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Contract clause requiring ‘friendly discussions’ before arbitration is legally enforceable

A clause in a contract requiring ‘friendly discussions’ before either party can start formal legal proceedings may be enforceable, as if it was a duty to negotiate in good faith.

An agreement for sale of iron ore contained a provision requiring the parties to enter into ‘friendly discussions’ before starting arbitration proceedings. A dispute arose and one party went straight to arbitration on grounds that the ‘friendly discussion’ requirement was too uncertain to be legally unenforceable.

The court decided the clause was certain enough to be enforceable. It said courts were quite capable of judging whether there had been discussions, and whether they were ‘friendly’. It said the duty to have friendly discussions was the same as a duty to negotiate in good faith.

Other legal decisions had already ruled a duty to negotiate in good faith could be enforceable in some circumstances – although those decisions also said the duty of good faith did not stop the parties taking their wider commercial interests into account when negotiating.

The court drew a distinction between this clause and those in other cases requiring the parties to mediate, but without specifying who should be mediator. In those cases a vital component was missing, creating uncertainty. In this case it said:

“The agreement is not incomplete; no term is missing. Nor is it uncertain; an obligation to seek to resolve a dispute by friendly discussions in good faith has an identifiable standard, namely, fair, honest and genuine discussions aimed at resolving a dispute.”

The court looked at the parties’ conduct to see if there had been sufficient friendly discussions. In fact, it decided there had been, so the first party was entitled to go to arbitration.

One consequence of this decision is that a court may not be able to decide whether there have been friendly (good faith) discussions without hearing what was said in ‘without prejudice’ discussions (discussions that would not normally be admissible as evidence).

Operative date
• Now

Recommendation
• Parties wishing to include a contractual requirement for ‘friendly discussions’, ‘negotiations in good faith’ or similar provisions should take professional advice to make sure they are sufficiently certain to be legally enforceable.

Case ref: Emirates Trading Agency Llc v Prime Mineral Exports Private Ltd [2014] EWHC 2104

6 November 2014

Alex Cook initially trained as a Barrister (non-practicing) before cross-qualifying as a specialist commercial and property litigation solicitor. Prior to becoming joint owner of Helix Law in 2013, he was Head of Litigation and one of the youngest partners in the region in a large firm based in Eastbourne. Comfortable and experienced litigating against large international City firms, he has successfully resolved complex commercial and property disputes for clients ranging from large international businesses and property investors to individual business people. Alex is an accredited commercial mediator  and he is increasingly asked to advise on contracts, risk, dispute avoidance and exit strategies. He also continues to develop and innovate our products, services and funding arrangements with the aim of making specialist litigation services more transparent and accessible.

This article is written to raise awareness of the issues it discusses and it may not be updated after it is first written, even if the law changes. It is not intended to be legal advice and cannot be relied on as such. Helix Law is not responsible or liable for any action taken or not taken as a result of  this article. If you think the matters set out affect you and you wish to apply them to your particular circumstances then we are happy to give you free initial telephone advice. 

Contact Helix Law on 01273 761 990 or email: [email protected]