Although it is commercially sensible to encourage parties to resolve disputes before engaging in costly arbitration, lawyers and courts often struggle with clauses requiring negotiation or mediation as a pre-condition to arbitration. There is concern about the abstract scope of an obligation to negotiate” in good faith”, and a reluctance to define its substantive content. There also needs to be certainty as to the scope and duration of these obligations. An obligation unlimited in time offers a recalcitrant party an opportunity to delay simply by dragging out discussions. Alternatively, a defined time period, although certain, may delay a party from acting immediately to protect its rights. These issues may invite un welcome disputes over a tribunal’s jurisdiction.

The efficacy of so called multi-step or “tiered” clauses has also been limited by the tendency of some courts to regard them as generally unenforceable agreements to agree. Similarly, a duty to negotiate in good faith has been deemed inconsistent with the position of a negotiating party. A party must be free to develop whatever negotiating strategy it sees fit including, if necessary, simply walking away. Nevertheless the English Commercial Court has now expressed a positive judicial attitude towards enforcing tiered arbitration clauses, and giving effect to the public policy of encouraging ADR.

In Emirates Trading Agency LLC v Prime Mineral Exports Pte Limited [2014] EWHC 2104 (Comm), Mr Justice Teare distinguished earlier cases to conclude that an obligation to negotiate can be legally enforced. The arbitration clause stipulated”…The parties shall first seek to resolve the dispute or claim by friendly discussion…” and contemplated a 4 week period for those discussions. The judge placed considerable reliance upon a detailed analysis of the issues by the New South Wales Court of Appeal in United Group Rail Services Ltd v Rail Corp New South Wales (2009) 127 Con LR 202 and quoted from an extra-judicial lecture by Lord Steyn in concluding that “good faith connoted an honest and genuine approach to settling a dispute […] Where a party clearly fails to honour such standards of conduct judges and commercial arbitrators will have no particular difficulty in recognising and identifying such failures” (at para 53). Indeed, Teare J. went further than the NSW court, to hold that negotiations might include the broader commercial interests of the parties, and was not just limited to the existing contract (at para49).

In a later decision, involving the same claimant, another judge of the Commercial Court approved this approach and expressly rejected the submission that the negotiations needed to be referable to the parties’ rights and obligations under the existing contract: Emirates Trading Agency LLC v Sociedade de Fomento Industrial Private Limited [2015] EWHC 1452 (Comm)(para. 61).

These decisions reinforce the English Courts’ support for arbitration and ADR, and the judges of the Commercial Court appear prepared to give content to the obligation to negotiate by reference to accepted standards of commercial conduct, in line with reasonable expectations of commercial parties. It is hoped that this development will encourage parties to follow amicable dispute resolution agreements, and discourage tactical jurisdiction challenges based on non-compliance.