Arbitration - United Kingdom

Conciliation clause held too uncertain to be enforceable

Contributed by Clifford Chance LLP
February 14 2013
Introduction
Facts
Issue
Test for concil iati on and mediati on clauses
Comment

Introduction
Dispute resolution clauses in many commercial agreements provide for claims to be submitted to
conciliation or mediation before they can be submitted to arbitration or court proceedings. The
aim is to avoid costly arbitration or court proceedings by requiring the parties to engage in
cheaper and less formal processes first. However, many of these conciliation or mediation
provisions amount to nothing more than agreements to negotiate in good faith, which are not
enforceable under English law.
The recent High Court decision in Wah (aka Tang) v Grant Thornton International Ltd ([2012]
EWHC 3198 (Ch)) provides helpful guidance as to the drafting requirements that conciliation or
mediation clauses should meet to be upheld by the courts.
Facts
The claimants were two partners in a Hong Kong accountancy partnership that was expelled from
the Grant Thornton network of accountancy and audit firms by GTIL, the network's English
umbrella organisation. Arbitration proceedings regarding the expulsion were commenced under
the network's membership agreement. The agreement required a two-stage conciliation of
disputes first by GTIL's chief executive and then by three of GTIL's board members, to be
appointed by the board before a dispute could be submitted to arbitration. A one-month time
limit was put on each stage.
Some steps were taken with a view to complying with the conciliation process. The dispute was
submitted to GTIL's chief executive. However, he advised that given his involvement in the
decision to expel the Hong Kong partnership, he could not act as an objective conciliator. When
asked by their chairman some two months later whether they could serve on the independent
three-member panel contemplated at the second stage of the reconciliation process, GTIL's
board members also declined to put themselves forward as conciliators.
In the arbitration proceedings that were subsequently commenced, the Hong Kong partnership
argued that the tribunal did not have jurisdiction, because the requisite steps of pre-arbitration
reconciliation had not been complied with. Those steps, the Hong Kong partnership argued, were
clearly prescribed and were conditions precedent to any reference of the dispute to arbitration.
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GTIL took the position that the provision was too uncertain to be enforceable and that the dispute
had therefore properly been referred to arbitration.
In its final award, the arbitral tribunal determined that it had jurisdiction, finding that the
conciliation clause in the membership agreement lacked essential qualities of a binding provision
for mediation or conciliation. The tribunal took these to involve reference to a third party that was
independent and, possibly, also paid.
The Hong Kong partnership applied to the English court to have the final award set aside on the
ground that the tribunal did not have jurisdiction. Confirming the tribunal's finding that it had
jurisdiction, the judge upheld the award.
Issue
In reaching his decision, the judge considered the requirements that must be satisfied for
provisions for the conciliation or mediation of disputes before arbitration or court proceedings to
be enforceable. When considering the authorities, the judge identified a tension between the
desire to give effect to what the parties agreed and the difficulty in giving objective and legally
controllable substance to what they agreed.
The judge took as the starting point the general rule that agreements to agree and agreements to
negotiate in good faith are generally unenforceable under English law. An exception to the
general rule is where the provision in question can be construed as a commitment to agree a fair
and reasonable price.
However, especially when the relevant provision forms part of an otherwise legally enforceable
contract, the court will strain to find a construction that gives it effect. The court might imply
criteria to enable it to determine what process is to be followed and when and how the process is
to be treated as successful, exhausted or properly terminated. Again, the court will especially
readily imply such criteria in the context of a stipulation for the agreement of a fair and reasonable
price.
Test for concil iati on and mediati on clauses
The judge emphasised that the court must consider each case on its own terms. The test is not
whether the clause is a valid provision for a recognised process of alternative dispute resolution.
The question is rather whether the terms that it imposes are sufficiently clear and certain to be
given legal effect. For this purpose, the judge distinguished between positive obligations and
negative injunctions.
Posi ti ve obl igations
With respect to positive obligations to attempt to resolve a dispute or difference amicably before
referring a matter to arbitration or bringing proceedings, the test is whether the provision
prescribes, without the need for further agreement, a sufficiently certain and unequivocal
commitment to commence a process from which might be discerned what steps each party is
required to take to put the process in place, and which is sufficiently and clearly defined to enable
the court to determine objectively:
the minimum required of the parties to the dispute under that process in terms of their
participation in it; and

when or how the process will be exhausted or properly terminable without breach.
The judge concluded that the conciliation clause in this case did not satisfy the test for
enforceability. While the clause made clear that a reference to the chief executive was required, it
did not make clear what form the conciliation process should take, who was to be involved in it
(eg, the parties to the dispute) and what they were required to do by way of participation in the
process; nor did the clause clarify what the obligation to attempt to resolve the dispute required
the chief executive to do.
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Negati ve obl igations
In the context of a negative stipulation or injunction preventing a reference or proceedings until a
given event, the question is whether the event is sufficiently defined and its occurrence
objectively ascertainable in order to enable the court to determine whether and when the event
occurred.
The judge rejected the submission by the Hong Kong partnership that the conciliation clause
constituted a permanent bar to any party commencing arbitration if either the three-member panel
had not been established or no request for conciliation had been referred to it. He held (in the
alternative to his conclusion that the conciliation clause was not enforceable) that on its true
construction, the clause did not prevent any party from commencing arbitration proceedings
either:
two months after a request for conciliation had been made; or
if a three-member panel could not be established because there were no board members
willing to serve or because the board as a whole took the view that the dispute could not be
resolved by such a panel.

Comment
In reaching his conclusion, the judge appears to have aligned conciliation with mediation, for
which procedures are required if an obligation to mediate is to be enforceable, rather than
discarded as a mere agreement to agree.
The decision highlights important aspects to be borne in mind when drafting enforceable
conciliation clauses:
In addition to applicable time limits, a conciliation clause should make clear the process for
conducting conciliation, including what is required of the conciliators and the parties to the
dispute by way of participation.

The conciliators or a process for their appointment should be identified. If possible, the
conciliators should be independent of the parties and the dispute that is being referred to
them for resolution.

If the parties' intention is that engagement in the conciliation process is a condition precedent
to any reference of a dispute to arbitration, the conciliation clause should make this clear and
specify when or how the conciliation process will be exhausted or properly terminable without
breach.

For further information on this topic please contact Marie Berard or Katharina Lewis at Clifford
Chance LLP by telephone (+44 20 7006 1000), fax (+44 20 7006 5555) or email
(marie.berard@cliffordchance.com or katharina.lewis@cliffordchance.com).
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Authors

Marie Berard
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Kathari na Lewis





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