As the ink dries on their signatures and the parties to a newly formed contract sip champagne, rarely do they contemplate what happens when things go wrong. After all, it is hoped that the contract is the beginning of a long and successful business relationship.
However, it is important for parties to consider what should happen if that business relationship fails during the course of that contract.
For instance, if there is a breach, should the parties go to court or have the matter heard before an arbitrator?
As you’ll know from our ‘Making litigation cheaper‘ series, going to court can be costly and time consuming.
In a recent case, the parties sought to overcome this by agreeing to resolve any dispute by ‘friendly discussions’ prior to starting arbitration.
As a general position, there is no duty of good faith under English law and the courts have previously viewed good faith clauses as being too uncertain to enforce.
However, in this case the Commercial Court upheld the enforceability of a clause requiring the parties to enter into ‘friendly discussions’ before taking the matter to arbitration, marking another step towards the enforceability of good faith clauses in contracts – particularly when the clauses were negotiated by the parties involved.
We should not forget that each case is considered on its own merits and facts, and in this case, previous case law was distinguished. The Judge stated that whilst a simple agreement to agree would remain unenforceable, here the parties had created an obligation to negotiate within a specified period of time before moving on to arbitration.
This was clearly the parties’ intention and the Judge took into consideration the public policy reasons for encouraging parties to resolve their disputes without becoming engaged in legal proceedings.
Continuing the trend?
The courts have always given weight to the commercial negotiations that parties entered into when forming their contract. This decision marks a step towards validating the parties’ agreement that a ‘friendly discussion’ clause is appropriate in the circumstances.
It will be interesting to see whether this judicial trend towards the enforceability of good faith clauses continues; in the meantime, however, businesses should consider whether their contracts should contain multi-tiered dispute resolution clauses in an effort to resolve disputes in a timely and cost effective manner without involving court proceedings.