The English High Court has, somewhat controversially, found that an obligation on parties to enter into “friendly discussion” before embarking on arbitration was an enforceable term of the contract.
The contract in question was for the purchase of iron ore. The buyer didn’t take up all the iron ore that it was expected to under the purchase agreement. After some time, the seller terminated the agreement and claimed over US$45 million liquidated damages for the buyer’s breach.
The dispute resolution clause in the agreement provided that the parties should seek to resolve any dispute by “friendly discussion”. Failing resolution within a continuous period of four weeks, the non-defaulting party could refer the dispute to arbitration.
There were a number of meetings between the parties to discuss the buyer’s breach of contract, both before and after the seller had served notice to terminate the agreement. The disputes were not resolved and the seller referred the matter to arbitration.
The buyer argued that the arbitrators had no jurisdiction because the “friendly discussion” condition had not been met.
The questions for the court were as follows:
- Was the “friendly discussion” clause in the agreement enforceable?
- If it was not, then the arbitrators had jurisdiction. If it was, the next question was whether the parties had in fact complied with the “friendly discussion” requirement.
Previous English cases have tended not to recognise contractual provisions requiring disputes to be settled amicably. These sorts of agreements have been held to be too uncertain to enforce, and the courts have declined to do so because of the practical difficulties of monitoring and enforcing compliance.
In this case, however, the judge concluded that the requirement to enter into friendly discussion was enforceable. He also decided that, on the facts of the case, the parties had in fact complied with it – and, as they still hadn’t resolved their differences, the seller had been entitled to refer the matter to arbitration.
The judge considered that, for public interest reasons, the courts should seek to give effect to parties’ agreed dispute resolution clauses that purport to prevent them from arbitrating or litigating a dispute without first seeking to resolve it by friendly discussion – and noted that requirement would in turn imply an obligation to do so in good faith.
The case may mark a turning point in the enforcement of such clauses under English law. For those involved in negotiating and drafting agreements, it highlights the need to be precise when drafting the dispute resolution provisions. Parties embarking on commercial relationship are often tempted to shy away from discussions about what will happen if things go wrong. But it can be crucial to get a clearly drafted, dispute resolution clause that is practical and workable for both contracting parties.
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On July 14, 2014