The pre-arb negotiation agreement: Glue or sticking point?

By Xie Wei, CIETAC South China Sub-Commission
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The pre-arb negotiation agreement- Glue or sticking point_ , 仲裁条款中的协商前置约定:粘合剂还是绊脚石?

The parties usually agree in commercial contracts to negotiate with good faith before the commencement of arbitration or litigation. The pre-arbitration agreement contributes to the efficiency of dispute resolution, to save the time and cost of all parties and avoid further damage to the ongoing business relationship during legal proceedings.

However, it is often difficult for the parties to communicate effectively after disputes arise. An agreement to make negotiation or mediation a condition precedent to the right to pursue arbitration may sometimes be considered as a burden on the non-defaulting party, and become an obstacle to the resolution of disputes through formal legal procedures. In the process of case filing, arbitration institutions will focus on those unconventional wordings of the arbitration agreement, one of which is the pre-arbitration negotiation agreement.

In practice, there are generally two types of pre-arbitration negotiation agreement.

(1) Agreement with no period and form of negotiation.

“In case of any dispute or claim arising out of, or in connection with, or under this [contract], the parties shall first seek to resolve the dispute or claim by friendly discussion. If no solution can be arrived at between the parties, then any of the parties can invoke the arbitration clause and refer the dispute to the CIETAC South China Sub-Commission.” This is an example of this type of agreement. At the time of case filing examination, it is generally believed that the application for arbitration filed by the party concerned shall be deemed as a failure in negotiation, and the application shall be accepted.

(2) Agreement with specific period and form of negotiation

“In case of any dispute or claim arising out of, or in connection with, or under this [contract], the parties shall first seek to resolve the dispute or claim by negotiation in writing. If no solution can be arrived at between the parties for a continuous period of four weeks, then any of the parties can invoke the arbitration clause and refer the dispute to the CIETAC South China Sub-Commission.” This is a typical example of this type of agreement. It is important for arbitration institutions to confirm the date of commencement of negotiation or consultation, and to determine whether the prerequisite to arbitration is satisfied. Generally, the parties are required to demonstrate the subject, course and timing of the negotiation by submitting prior written communication between the parties. The written letter shall be, in form and content, including but not limited to an attorney’s letter, payment demand letter, notice letter, etc., so as to clarify that one or both parties have communicated on the dispute that is filed for arbitration.

However, in many disputes, the parties concerned cannot provide written documents, or they have communicated with each other only by phone, or WeChat. Under such circumstances, arbitration institutions may be cautious as to the content of the communication, or require the party concerned to submit an explanation about the process of negotiation. If the conditions are not satisfied, the secretary may explain this to the party, and suggest submission of the arbitration application only after the negotiation period and form are satisfied in a proper way, so as to consolidate the “ground” of arbitration.

In international commercial arbitration, a pre-arbitration negotiation agreement is also the key to the commencement of arbitration procedure. If one party decides to commence arbitration before a pre-arbitration negotiation or mediation has been completed, or even started, the other party may give notice of the violation of the agreement, and inform the secretariat of the Court.

Pre-arbitration negotiation here refers to the one with a specific period or form. Under the arbitration rules of the International Chamber of Commerce (ICC), if the court is prima facie not satisfied that it has jurisdiction over the matter in dispute, it may decide the arbitration cannot proceed, in view of the fact that pre-arbitration negotiations have not been completed.

However, in practice, the ICC usually leaves the decision to the arbitral tribunal, after its constitution. If the arbitral tribunal finds that the preconditions for arbitration have not been met, it has the competence to stay, or even dismiss, the arbitration proceedings. In extreme cases, the procedure is dismissed, and the pre-arbitration negotiation agreement has to be enforced before referring back to arbitration.

Although a pre-arbitration negotiation agreement does not affect the validity of an arbitration agreement, it is essentially a condition for the jurisdiction of arbitration over the dispute. The parties are expected to take full account of the nature and content of the transaction, and pay attention to the wording of the pre-arbitration agreement. Whether the duty to negotiate in the arbitration agreement will benefit or result in more cost and delay depends on how the party reduces the uncertainty of the scope of negotiation.

Xie Wei is a case manager at CIETAC South China Sub-Commission