It is tempting for an aggrieved person to immediately initiate legal action against someone who has wronged them. However, if the parties’ relationship is governed by a written contract, more often than not there would be a dispute resolution clause. This clause may contain requirements that each party must abide by before commencing litigation or arbitration against the other party.

Take construction contracts for example. Under the PAM Contract 2018, clauses 36 and 37 stipulate the condition precedents a party must comply to commence adjudication or arbitration. In the P.W.D. Form 203 (Rev. 1/2010) contract, clause 66.0 provides that any dispute or difference arising from the contract is to be referred to an officer named under the contract, before commencing arbitration. 

Non-compliance of these condition precedents can render an action to be a non-starter. In the Federal Court case of Juara Serata Sdn Bhd v Alpharich Sdn Bhd [2015] 6 MLJ 773, it was held that the condition precedents in dispute resolution clauses are to be upheld and adhered as parties must be held to their bargain.

Condition precedents requiring parties to “negotiate in good faith” – are these enforceable?

Some clauses may dictate that parties must try to negotiate or settle their differences in good faith first, before commencing legal action. This is not surprising given that both litigation and arbitration can be costly and time consuming.

These clauses have been held enforceable in jurisdictions like England and Australia:

  • In Emirates Trading Agency LLC v Prime Mineral Exports Private Limited [2014] EWHC 2104 (Comm) (“Emirates Trading”), the High Court held that the requirement for parties to resolve a dispute by friendly discussions in good faith before commencing arbitration is enforceable.
  • In United Group Rail Services Limited v Rail Corporation New South Wales [2009] NSWCA 177 (“United Group Rail”), “genuine and good faith negotiations” clauses as preconditions to arbitration or litigation were  enforceable.

In Malaysia, the High Court in Yong Ah Huat & Anor v Toshiba Corp [2018] MLJU 262, referring to Emirate Trading and United Group Rail among others, determined that a clause requiring “amicable discussion” before arbitration is a mandatory condition precedent. There, the Court held that even though the “amicable discussion” clause was written in general terms (eg: without specifying any time frame or person), the main principle is that parties are bound to adhere to what they have bargained for and must fulfil the preconditions before they proceed with arbitration. In determining whether parties have complied with a generally worded precondition, the Courts will recognise the commercial and practical realities where parties have actual notice of a dispute and have attempted to amicably resolve their dispute.

Key Takeaways

It is understandable that at the time of drafting, parties are looking forward to formalise their future business relationship, and may not be thinking of or even contemplating a dispute. However, dispute resolution clauses should not be treated as “boilerplates” and ignored or skipped over during a contract review. 

In a contract review, special attention should be paid to the dispute resolution clause. Parties should consider the practicalities of the clause, such as whether a pre-condition is necessary, or if it would be more favourable to both parties to allow direct initiation of legal action. Factors that could affect this include the nature and value of the transaction, the location of parties, and ease (or difficulty) and costs of commencing legal action against the other. Parties will be held to their bargain, so a dispute resolution clause is ignored at one’s own peril.

***

This article was written by Sean Ferdinand Ng (Associate) from Donovan & Ho’s employment law practice. 

Donovan & Ho is a law firm in Malaysia, and our employment practice group has built a reputation for providing strategic employment advice to local and global organisations.  Our team of employment lawyers provide advice on employment law and industrial relations including review of employment contracts, policies and handbooks, advising on workforce reductions, and managing dismissals of employees for poor performance or misconduct. We also represent clients in unfair dismissal claims and employment-related litigation. Have a question? Please contact us.

 

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