This article is written by Tanisha Kohli, pursuing Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho.

Introduction

A pre-arbitration dispute resolution clause essentially provides that; prior to arbitration, the parties will attempt to resolve the dispute through other means such as negotiation, mediation, or deliberations. In other words, it can be understood as an agreement between the parties to engage in a multi-tier dispute resolution process. For instance, the clause may provide that at the first tier, parties will resolve the dispute by negotiation. If the dispute is not resolved by negotiation, then parties will proceed to the second tier. The second tier may provide that the parties will resolve the dispute by mediation. If the dispute is not resolved by mediation, then parties will proceed to the third tier. The third tier may provide that the parties shall resolve the dispute by arbitration.  

Sometimes, a party may bypass a tier, and directly proceed to the next tier. For instance, a party can initiate arbitration directly, without resorting to negotiation. In such a case, the other party can argue that the arbitral tribunal does not have jurisdiction to decide the dispute, as the jurisdiction is ousted by the existence of a valid and mandatory pre-arbitration procedure clause, which is a condition precedent to arbitration. 

This article provides some ideas on how to argue that the pre-arbitration dispute resolution clause is not enforceable, and thus the jurisdiction of the arbitral tribunal is not ousted. It deals with pre-arbitration dispute resolution clauses in an international commercial arbitration agreement. 

Sample pre-arbitration dispute resolution clause

“The parties shall try to resolve any disputes arising out of or in connection with this agreement amicably through good faith negotiations and deliberations. In the event that such attempts should fail within 30 (thirty) calendar days from the first written request for negotiations and deliberations by either party, either party may refer the dispute to arbitration in accordance with the arbitration rules of the Singapore International Arbitration Centre (“SIAC Rules“) for the time being in force. The tribunal shall consist of one arbitrator who shall be appointed in accordance with the SIAC Rules. The language of the arbitration shall be English. The seat of the arbitration shall be the City of Lakes, Iliria. The decision of the tribunal shall be final and binding upon the parties. The expenses of arbitration shall be borne in accordance with the determination of the arbitration.” 

This clause was a part of the moot problem of the 6th NLIU – Justice R.K. Tankha Memorial International Arbitration Moot, 2021.

The pre-arbitration dispute resolution procedure is unenforceable because it is not valid

It is a cardinal principle of law that an agreement has to be sufficiently certain to be enforceable. Though intended to be enforceable, if the terms of the agreement are so vague that there is no standard for deciding whether the agreement had been kept or broken, or to fashion a remedy, and no means by which such terms may be made certain, then there is no enforceable contract. This was said in the case of Candid Productions v. International Skating Union. Moreover, the court must be satisfied that each part of the clause which was intended to be operative can be given certain legal content and effect. Thus, it can be argued that in the concerned dispute, the pre-arbitration dispute resolution procedure is too uncertain and vague. To buttress this submission, it can be argued that the conditions laid down in the case of Wah v Grant Thornton Int’l Ltd are not met.

In this case, the court stated: “In the context of a positive obligation to attempt to resolve a dispute or difference amicably before referring a matter to arbitration or bringing proceedings the test is whether the provision prescribes, without the need for further agreement, (a) a sufficiently certain and unequivocal commitment to commence a process (b) from which may be discerned what steps each party is required to take to put the process in place and which is (c) sufficiently clearly defined to enable the Court to determine objectively (i) what under that process is the minimum required of the parties to the dispute in terms of their participation in it and (ii) when or how the process will be exhausted or properly terminable without breach.” 

There is no sufficiently certain and unequivocal commitment to commence a process

Agreements to agree and agreements to negotiate in good faith, without more, must be taken to be unenforceable. As held in the Candid Productions case, such an agreement is nebulous since it implicates so many factors that are indefinite and uncertain and the intent of the parties can only be fathomed by conjecture. It has also been recognised that there is a practical and legal impossibility of monitoring and enforcing the process of ‘good faith’ negotiation. For instance, it may be argued that in the sample pre-arbitration dispute resolution clause, it merely provides that the parties shall try to resolve any disputes arising out of or in connection with this agreement “amicably” through “good faith negotiations and deliberations.” There is no indication as to what is meant by the words “amicably” and “good faith negotiations and deliberations”. Thus, there is no sufficiently certain and unequivocal commitment to commence a process.

It is not possible to discern what steps each party is required to take to put the process in place and what is the minimum required in terms of their participation

A clear set of guidelines to measure any party’s best efforts is essential for the enforcement of such a clause. In Fluor Enters. Inc. v. Solutia Inc the court enforced the contractual negotiation procedure which provided for a minimum number of meetings, the designation of the person who would request the meeting to take place and the number of days within which the meeting must take place. 

In White v. Kampner, The court enforced the mandatory negotiation clause which provided the minimum number of negotiation sessions that the parties were required to undertake. It may be argued that these indications in the above two cases are absent from the concerned arbitration clause.  For instance, in the sample clause, the pre-arbitration dispute resolution procedure provides for “the first written request for negotiations and deliberations by either party”. 

