- Arbitral Award
- ICC International Court of Arbitration, Paris 8540
PRE-BID AGREEMENT - BETWEEN A UNITED STATES SUPPLIER AND A MIDDLE EASTERN MANUFACTURER - GOVERNED BY THE LAW OF THE STATE OF NEW YORK - REFERENCE BY ARBITRAL TRIBUNAL TO UNIDROIT PRINCIPLES AS USEFUL SOURCE FOR ESTABLISHING GENERAL RULES FOR INTERNATIONAL COMMERCIAL CONTRACTS
AGREEMENT TO NEGOTIATE IN GOOD FAITH - TO BE CONSIDERED ENFORCEABLE UNDER THE LAW OF THE STATE OF NEW YORK - SOLUTION CONFIRMED BY GENERAL PRINCIPLES OF LAW AS REFLECTED IN UNIDROIT PRINCIPLES (ARTS. 1.1, 1.3, 1.7, 2.15 [ART. 2.1.15 OF THE 2004 EDITION] UNIDROIT PRINCIPLES)
A supplier of telecommunications systems in the United States (claimant) and a Middle Eastern manufacturer of telecommunications cables (defendant) entered into a pre-bid agreement whereby the parties undertook to negotiate in good faith for the supply of cables in the event that claimant's bid to become prime contractor for a telecommunications expansion project succeeded. Claimant secured the entire contract but after a series of fruitless negotiations terminated the preliminary agreement on the ground that the parties were unable to conclude the contemplated final agreements.
In the absence of any choice of law clause, while claimant invoked the law of Saudi-Arabia or that of England or that of Georgia as the applicable law, defendant invoked the law of the State of New York or that of New Jersey and, in addition, requested the Arbitral Tribunal to apply the UNIDROIT Principles as evidencing general principles of international commercial contracts.
The Arbitral Tribunal admitted that international arbitrators were fully justified in turning to general principles of law which may present some advantage over the selection of one of many competing municipal systems of law with no compelling connecting factors, but in the case at hand it decided in favour of the law of the State of New York as the applicable law.
However, the Arbitral Tribunal also referred to the UNIDROIT Principles, defined as a useful source for establishing general rules for international commercial contracts, in order to demonstrate that the conclusion it had reached under the law of the State of New York with respect to the issue at stake, i.e., the enforceability of the parties' agreement to negotiate in good faith, was also confirmed by the general principles of law as reflected in the UNIDROIT Principles (in particular Arts. 1.1, 1.3, 1.7 and 2.15 [Art. 2.1.15 of the 2004 edition]).
On the basis of its findings, the Arbitral Tribunal ordered the parties to promptly resume negotiations with a view to reaching an agreement on the supply of cables within the parameters set forth in the preliminary agreement.
Having concluded that the Parties intended to obligate themselves to cooperate in good faith and, upon award of any cable related Contract […], to meet promptly and negotiate in good faith supply and service agreements, the Tribunal must now determine whether such an obligation is enforceable under the law applicable to the merits of the dispute.
The position of the Claimant on this question is succinctly set out in the introduction to the relevant section of the ‘Post-Hearing Brief’. “The obligation to negotiate in good faith is unenforceable under any of the laws that might be applied to the [Agreement] – English, Saudi Arabia, Georgia, New York or New Jersey."
The Defendant, for its part, urges the Tribunal to reject the application of English or Saudi law, it being common ground between the Parties that an obligation to negotiate in good faith is unenforceable under the former, whereas application of the latter would result in the [Agreement] being void. The Defendant further submits that the Parties' obligation to negotiate in good faith is enforceable under the laws of Georgia, New York or New Jersey; subsidiarily, it invites the Tribunal to apply the Principles of International Commercial Contracts (the "UNIDROIT Principles"), under which, the Defendant submits, the Parties' express contractual commitment to negotiate in good faith is clearly enforceable.
