‘Friendly discussion’. Two words that perhaps on first sight appear uncontroversial as to their meaning. However, when put into the dispute resolution clause of a contract, these two seemingly simple words can create issues from a contractual certainty perspective.

Two recent cases heard in the English Commercial Court dealt with this issue (Emirates Trading Agency LLC v Prime Mineral Exports Private Ltd [2014] EWHC 2104 (Comm) (“PMEPL case”) and Emirates Trading Agency LLC v Sociedade De Fomento Industrial Private Ltd [2015] EWHC 1452 (Comm) (“SFI case”)). Gautam Bhattacharyya (Partner) and Simon Greer (Associate) acted for Sociedade de Fomento Industrial Private Ltd in the SFI case.

The clauses in question The contracts between the parties in both cases were iron ore supply contracts. Disputes arose under both contracts as to breaches of contract by Emirates Trading Agency LLC. Both contracts had dispute resolution clauses providing for English law as the governing law and providing for disputes to be resolved by way of ICC arbitration. However, both contracts also had similar wording in them suggesting that, prior to arbitration being commenced, the parties to the contract had to seek to resolve their dispute by way of ‘friendly discussion’ (for a period of four weeks in one case, and a period of three months for the other) namely:

• “In case of any dispute or claim arising out of or in connection with or under this LTC including on account of a breaches/defaults mentioned … above, 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 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.”
• “In case of a breach mentioned … above, if such breach is not caused by an event of Force Majeure, the Parties shall seek to resolve any dispute or claim arising out of or under this LTC 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 in between the parties for a continuous period of three (3) months, then the non-defaulting Party can invoke the arbitration clause…”

Why have such a clause? This is the first question that may come to mind. The answer is that of course commercial parties want to avoid expensive and time-consuming arbitration (or indeed litigation) where at all possible, and having a dispute resolution clause requiring parties to try to resolve a dispute amicably before they have the ability to refer it to arbitration is desirable from a commercial point of view. Mr Justice Teare eloquently summarised this in the PMEPL case as follows:

“There is obvious commercial sense in such a dispute resolution clause. Arbitration can be expensive and time consuming. It is far better if it can be avoided by friendly discussions to resolve a claim. Thus the clause obliges the parties to seek to resolve a claim by friendly discussions before a claim can be referred to arbitration. The reference to a period of four continuous weeks ensures both that a defaulting party cannot postpone the commencement of arbitration indefinitely by continuing to discuss the claim and that a claimant who is eager to commence arbitration must have the opportunity to consider such proposals as might emerge from a discussion of his claim for a period of at least four continuous weeks before he may commence arbitration.”

So what can be learnt from these cases? In the PMEPL case, Mr Justice Teare held that the ‘friendly discussions’ clause was enforceable as a condition precedent to PMEPL being able to commence arbitration against ETA, although he also importantly held, after hearing detailed argument, that PMEPL had fully complied with the clause on the facts.

In the SFI case, Mr Justice Popplewell dismissed ETA’s application for reasons of res judicata (as the issue had already been determined in a prior arbitration between the parties) but, having also heard argument on the enforceability of the ‘friendly discussions’ clause, he declined to make any ruling on its enforceability and indicated, again after hearing detailed argument, that if the clause was enforceable then SFI had fully complied with it on the facts.

Whilst it is possible that such a ‘friendly discussions’ clause may be enforceable, such a point is entirely academic if the clause has been complied with as a matter of fact. Accordingly, whilst to lawyers and academics the debate about the enforceability of such a clause may be very interesting, to commercial parties, such a debate is undesirable.

So what can be done to avoid this? In one word: certainty.

When drafting a dispute resolution clause and some form of ADR is desired before the entitlement to formal proceedings arises or the other party is insisting on it, then it is worth thinking, if someone is looking at the clause in five years’ time, will they clearly know what was intended or can it be argued about? The latter is what needs to be avoided. Certainty applies to every element:

i. The nature of the discussion – ‘Friendly discussion’ – what does that mean? Firstly, what does ‘friendly’ mean? Mr Justice Teare sought to define it as “fair, honest and genuine discussions aimed at resolving a dispute”. Even if that is what is meant by ‘friendly’ as a matter of English law, it could then be argued between parties as to whether they had been “fair”, “honest” and/or “genuine”. Ultimately, the lesson to be learned here is that descriptive words to describe the nature or character of the discussions should ideally be avoided.

ii. The type of discussion – What is a ‘discussion’? Does it have to be in person, or on the telephone, or can a discussion occur by way of letter or email? Arguably ‘discussion’ can include all of these forms of communication but, again, the form and forum of the discussion should be defined as clearly as possible at the outset.

iii. Who has to be involved in the discussion? – A party would not want any arguments at a later date that the discussions were not compliant with the dispute resolution clause because the person who conducted them on their behalf did not have a sufficient level of authority to bind the company, for example.

iv. Timing – In the PMEPL and SFI cases, the question of timing/length of the ‘friendly discussions’ also became an area for argument. As mentioned above, one clause required a continuous period of four weeks and the other required a continuous period of three months. An immediate question is: What is a ‘continuous’ period? Are the parties supposed to be speaking to each other every day for four weeks or three months? Clearly that cannot be what was commercially intended. Accordingly, defining the timing of the process needs to be done carefully and with certainty.

There is no issue in having, for example, a four week period in which the discussions must take place (after notice being given) and then a four week longstop date after those discussions in which a resolution must be reached, but within those time periods, the number of discussions should be defined. For example, the parties could agree that, before arbitration can be commenced, two in person meetings between their respective CEOs must occur within a period of four weeks and that, thereafter, if following a further four week period expiring after the last of those two meetings, there has been no resolution, the dispute may be referred to arbitration.

v. Notice of desire to have a meeting – linked to timing, this is another way of providing certainty to the process and also starting the clock ticking so that there can be no debate about when the ability to refer the dispute to arbitration starts. There could be a provision stating that if one party gives the other written notice of its desire to have a meeting to look to resolve the dispute, the other party must attend a meeting within a defined time period thereafter and, if they fail to do so, the dispute may then be referred to arbitration. Such a notice provision will hopefully ensure that the clause is adhered to.

How to avoid problems down the line

Solution 1 – bearing all of the above in mind, define what form the discussion must take, who must attend, where it must be, when it must take place and how the desire to have a discussion must be communicated.

By defining the above issues more specifically, if one party simply refuses to engage in the process by refusing to have a meeting, it can be more easily shown that they breached the clause and therefore that the other party can proceed to arbitration.

Solution 2 – a more formal ADR mechanism such as a mediation or adjudication procedure could be specified (again the specifics of these processes should be clearly defined, including the factors mentioned above).

Solution 3 – the other option is simply not to have any sort of amicable resolution procedure as a condition precedent to arbitration at all. Parties can have ‘without prejudice’ discussions at any time. They do not need to provide for it in their contract terms and therefore it may be that many commercial parties simply prefer to have the right to refer a dispute to arbitration or court immediately, rather than have to go through an ADR process.

Conclusion Care should always be taken when drafting a dispute resolution clause. The PMEPL and SFI cases re-emphasised just how important the above factors are when drafting a dispute resolution clause, and just as importantly that PMEPL and SFI both fully complied with the clauses in question. Commercial parties will always want to try to avoid expensive and time-consuming formal proceedings where at all possible but it is essential to have as much certainty as possible in the dispute resolution clause, to avoid expensive and distracting satellite litigation.

Client Alert 2015-246