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M&A Diligence: time limited obligation to resolve a dispute by "friendly discussions" found to be enforceable

Recent case law suggests that care should be taken when inserting clauses in acquisition agreements which require parties to speak to each other to resolve problems, as such provisions may constitute binding obligations.  In Emirates Trading Agency LLC v Prime Mineral Exports Private Limited [2014] EWHC 2104 (Comm), the parties entered into a contract for the sale and purchase of iron ore.  Clause 11.1 of the contract required the parties to “first seek to resolve the dispute or claim by friendly discussion”.  If the dispute was not resolved within four weeks, then the non-defaulting party could refer the dispute to arbitration.

Emirates breached the contract, and Prime Mineral served a notice of termination on 1 December 2009.  The parties met on various occasions to try and resolve the dispute, but to no avail, so Prime Mineral referred the matter to arbitration in June 2010.  The arbitral tribunal held that the obligation to resolve the dispute by friendly discussion was unenforceable but, in any event, the parties had complied with such an obligation.  Emirates applied to the High Court under the Arbitration Act 1996, claiming that the requirement for friendly discussions was a condition precedent to arbitration, and that as there had not been four weeks of continuous discussions between the parties, the tribunal did not have jurisdiction to hear the dispute. Prime Minerals claimed that the obligation to resolve the dispute by friendly discussions was an unenforceable “agreement to agree”, but it had nonetheless been satisfied by the parties.

In dismissing Emirates’ application, the High Court held that the obligation to engage in friendly discussions was enforceable, but on the facts had been complied with by the parties. Justice Teare accepted that the English law authorities to which he had been referred suggested that clause 11.1 was unenforceable.  However, the present case could be distinguished from other authorities (including the seminal Walford v. Miles), on the basis that:

  • the obligation to resolve the dispute by friendly discussion was time limited; and
  • “friendly discussion” imported a standard of good faith, which was an identifiable standard, namely “fair, honest and genuine discussions aimed at resolving a dispute”.

Therefore, in this case the relevant obligation was neither incomplete nor uncertain.  In addition, enforcement of such an obligation was in the public interest, because commercial parties expect obligations which they have freely undertaken to be enforceable and, second, because the object of the clause was to avoid expensive and time consuming arbitration.

It remains to be seen whether the decision in Emirates will be upheld or followed in subsequent cases.  Nonetheless, it is a significant departure from previous law.  Commercial parties and lawyers drafting contracts should be aware that there is now English law authority suggesting that a clearly defined, time limited obligation to resolve a dispute with friendly discussions is enforceable.  This may be relevant to various types of clauses found in corporate agreements, including provisions in share purchase or shareholders’ agreements which require parties to agree on particular matters within a specified time frame (e.g. earnout mechanics, clauses requiring the parties to agree a price for a leaver’s shares, or deadlock provisions).

For more information, please contact Adam Kuan.