B. Applicable law
The Parties did not make an express or implied choice of a specific municipal system of law governing the [Agreement]. As stated earlier in this award, shortly after it was constituted, the Tribunal was seized of the Defendant's Application for Determination of the Proper Law. This preliminary Application was dealt with in the Tribunal's Order No. 1, wherein we indicated that we would not decide the proper law of the in limine litis, since we wanted to give full opportunity to the Parties "to present and argue their case on the intent and meaning of all provisions of the [Agreement] relevant to the present arbitration . . ." The Tribunal referred specifically to paragraphs (3) and (5) of Article 13 of the ICC Rules which, we opined, "mandate the Tribunal not to decide the applicable law until sufficient evidence has been introduced to enable the Arbitrators to understand fully the terms of the [Agreement]. Thus, we remained seized of the Application and the question of the applicable law now has to be determined.
According to [Claimant] the question of the governing law of the [Agreement] was explicitly discussed, albeit not in any great detail, between [Claimant] and [Defendant] during the course of the August 1993 negotiations in Georgia. [Claimant] told the Tribunal that he proposed as the governing law the law of a State of the United States, either New York or New Jersey. Mr. X added that [Defendant] was unwilling to accept a governing law of the United States and wanted Saudi law to govern the contract. [Claimant], being unfamiliar with Saudi law, refused. In light of their disagreement, according to [Claimant’s] evidence, [Claimant] suggested that no governing law be specified in the [Agreement]. The evidence of [Defendant] on this question is that there was never any discussion of governing law between him and [Claimant]. Given that the [Agreement] is silent as to the applicable law, the Tribunal looks to Article 13(3) of the ICC Rules, which the Parties have expressly adopted. Art. 13(3) reads as follows:
“ (3) The parties shall be free to determine the law to be applied by the Arbitrator to the merits of the dispute. In the absence of any indication by the parties as to the applicable law, the Arbitrator shall apply the law designated as the proper law by the rules of conflict which he deems appropriate.”
As regards selection of the appropriate conflict rules, [Defendant] submitted in its Application for determination of the proper Law that "the accepted choice of law rule" in contract cases is "the law of the place with which the contract and the dispute has its most significant connection." In its Reply Memorandum, [Defendant] asserted that the "generally accepted centre of gravity - balancing of the contacts - test" is "consistent with the conflict of law rules of most jurisdictions."
[Claimant] for its part submits that the Tribunal should apply, either separately or collectively, English conflict of laws rules or generally accepted international conflict of laws principles. In Claimant's Post-Hearing Brief, counsel for [Claimant] referred to the "country having the most decisive connection with the PBA". The Kingdom of Saudi Arabia, the United States of America and, as the contractually designated seat of the arbitration, England, all have significant connections to the and the disputes referred to arbitration.
In agreeing to submit their disputes to ICC arbitration, [Claimant] and [Defendant] have expressed the intention that their agreement, as interpreted by the Tribunal, should be given full effect. Art. 13(5) of the ICC Rules is an expression and confirmation of this intention. It reads as follows:
“(5)In all cases, the arbitrator shall take account of the provisions of the contract and the relevant trade usage.”
In view of the Parties' intention in that regard, we are of the opinion that this Tribunal cannot designate as the proper law a system of law under which there would be found a legal nullity, or one under which the Parties’ key obligation would be found to be unenforceable. Stated otherwise, Art. 13(5) operates, in our opinion, as an implied negative choice of such a system of law. The Tribunal has already concluded that the Parties have obligated themselves to meet promptly and negotiate in good faith mutually satisfactory supply and service agreements. In our view, the Parties could not have intended that the governing law of the would render this contractual obligation unenforceable. This can be seen in a different context by Judge Leval in Tribune, a decision applying New York law which we discuss below.
It is, of course, the aim of contract law to gratify, not to defeat, expectations that arise out of intended contractual agreement. In the circumstances, neither the law of Saudi Arabia nor the law of England can, in our opinion, be designated as the proper law of the [Agreement]. In any event, neither England, as the lex fori, nor Saudi Arabia, even though the [Agreement] relates to a project located in that country, have decisively stronger connections with the in the dispute than the U.S. jurisdictions mentioned below.
