Commercial Court held that a dispute resolution clause in an existing and enforceable contract requiring the parties to seek to resolve a dispute by “friendly discussions” within a limited time period and in good faith before the dispute could be referred to arbitration was enforceable, thereby departing from the general principle that an agreement to negotiate is unenforceable.
The clause in question read as follows:
“11.1 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 consuLTCion [sic] 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.
11.2 All disputes arising out of or in connection with this [contract] 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…“.
The claimant argued that the proposed arbitral tribunal lacked jurisdiction because the condition precedent set out in the clause (i.e. that the parties engage in four continuous weeks of “friendly discussions”) had not been fully complied with. The defendant’s response was that the arbitration tribunal was without jurisdiction as agreements to negotiate are unenforceable for want of certainty.
Departing from previous authorities, Teare J held that such an agreement is enforceable on the following bases:
Teare J distinguished Walford v Miles on the basis that it was not a case of a dispute resolution clause within a concluded, binding contract, whereas the present dispute was. He also distinguished the decision in Sulamerica v Enesa Engenharia on the basis that the absence of a named mediator or an agreed process whereby a mediator could be appointed rendered the agreement incomplete. Instead, Teare J relied heavily upon the Singaporean authority, International Research Corp. PLC v Lufthansa Asia Pacific Pte Ltd  SGHC 226 and the Australian Decision, United Group Rail Services v Rail Corporation New South Wales (2009) 127 Con LR 202.
It remains to be seen whether Teare J’s judgment will be followed in future cases. In any event, despite his more favourable approach parties should still ensure that they give careful consideration to tiered dispute resolution clauses; firstly, as to whether such a clause should be included in the contract and, if so, secondly, how such a clause should be constructed. Notwithstanding the obvious advantages of these clauses, they may have the unintended effect of enabling a recalcitrant party to simply delay and avoid its obligations. This is particularly pertinent if limitation is an issue. If parties do consider that it is beneficial to include such a clause, then they must ensure that it is clearly drafted with the type of ADR properly defined and provision for arbitration or litigation to be commenced if the ADR is unsuccessful within a stipulated period of time. Despite the Court’s recent shift in approach, failure to do so is still likely to render the clause unenforceable for lack of certainty.
Simon Ekins, partner, Fladgate LLP (email@example.com)