Multi-Tiered Dispute Resolution Clauses: Clarity Required for Good Faith Negotiation

Wednesday, 26th August 2015

Multi-tiered dispute resolution clauses outline the steps that parties must take before initiating arbitration, or Court proceedings. The clauses stipulate that the parties attempt to reach a settlement through means other than commencing proceedings, most commonly beginning with negotiation.  Where, after a dispute has arisen, the parties are prepared to comply with such clauses they provide a useful mechanism to avoid the expense and uncertainty of formal proceedings. However, where one party does not comply with the procedure laid down in such a clause, difficulties may arise in enforcing an obligation to negotiate in good faith.   

Until recently, courts have generally been unwilling to interpret these clauses as having legal force, viewing them as unenforceable ‘agreements to agree’ rather than as conditions precedent. However, the ruling in Emirates Trading Agency LLC v. Prime Mineral Exports Private Limited [2014] has moved English jurisprudence towards an interpretation that a promise to negotiate in good faith, which constitutes part of a complete agreement and is sufficiently clear, may be binding upon the contracting parties. It is important to note that, while the court appears to have made multi-tiered dispute resolutions clauses enforceable, it did not advance a legal standard for measuring the nature and extent of ‘negotiating in good faith’ save as to say good faith, in this context, connotes an honest and genuine approach to settling a dispute which if disregarded, judges and commercial arbitrators will have no particular difficulty in recognising  such a failure.

Good faith negotiation

The principle of good faith has a broad connotation, which makes it especially difficult to identify in parties’ conduct. Critics of compulsory negotiation argue that it gives too much interpretative leeway to the adjudicatory bodies, resulting in incoherent and ideologically motivated rulings. Such concerns are especially relevant in arbitration jurisprudence, which lacks the precedent principle of common law.

While it is difficult to define good faith, contract language can (and must) clarify the matter by setting out clear parameters or procedures. For example, the contract could outline how negotiations must proceed: what the allowable issues up for negotiation are, how many meetings will take place, and what the deadlines are. The contract may call for a third party – a mediator, for example – to ensure an efficient negotiation provided of course the process for appointment of a mediator is sufficiently clear and certain.

Alternatively, the tribunal could ascertain whether a party negotiated in bad faith. It is much easier for a tribunal to identify inappropriate conduct than to decide whether a party’s behavior met the required legal standard. Providing false information, for example, in order to prolong negotiations and increase the other party’s costs is likely to be considered a breach. The challenge for the arbitrator is to differentiate between, on the one hand, hard bargaining in negotiations inherent to negotiations between two or more self-interested parties and, on the other hand, an obstructive approach that constitutes bad faith in negotiating an agreement.

Conclusion

Multi-tiered dispute resolution clauses remain problematic despite the decision in the Emirates Trading Agency case. Where parties have contractually bound themselves to negotiate in good faith and negotiations have ostensibly failed with one party seeking to arbitrate or litigate, relying on the other's failure to negotiate in good faith as the basis of their entitlement to commence proceedings, determining the absence of good faith entails substantial legal uncertainty. It is therefore incumbent on those drafting these clauses to ensure that there is sufficient detail to provide certainty, particularly in relation to any criteria that might be relied upon to demonstrate good faith.