In their able arguments, the Parties have drawn our attention to a multitude of connecting factors leading to a number of legal systems. As between the three U.S. jurisdictions with which the [Agreement] and the dispute have some connections, none of these connecting factors taken individually, nor all of them taken collectively, create a link of such intensity that the selection of one of these legal systems would readily impose itself. Moreover, the Parties, in their respective arguments, in effect agree that there is an absence of "clear pointers" to a single jurisdiction with which characteristic performance of the Parties' obligations can be linked. In order to determine the applicable law, we shall mention some of the connecting factors to which we have been referred by both Parties and which we consider relevant.
There are some important connections with the State of New Jersey. Negotiations of the [Agreement] , after 6 August 1993, took place in that State. The [Agreement] was signed in New Jersey by [Claimant] and, prior to the addition of paragraph 3(g), by [Defendant] as well. As regards contacts with the State of Georgia, we note that the initial negotiations of the [Agreement] in August 1993 were conducted in that State. Furthermore, a significant part of the negotiations contemplated by the [Agreement] was conducted in Georgia, in 1994.
In so far as the State of New York is concerned, we do not view as particularly significant the fact that [Defendant] approved the change to paragraph 3(g) from a hotel room in New York City. We do consider highly relevant, however, the fact that the Non-Disclosure Agreement which was signed by the Parties at the inception of the discussions concerning the [Agreement] on 4 August 1993 contains a choice of law clause in favour of the law of New York, including the statement, in paragraph 8, that "the parties are familiar with the principles of New York commercial law, and desire and agree that the law of New York shall apply in any dispute arising with respect to this Agreement."
We note the following explicit reference to this Non-Disclosure Agreement in paragraph 4 of the contract:
“4. Information. The Parties shall share such information as they, deem to be mutually beneficial in carrying out the purposes of this Agreement. Such information may include marketing or other proprietary information requiring protection against disclosure to unauthorized persons. Such proprietary information may also include data, and other technical, financial and business information. The Parties acknowledge and agree that such information shall be covered by the Non-Disclosure Agreement between dated 4 August 1993.”
Thus, the Parties, in effect, have already made the law of New York applicable to part of the . disclosure of proprietary information covered by paragraph 4 of the [Agreement] […] We consider relevant to our analysis, as well, the fact that, as appears from the contract itself, [Claimant] is a corporation organized under the laws of the State of New York. On balance, and, as already stated, while none of these three U.S. jurisdictions readily imposes itself, the Tribunal finds that the applicable law of the is the law of the State of New York.
C. General Principles of Law
Because of the acknowledged difficulty in finding a municipal system of law with which the [Agreement] is most closely connected, the Defendant invited the Tribunal to apply the UNIDROIT Principles. The Claimant, for its part, resisted the application of "general principles of law" to the present case.
In an international commercial transaction such as this contract between and, where the Parties have not indicated the applicable law and where there are many disparate connections to many different municipal systems of law, we are of the opinion that international arbitrators are fully justified to turn to general principles of law.
The choice of these general principles in such circumstances may present some advantages over the selection of one of many municipal systems of law where none of the connecting factors is compelling. Having found, however, after due consideration of the complete record, that the applicable law of the [Agreement] is the law of the State of New York, we decided to look to general principles only to compare the conclusion which results from the application of the proper law with the conclusion that would be obtained were the Tribunal to apply these general principles. In determining the content of these general principles, we feel entirely justified in referring to the UNIDROIT Principles which we consider a useful source for establishing general rules for international commercial contracts.
