Enforceability of Pre-arbitral Agreements to Negotiate

– Kabir Chaturvedi*

Abstract

An agreement to negotiate is one of the pre-conditions to arbitration included in Multi-Tier Dispute Resolution clauses. If a clause employs imperative diction, pre-conditions to arbitration are to be mandatorily fulfilled before commencement of arbitration. However, in cases of non-fulfillment of agreements to negotiate, courts do not bar commencement of arbitration, despite imperative language. This blog examines decisions of courts and tribunals from several jurisdictions and seeks to explain why pre-conditions to negotiate have been rightly termed vague, amorphous, and legally unenforceable.

INTRODUCTION

Pre-Arbitral agreements to negotiate are a part of Multi-Tiered Dispute Resolution clauses[1] (hereinafter “MTDR” clauses). These agreements are typically included in commercial contracts, when parties do not want any future disputes to hamper their business relationship. Agreements to negotiate encourage resolution of disputes through commercial settlements, effectively saving time and money of the parties involved. Negotiations are the first tier of MTDR clauses, and tribunals should be approached only after these attempts to amicably settle the dispute fail. 

NATURE OF AGREEMENTS TO NEGOTIATE

When the language of a MTDR clause employs imperative terms, such as “shall” or “must”, it becomes mandatory for the parties to participate in negotiations before submitting the dispute for arbitration. In such cases, pre-arbitral procedures are consistent with a mandatory obligation.[2] This mandatory obligation represents a condition precedent to the right to refer a claim to arbitration. In Int’l Research Corp. plc v. Lufthansa Sys. Asia Pac. Pte Ltd, the Singapore court reasoned that:

“…until the condition precedent to the commencement of arbitration is fulfilled, neither party to the arbitration agreement is obliged to participate in the arbitration. In the same vein, an arbitral tribunal would not have jurisdiction before the condition precedent is fulfilled.”[3]

Hence, agreements to negotiate should also be compulsorily fulfilled before commencing arbitration.

COURTS AND TRIBUNALS’ INTERPRETATION OF AGREEMENTS TO NEGOTIATE

The above conclusion however, only stands true in principle. Courts and arbitral tribunals have both been reluctant to enforce these agreements as a pre-condition to commencement of arbitration proceedings.[4] The Queen’s Bench in Itex Shipping PTE Ltd v. China Ocean Shipping Co (The “Jing Hong Hai”)[5] declared that an agreement to settle disputes amicably by negotiations was not a “legally enforceable obligation constituting condition precedent to arbitration.” Similarly, in an International Chamber of Commerce (hereinafter “ICC”) case[6] the tribunal opined that a clause calling for attempts to settle a dispute amicably primarily expresses the intention and must be viewed in the light of the circumstances. They should not oblige the parties to engage in fruitless negotiations or to delay an orderly resolution of the dispute.

THE REASONS BEHIND RELUCTANCE TO ENFORCE

Why have these agreements held to be unenforceable? The justification behind this decision of courts from numerous jurisdiction can be presented in the form of a three-pronged argument:

Too vague and uncertain to correctly enforce

Agreements to negotiate have been categorized as too vague and uncertain for enforcement. In Candid Prod., Inc. v. Int’l Skating Union[7], the US court reiterated this dictum. It held that agreements to negotiate are “even more vague than an agreement to agree,” and “an agreement to negotiate in good faith is amorphous and nebulous, since it implicates so many factors that are themselves indefinite and uncertain that the intent of the parties can only be fathomed by conjecture and surmise.[8] In Wah (aka Tang) v. Grant Thornton Int’l Ltd[9] agreements to negotiate in good faith were held to be unenforceable because good faith is “too open-ended a concept or criterion” to provide a sufficient definition of what such an agreement must, at minimum, involve and when it can “objectively be determined to be properly concluded.”

Most courts only uphold the validity of agreements to negotiate only where there are a reasonably clear set of substantive and procedural requirements, against which a party’s negotiating efforts can be meaningfully measured. In Mocca Lounge, Inc. v. Misak, the U.S. Court observed, “even when called upon to construe a clause in a contract expressly providing that the parties are to apply their best efforts to resolve their dispute amicably, a clear set of guidelines against which to measure a party’s best efforts is essential to the enforcement of such a clause.”[10] Absent such guidelines, courts in both civil and common law jurisdictions have frequently held that particular agreements to negotiate the resolution of disputes are inherently uncertain and indefinite, and therefore invalid.[11]

No commitment to any outcome makes them fruitless

Agreements to negotiate in good faith have been termed to be naturally aspirational, which depict a mutual desire of amicable resolution of disputes, yet no commitment to any particular outcome. Undertakings of this character are properly treated as sui generis, valid and enforceable only in limited circumstances, which do not infringe on the parties’ general freedom of contract and commercial autonomy.[12] Agreements to negotiate, hence, have been held to be fruitless, and a mere formality. This is especially true in cases where it is clear that there is little prospect of settlement. ICC, in a case from 2001 rejected an appeal of the respondent on these very grounds, stating that “a clause calling for attempts to settle a dispute amicably are primarily expression of intention, and must be viewed in the light of the circumstances. They should not be applied to oblige the parties to engage in fruitless negotiations or to delay an orderly resolution of the dispute.”[13]

