The English high court in Emirates Trading Agency LLC v Prime Mineral Exports Private Limited has now, hopefully, put an end to a debate in the English Courts on the enforceability of escalation clauses.
The dispute resolution clause required the parties to first seek to resolve any dispute by “friendly discussion” and, if there was no solution within a period of four weeks, the non-defaulting party could escalate the dispute and commence arbitration.
Previous judgments had held that the escalation clauses constituted an agreement to agree and were unenforceable. Alternatively, the courts held that clauses requiring such things as “friendly discussion” are too nebulous to be given legal effect.
The referral to arbitration was challenged on the basis that the required “friendly discussion” had not been completed. That challenge failed on the facts. More importantly, the court held that a time-limited obligation is enforceable and a condition precedent to the right to arbitrate.
In both South African and English law, contractual provisions must be sufficiently certain to be enforceable. The judgment is a common sense approach to the enforcement of dispute resolution clauses. It is in the public interest to enforce clauses that commercial parties have freely agreed to and expect to be enforced, especially if the object of the agreement is to avoid expensive and time-consuming arbitration or litigation.
These clauses should be drafted in clear and certain terms.