October 1, 2014
Many commercial contracts contain a 'friendly negotiations' or 'confer in good faith' clause which specifies that if differences or disputes arise during the course of the contractual relationship, the parties will attempt discuss and resolve the dispute amicably prior to resorting to adjudication, whether by litigation or arbitration.
Prior to the Court of Appeal decision of HSBC Institutional Trust Services (Singapore) Ltd (trustee of Starhill Global Real Estate Investment Trust) v Toshin Development Singapore Pte Ltd1, it was unclear if the Singapore Court would adopt the views of the English House of Lords decision of Watford v Miles2, that an agreement3 to negotiate in good faith was unworkable in practice, uncertain and had no legal content.
In Toshin, one of the main issues was whether an express term in a contract which obliged the parties to endeavour, in good faith, to agree on a new rent was valid and enforceable. The Court of Appeal distinguished Watford on the basis that that case involved pre-contractual negotiations and held that Watford did not have the effect of invalidating an express term in a contract. The Court of Appeal also opined that there was no reason why an express agreement between contracting parties that they must negotiate in good faith should not be upheld, and that such clauses were in the public interest as they promote the consensual disposition of any potential disputes.
Soon after Toshin, a similar issue arose in International Research Corp PLC v Lufthansa Systems Asia Pacific Pte Ltd and another4. In that case, the main agreement contained a dispute resolution mechanism which prescribed that any dispute should first be resolved by a specified mediation procedure, failing which, the dispute should be resolved by arbitration. Chan Seng Onn J followed Toshin and held that an obligation to refer the dispute to a specified mediation procedure was enforceable and a condition precedent to the commencement of arbitration. He also held that an arbitration tribunal would not have jurisdiction before the condition precedent was fulfilled.
Given the two decisions cited above, it appears that parties to a 'friendly negotiations' or 'confer in good faith' clause must comply with their obligations to negotiate in good faith prior to resorting to an adversarial process, or risk a challenge to jurisdiction at a later stage.
1 4 SLR 738 ("Toshin")
2  2 AC 128 (''Watford'')
3 In Watford, the agreement was an oral and involved pre-contractual negotiations.
4  1 SLR 973