However, it is not clear that when either party makes a written request for negotiation and deliberation, what is the step that the other party is required to take in order to meet the criteria of good faith negotiation and deliberation. Moreover, there is no indication about who is to be involved in the process of negotiations and deliberations. Thus, the process is not sufficiently certain because there is the need for an agreement at any stage before matters can proceed.

It is not possible for the court to determine objectively when or how the process will be exhausted or properly terminable without breach

During negotiations, either party is entitled to withdraw from these negotiations, at any time and for any reason. There is no obligation to continue to negotiate until there is a ‘proper reason’ to withdraw. Thus, it may be argued that it is not possible for the court to determine objectively when or how the process will be exhausted or properly terminated without breach. For instance, in the sample clause, it can be argued that, the phrase “in the event that such attempts should fail” does not make it sufficiently clear what would constitute a failure of the good faith negotiations and deliberations. 

The pre-arbitration dispute resolution procedure is not mandatory

Assuming but not conceding that the pre-arbitration dispute resolution procedure is valid, the claimant may submit that it is not mandatory. Doubts regarding the mandatory character of contractual negotiation provisions should generally be resolved in favour of their aspirational, non-binding nature. Only in cases involving unequivocal language, should a pre-arbitration negotiation provision be regarded as a mandatory requirement. Here, the parties will have to examine the language of the clause, to see whether the words used are “shall” and similar words or “may” and similar words. Usage of “shall” will be a strong indication of a mandatory obligation. 

The pre-arbitration dispute resolution procedure does not constitute a condition precedent

A number of national court decisions have concluded that certain pre-arbitration procedural requirements were not the conditions precedent to commencing arbitral proceedings – even where they were valid and mandatory. These decisions have instead reasoned that pre-arbitration procedural requirements were contractual obligations, whose breach only entitled a counterparty to damages. Provisions that specifically provide that a particular pre-arbitration step is a “condition precedent” or “condition” will generally be more likely to be characterized as foreclosing access to arbitration if they are breached. 

The claimant may thus argue that there is no express language providing that the good faith negotiations and deliberations are a “condition precedent” to arbitration. 

The claimant has complied with the pre-arbitration dispute resolution procedure

Assuming that the pre-arbitration dispute resolution procedure is valid, mandatory, and a condition precedent to arbitration, the claimant can argue that it has complied with the pre-arbitration dispute resolution, by highlighting the scope of efforts required by the party, and the instances of compliance with these requirements. For instance, in a matter where negotiation was agreed upon as the pre-arbitration dispute resolution procedure, the claimant may argue as follows. 

Negotiating ordinarily means no more than indicating availability to exchange views about a dispute and imposes no obligation to compromise, to consider compromises, to volunteer a new or revised position, or otherwise to engage in bargaining with a counterparty. It may suffice that a discussion should have been commenced, and it may be very short. Thus, to argue that it has complied with the pre-arbitration dispute resolution procedure the claimant may rely upon communications between the parties, such as those in which each party was maintaining its position and those positions were far apart, with little prospect of a compromise. Other facts which show that prior to commencing arbitration, the claimant attempted to settle the dispute amicably, and complied with the pre-arbitration dispute resolution procedure can be relied upon. 

Conclusion

In sum, the claimant can argue that the pre-arbitration dispute resolution procedure does not oust the tribunal’s jurisdiction. This is because the pre-arbitration dispute resolution procedure is unenforceable as it is not valid, and nor is it mandatory. It is, at most, a contractual obligation, and does not constitute a condition precedent to commencing the arbitration proceedings. Without prejudice to the aforementioned submissions, the claimant can submit that it has complied with the pre-arbitration dispute resolution procedure. 

References

• Candid Productions v. International Skating Union, 530 F. Supp. 1330 (S.D.N.Y. 1982)
• Wah (aka Tang) v. Grant Thornto n Int’l Ltd, [2012] EWHC 319
• Halifax Fin. Servs. Ltd v. Intuitive Sys. Ltd, [1999] 1 All ER (Comm)
• Mocca Lounge,Inc.v.Misak,94 A.D. 2d761,763(N.Y.App.Div.1983)
• Fluor Enters. Inc.v. Solutia Inc.,147F. Sup p.2d648,649n.1(S.D.Tex.2001)
• White v. Kampner, 641A.2d1381,1382 (Conn.1994)
• Holloway v. Chancery Mead Ltd., [2007] EWHC 2495
• GARY B BORN, INTERNATIONAL COMMERCIAL ARBITRATION 636 – 942(2nd ed. Kluwer 2014)
• Final Award in ICC Case No.11490, X XXVIIY.B.Comm.Arb.167(2012)
• Greece v. Britain, (1924),PCIJSer.A,No.2

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