Friday, August 29, 2014

Good faith in multi-tier dispute resolution clauses - Part I

One of the more significant contract law decisions to emerge from the English High Court in 2013 was the decision of Leggatt J in Yam Seng, which held that 'good faith' was a concept not limited to civilian legal systems and could be put to use in the interpretation of contracts in the common law world. Another decision of the High Court last month has now extended the dictum of Yam Seng to multi-tier dispute resolution clauses, marking another departure from previous jurisprudence.

The issue in Emirates was straightforward - the Court was asked to interpret and determine the enforceability of the following clause:

"In case of any dispute or claim arising out of or in connection with or under this [contract], 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."

Mr Justice Teare began by stating that the clause could not be construed to require the parties to "engage in friendly discussion ... for a continuous period of 4 weeks". The parties merely needed to engage in friendly discussion to the extent possible, and if no solution could be arrived at after 4 weeks (irrespective of the period the discussion lasted), the dispute may be referred to arbitration. Teare J also rightly pointed out that the notification of the desire to enter into the consultation was not a mandatory requirement, but merely an option available to the parties ("any party may").

The critical question then was whether this obligation to "first seek to resolve the dispute or claim by friendly discussion" was enforceable. In a somewhat surprising decision, Teare J concluded that the clause was enforceable, distinguishing decisions of the House of Lords, the Court of Appeal and four High Court decisions, relying instead on a decision of the New South Wales Court of Appeal. Teare J held that in order to bring a claim in arbitration, it was necessary for the parties to have sought to resolve the dispute by friendly discussion and for a period of 4 weeks to have elapsed since such effort was first made. On facts, Teare J held that this prerequisite was satisfied and therefore the arbitration claim had been validly brought.

The most interesting aspect of the decision however is the crucial role played by the Yam Seng reasoning in arriving at this conclusion – as will be discussed below (and in a following post), without the implication of ‘good faith’ the decision would have been fundamentally at odds with binding English precedent.

The locus classicus on the enforceability of agreements to negotiate is the House of Lords decision in Walford v Miles [1992] 2 AC 128. In Walford, the House of Lords held that a lock-out agreement (whereby one of the parties agreed not to negotiate or consider proposals from third parties) was unenforceable.

Lord Ackner’s judgment for the Court addresses the two discrete obligations pleaded by the claimant: (1) a negative obligation to not negotiate with any other party; and (2) a positive obligation to negotiate with the claimant in good faith. Lord Ackner held that the negative obligation could not be enforced because the agreement in question did not specify any time limit for its operation and held that the positive obligation could not be enforced because an obligation to negotiate in good faith is “inherently repugnant to the adverserial position of the parties when involved in negotiations”. In arriving at his decision on the positive obligation, Lord Ackner made several statements regarding the uncertainty of the obligation and the unworkability of enforcing such a subjective obligation in practice, which have since been relied on by several English courts in determining the enforceability of agreements to negotiate.

Against this backdrop, it is easy to identify the major distinction between the facts of Walford & Miles and Emirates – the negative obligation in Emirates was time-bound. What is more difficult however is to give effect to the positive obligation to “seek to resolve the dispute or claim by friendly discussion”. In the next post, we will discuss how Teare J gave effect to this obligation placing reliance on the NSWCA decision in United Group Rail Services v Rail Corporation New South Wales and, crucially, on Yam Seng.

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