A surprising recent court judgment gives us the opportunity to look at several interconnected topics which will have an effect on how you run your construction projects.
First, let’s summarise the case. In a contract for the purchase of iron ore, the parties wrote that they will “first seek to resolve the dispute by friendly discussion” and “if no solution can be arrived at for a continuous period of four weeks, then the non-defaulting party may refer the dispute to arbitration”. The parties held various meetings and discussions at different times over a six month period but could not resolve the dispute, so the claimant referred the matter to arbitration. The defendant tried to stop the arbitration by saying that the dispute mechanism was a condition precedent to any formal dispute process and had not been followed.
The judge in this case said that it was a specific, measurable, quantifiable obligation that could be enforced. In other words, the contract clause here required two parties to negotiate for a period of time – it did not require them to reach agreement and settle the dispute. The judge then went onto say that “continuous” could not mean every single day because parties were entitled to take time to gather their evidence and analyse the other party’s position. Therefore in this case the clause was enforceable but had been satisfied so the arbitration continued.
Lawyers think this case is surprising because the House of Lords established more than twenty years ago that an obligation to resolve a dispute by negotiation was unenforceable, lacking certainty as a simple agreement to agree. (i.e. A and B cannot sign a contract promising that they will agree something in the future and then sue each other when they do not manage to agree). As a result the judge here had to find a way to differentiate between the two concepts and in order to do so, had to find examples in Australia and Singapore.
In a construction contract in England, it is an implied term that either party may adjudicate at any time, but this was not a construction contract. Did you know that JCT terms also require parties to give “serious consideration” to mediation if a dispute cannot be resolved by direct negotiation? Mediation is often a good commercial strategy anyway, and the courts will penalise you financially if you do not consider it, but how often is a breach of JCT clause 9.1 pleaded? It isn’t, probably because up to now it has been considered unprovable and unenforceable.
That is not the end of the story. English law says there is no universal implied duty to act in good faith but judges have been willing to imply good faith duties in certain circumstances. A term can be implied into a contract if it is so obvious that it goes without saying, or where it is required to make the contract work properly, or where you can prove that the parties both intended such a term to apply, and in all cases the purpose is specific and ascertainable.
So back to this case. The contract required “friendly discussions”. The parties were large commercial organisations, of equal bargaining power, with professional advisors. There is no suggestion of unfair contract terms (UCTA) or commercial duress arguments. The parties were free to negotiate contracts as they saw fit. The courts always seek to uphold commercial bargains if at all possible. FIDIC Dispute Boards where people manage and analyse the issues in real time have demonstrated tangible success in reducing dispute costs.
So perhaps this case is not so surprising. The parties chose to use the word “friendly” – their intentions seem to show a desire to act in a sensible way to resolve disputes in a cost effective manner. So one might say that the parties actually wanted to act in good faith and therefore the judge reached the correct decision in upholding the clause by the wrong route.