Insights

Agreement to Negotiate/Mediate: A Matter for Careful Drafting

Dispute resolution provisions have taken on new meaning these days. Not too long ago, such provisions were frequently regarded as little more than clauses dealing with the agreement to arbitrate. Then mediation came into vogue, and mediation-arbitration provisions became popular, requiring parties to consider mediation proceedings before resorting to arbitration. When even mediation came to be regarded as time-consuming, overly legalistic, and expensive (in keeping with the common misconception that anything involving lawyers is time-consuming and expensive), ingenious practitioners came up with a new provision, one we can conveniently name "the discussion-mediation-arbitration provision."

Usually, this means that another level of discussion is required before mediation proceedings can take place, and the discussions themselves may have further "sublevels," with the result that mandatory discussions between executives at different levels are frequently required (if talks fail at one level, they proceed to another) before parties can consider mediation, let alone arbitration. This process can take months, in which the dispute dies a natural death because of the sheer exhaustion of the negotiators.

It may surprise some practitioners to learn that despite the uncertainties inherent in such provisions, they have been held to be enforceable under English law (see Cable & Wireless plc v IBM United Kingdom Ltd [2003] BLR 89). Indeed, court proceedings can be stayed if the parties have not first resorted to and complied with such provisions (see, e.g., Channel Tunnel Group v Balfour Beatty (1993) 61 BLR 1). These provisions must not be mere "agreements to negotiate," however, since the lack of specific dispute recommendations will render them unforceable (Paul Smith Ltd v H&S International Holding Inc [1991] 2 Lloyd’s Rep 127; Courtney & Fairbairn v Tolaini Brothers (Hotels) Ltd [1975] 1 WLR 297). Which side a provision falls on depends very much on its wording, and the recent decision in Hong Kong of Hyundai Engineering and Construction Co Ltd v Vigour Ltd [2005] 1 HKC 579 provides useful guidelines in this respect.

The Provision

In the Hyundai case, the agreement in question contained the following provision:

. . . the parties will start to discuss together to resolve any differences under or in connection with the above Contracts and any arguments that may come up now and in the future for anything about the above Contracts that cannot be finalised will be resolved and decided by the managing directors of the ultimate shareholder group of the highest level, provided failing an ultimate agreement then both parties shall agree and submit to Third Party Mediation procedure, which shall be conducted and completed as soon as possible and in any case no party will exercise the right to sue against each other. . . . (emphasis added)

The Decision

The Hong Kong Court of Appeal held that an agreement that disputes "will be resolved" by party representatives is unenforceable for lack of certainty (Watford v Miles [1992] 2 AC 128), even if the agreement requires the parties to put forth their "best endeavours" to negotiate.

Argument was then made (apparently using the judgment of Kirby P in Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1) that the provision would be rendered enforceable by its statement that in the failure to reach agreement during negotiations, parties would "agree and submit to Third Party Mediation procedure."

But the Court held that this wording did not render the agreement any more certain. According to the Court, the purported "mediation agreement" lacked precision because it had not prescribed specific measures, such as a timetable, for a formalized alternative dispute resolution procedure. (The Court compared this agreement with that in Cable & Wireless plc v IBM United Kingdom Ltd [2003] BLR 89, which was held to be enforceable because it had actually specified details for a formalized alternative dispute resolution procedure.) The Court held that such a general reference to mediation meant nothing more than negotiations assisted by some unspecified third party.

Even reading that provision against a more detailed mediation clause provided in the parent contract (Clause 86 of the standard Kowloon-Canton Railway Corporation Contract Form) would not have saved it, because Clause 86 related to a different matter and the procedure described therein ultimately provided for arbitration at the insistence of either party—something the parties to the agreement in question apparently wished to avoid.

Another provision in the agreement, which purported to exclude formal proceedings, stating that parties would not continue or bring any arbitral or legal proceedings "forever," was also held to be unenforceable because the agreement in question did not itself provide any means to resolve disputes, the provision for mediation having been ruled unenforceable. The Court thought it might be feasible to enforce such an exclusion provision if the agreement had provided alternative means to resolve any issues arising from the parties. But since that was not the case, the exclusion provision cannot be enforced.

In the course of argument, it was also submitted that such an exclusion provision would be unenforceable on public-policy grounds because it purported to oust the jurisdiction of the courts. The Hong Kong Court of Appeal did not have to deal with this argument because of the position it had taken above.

Conclusion

The enforceability of a "negotiate first" provision is often important, whether as a primary means of allowing key stakeholders to talk and manage the relationship or to buy time to prepare a case and avoid adverse market reactions. Business leaders may (and often do) make aggressive project decisions on the assumption that any fallout from the small print can be sorted out in lengthy and compulsory negotiations. But if these provisions turn out to be unenforceable, the consequences can be disastrous. The stakes also become higher when there are no alternative mechanisms available to resolve disputes (e.g., arbitration) and the parties are forced to turn to the local courts for a decision.

The Hyundai case therefore illustrates the point that while "negotiate first" provisions are useful, they have to be carefully drafted to prevent commercial/business teams from encountering unwanted surprises.

Lawyer Contact

For further information, please contact your principal Firm representative or the lawyer listed below. General e-mail messages may be sent using our "Contact Us" form, which can be found at www.jonesday.com.

Chee Yean Choy
65.6233.5550 (Singapore)
852.64707747 (Hong Kong)
cychoy@jonesday.com

Jones Day Commentaries are a publication of Jones Day and should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at its discretion. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship.

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