D. The Enforceability of the Parties' Obligation to Negotiate in Good Faith under the Proper Law and under General Principles of Law
We have reviewed carefully the evidence of the learned American jurists produced as expert witnesses by the Parties on the issue of the enforceability of contractual obligations to negotiate in good faith. We have consulted the decisions of American Courts to which we have been referred by counsel, particularly those that apply New York law. In these decisions, we note that the following are among the principal factors relevant in determining whether or not a preliminary agreement is binding: the circumstances surrounding the negotiations of the agreement, the conduct of the parties and, of course, the terms of the agreement, including the number and significance of open terms. A distinction also emerges from American cases between so-called "naked covenants" and "more complex" agreements such as the PBA.
In the present case, we have determined that, in executing the, the Parties intended to contract legally binding obligations, including the obligation to negotiate in good faith. As Judge Leval wrote in the Tribune case:
“Notwithstanding the importance of protecting negotiating parties from involuntary judicially imposed contracts, it is equally important that courts enforce and preserve agreements that were intended as binding, despite a need for further documentation or further negotiation. It is, of course, the aim of contract law to gratify, not to defeat, expectations that arise out of intended contractual agreement, despite informality or the need for further proceedings between the parties.”
The legal experts we heard all acknowledge that Tribune is an important precedent under the law of the State of New York on the subject of preliminary agreements. In the opinion of Professor Perillo, Tribune is "a very significant case, (...) significant because the reasoning it employed has come to be regarded as the controlling case on the issue under New York law." In Tribune, the Court wrote that preliminary contracts can be of at least two distinct types. In the first type, the parties have reached complete agreement (including agreement on the binding nature of their commitment) on all issues requiring negotiation. All that remains to be done is for the parties to formalize their agreement. As Judge Leval observes, such agreements are preliminary only in form. Judge Leval describes the second type of preliminary contracts as follows:
“The second and different sort of preliminary binding agreement is one that expresses mutual commitment to a contract on agreed major terms, while recognizing the existence of open terms that 'remain to be negotiated’. Although the existence of open terms generally suggests that a binding agreement has not been reached, that is not necessarily so. For the parties can bind themselves to a concededly incomplete agreement in the sense that they accept a mutual commitment to negotiate in good faith and to reach final agreement within the scope that has been settled in the preliminary agreement.”
Judge Leval has this to say with respect to the obligation to negotiate in good faith which arises (often implicitly) out of such an agreement:
This obligation does not guarantee that the final contract will be concluded if both parties comport with their obligation, as good faith differences in the negotiation of the open issues may prevent a reaching of final contract. It is also possible that the parties will lose interest as circumstances change and will `mutually abandon the negotiation’. The obligation does, however, bar a party from renouncing the deal, abandoning the negotiations, or insisting on conditions that do not conform to the preliminary agreement.
We find this reasoning both compelling and appropriate. Having reviewed the evidence of all legal experts on the applicable law as well as the cases we consider relevant, we have come to the conclusion that, under the law of the State of New York, the Parties' express obligation to negotiate in good faith is enforceable. The application of general principles of law as applied to international commercial contracts would lead us to the same conclusion. Under general principles of law, as reflected in the UNIDROIT Principles, the Parties are free to determine the content of their contract (Article 1.1). Consequently, they are free to undertake that they will negotiate in good faith. In the absence of any cause invalidating their agreement (as set out in Chapter 3 of the Principles), this agreement is binding on the Parties (Article 1.3).
We accept, as a sound interpretation of the pertinent Articles on this subject, the opinion of Professor Farnsworth who stated:
“Plainly, although the Principles impose a duty of good faith on negotiating parties quite apart from agreement, it would be inconsistent with the Principles to hold an agreement to negotiate to be unenforceable.”
The [Agreement] and specifically the undertaking to negotiate in good faith stipulated in it, would thus be valid, binding and enforceable under general principles of law as reflected in the UNIDROIT Principles. We find in these general principles a confirmation of the conclusion which we have reached by applying the law of the State of New York, which we have ruled to be the applicable law of the [Agreement].}}
- White & Case International Dispute Resolution, Vol. 10, March 1997, 3}}