Reduce promised efficiency

The possibility of an arbitral tribunal declining jurisdiction merely due to the non-fulfilment of a pre-arbitral procedural requirement of a MTDR clause, heavily undermines the promised efficiency in finding, quick and cost-effective dispute resolution. This effectively vitiates the fundamental, underlying principle of undertaking arbitration. Closing the proceedings merely due to the non-fulfilment of a pre-arbitral agreement to negotiate would lead to termination of the current arbitral tribunal’s mandate. Further, since agreements to negotiate are non-determinative, if a solution is not reached, a new tribunal would have to be constituted. A termination of arbitral proceedings would also entail the risk of a party’s claim being time-barred as mediation or similar proceedings do not interrupt limitation periods.[14] A party might thus, not have the time to go through a pre-arbitral process before the statutory limitation period has expired. Accepting this commonly accepted scholarly view,[15] the Switzerland Supreme Court also rejected the option to decline jurisdiction and close the proceedings in a recent case.[16]

Other practical reasons

The argument against ignoring pre-arbitral agreements to negotiate is that when parties draft a clear and binding multi-tiered clause commencing with negotiation, the will of the parties should be respected within the scope of party autonomy.[17] However, when one of the parties commences arbitral proceedings, it is evident that the will of the parties has changed. Negotiation is a procedure which is consensual and its management is contingent upon the voluntary participation of the parties involved. Compelling an unwilling party to negotiate the disagreement would be futile and impractical due to the non-cooperative and non-consensual nature of the party. There can be no scope for settlement with that mindset. When there is no scope for a settlement, these clauses can be described as mere formalities, and hence to enforce the same would be against the essence of arbitration itself, which promises quick and cost-efficient resolution of disputes.[18]

CONCLUSION

The ambiguity of pre-arbitral agreements to negotiate perplexes the tribunals and courts, and is responsible for the vacuum between the principle behind enforcement of these agreements and the practice of doing it. The non-determinative nature of negotiation means that there is no guarantee for reaching a settlement. Further, there isn’t a prescribed procedure for this pre-arbitral agreement, which is why there aren’t any concrete ways to measure the parties’ efforts. The absence of this threshold is why courts and tribunals are unable to properly enforce these agreements, even if they wish to do so. In light of these complexities, tribunals and courts are generally reluctant to enforce agreements to negotiate.


*Kabir Chaturvedi is a student at Rajiv Gandhi National University of Law, Punjab. He can be reached via LinkedIn or emailed at kabirchaturvedi@rgnul.ac.in

[1] Award in ICC Case No. 9977, 14(1) ICC Ct. Bull. 84 (2003); G. Born, International Arbitration and Forum Selection Agreements: Drafting and Enforcing 100-101 (4th ed. 2013).

[2] Gary Born, International Commercial Arbitration, 927 (2nd ed. 2014) [Hereinafter Born].

[3] Int’l Research Corp. plc v. Lufthansa Sys. Asia Pac. Pte Ltd, [2012] SGHC 226, ¶¶101 et seq. (Singapore High Ct.).

[4] Cavinder Bull, ‘Commencing Arbitration’, International Arbitration: The Coming of a New Age?, 17 ICCA Congress Series, Kluwer Law International 135 – 173 (2013).

[5] [1989] 2 Lloyd’s Rep 522 (QB).

[6] Final Award, ICC Case No 8445, XXVI YB Comm Arbitration 167 (2001).

[7] Candid Prod., Inc. v. Int’l Skating Union, 530 F.Supp. 1330, 1337 (S.D.N.Y. 1982).

[8] Id.

[9] [2012] EWHC 3198, [2013] 1 Lloyd’s Rep 11.

[10] Mocca Lounge, Inc. v. Misak, 94 A.D.2d 761, 763 (N.Y. App. Div. 1983).

[11] Sulamerica CIA Nacional de Seguros SA v Enesa Engenharia SA – Enesa [2012] EWHC 42  (Comm), (2012) 1 Lloyd’s Rep 671 [27]; Brunet v. Artige, 1992 Rev arbitration 646 (French Cour de cassation civ. 2e).

[12] Born, supra note3, at 927.

[13] ICC Case No. 8445, Final Award, XXVI Y.B. Comm. Arb. 167 (2001).

[14] Alexander Jolles, Consequences of Multi-tier Arbitration Clauses: Issues of Enforcement, Arbitration 336 (2006); Kaufmann-Kohler & Rigozzi, International Arbitration: Law and Practice in Switzerland, 3, oup (2015) ¶5.23.

[15] Marco Stacher et al., Rechtsprechungspanorama in Schiedssachen 372 (2018); Berger & Kellerhals, International and Domestic Arbitration in Switzerland, 3 (2015) ¶584; Poudret & Besson, Comparative Law of International Arbitration, 2 (2017) ¶13.

[16] BGE 142 III 296.

[17] Didem Kayali, Enforceability of Multi-Tiered Dispute Resolution Clauses, 27(6) Journal of International Arbitration Kluwer Law International, 551-57 (2010).

[18] Gary Born & Marija Scekic, Practising Virtue – Inside International Arbitration 263 (2015).


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