UK: Hyundai v Vigour Appeal - Enforcing Agreements to Negotiate or Mediate

Last Updated: 5 May 2005
Article by Richard Foley and Eileen Tay

Originally published April 2005

Is an agreement to negotiate in good faith or an agreement to mediate without any defined mediation procedure enforceable? Is an agreement not to arbitrate or litigate enforceable or is it against public policy to oust the jurisdiction of the courts? These were issues dealt with in Hyundai Engineering And Construction Company Limited v Vigour Limited a case decided by the Hong Kong Court of Appeal on 25 February 2005.

The parties in this case had entered into construction contracts which contained arbitration agreements. Disputes arose over the architect's certifications. The parties verbally agreed to enter into settlement negotiations but Vigour then refused to continue negotiations unless Hyundai signed an agreement undertaking not to pursue arbitration or litigation against them. Presented with an ultimatum to ‘fight or talk’ Hyundai agreed to sign an agreement prepared by Vigour (‘the March Agreement’) the entire terms of which were this:

‘The parties will not continue arbitration and will not bring any arbitration or court action forever and any right to sue each other will not be exercised any more mutually and the parties will start to discuss together to resolve any differences under or in connection with the above contracts and any arguments that may come up now and in the future for anything about the above contracts that can not be finalized will be resolved and decided by the managing directors of the ultimate shareholder group of the highest level provided failing an ultimate agreement then both parties shall agree and submit to Third Party Mediation procedure which shall be conducted and completed as soon as possible and in any case no party will exercise the right to sue against each other. To demonstrate this private settlement is in place, the Employer will let this relevant bond for Contract B expire.’

Having persuaded Hyundai to sign the March Agreement, Vigour then stonewalled the settlement negotiations until eventually Hyundai, having lost all confidence that Vigour was sincere in wanting to settle the disputes, tried to invoke the arbitration agreements in the underlying contracts. Vigour contended that the March Agreement had revoked the arbitration agreements under the construction contracts and sought an injunction restraining Hyundai from arbitrating.

Court proceedings were commenced whereby Hyundai sought declarations as to the meaning and effect of the March Update

Agreement including declarations that parts of the March Agreement were contrary to public policy (for ousting the jurisdiction of the courts) and the remainder comprised no more than an agreement to negotiate or mediate and was thus unenforceable and void for uncertainty. Part of Vigour's case was that the March Agreement was a conclusive settlement agreement the effect of which was to bind the parties to the architect's certificates unless the parties could agree some other solution by negotiation or mediation.

In the Court of First Instance, Reyes J held that Hyundai was entitled to pursue its claim in arbitration. His reasoning was as follows:

  1. The wording of the March Agreement was not clear enough to revoke the arbitration agreements between the parties. Neither could it be construed as a surrender of the parties rights to litigate in Court. It was only an agreement to refrain from exercising their right to arbitrate or litigate while the March Agreement was in effect.
  2. The provisions within the March Agreement which provided for negotiation and mediation were neither unenforceable nor uncertain. The learned Judge was of the view that not all agreements to negotiate in good faith were per se unenforceable. General agreements to mediate were also enforceable and the failure to identify a procedure or a time frame was not fatal to the enforceability of the obligation to mediate. The parties here were under a duty to act reasonably to negotiate in good faith and ensure that mediation took place in the event that good faith negotiations broke down.
  3. On the facts, Reyes J found that Vigour's conduct amounted to a repudiatory breach, terminating the March Agreement and thus releasing Hyundai from its promise to forebear from pursuing arbitration.

The Court of Appeal

The Court of Appeal agreed that Hyundai should be allowed to pursue their claims in arbitration but for entirely different reasons. Their reasoning was as follows:

  1. The Court of Appeal did not accept that the March Agreement was enforceable. Insofar as the March Agreement provided for the resolution of differences by the parties' managing directors, the Court of Appeal held that this was no more than an agreement to agree and unenforceable. Rogers VP observed that a court is not in a position to determine the good faith or otherwise of negotiations because a party is entitled to negotiate in any way it feels fit (in some cases part of a negotiating tactic may be to call off the negotiations hoping that better terms would be offered).
  2. Insofar as the March Agreement provided for Third Party Mediation, the Court of Appeal held it was imprecise and unenforceable as it did not define any specific steps which must be taken, by when, within what procedural ambit, etc. Like the agreement to negotiate, the agreement to mediate lacked the necessary certainty which would allow the court to enforce it.
  3. The Court of Appeal held that the wording of the March Agreement did amount to an abrogation of the parties' rights to arbitrate and litigate. Rogers VP of the Court of Appeal held that the use of the words ‘forever’ and ‘in any case no party will exercise the right to sue against each other’ clearly indicated that both parties were agreeing to forego arbitration and litigation on a permanent basis. He was of the view that it might be feasible to enforce such an exclusion provision provided the agreement within which that exclusion provision was contained itself resolved the parties' disputes. However, in this case, as the machinery for settlement of the disputes had fallen away as being unenforceable, the entire March Agreement was unenforceable.
  4. As the March Agreement was unenforceable the issue of repudiation did not arise.

Conclusion

The Court of Appeal's decision confirms that in Hong Kong a bare agreement to negotiate is unenforceable. Moreover, an agreement to mediate which does not contain a defined procedure is merely an agreement to agree and also unenforceable. As for agreements not to arbitrate or litigate forever, it is most unlikely that such agreements, without more, will be enforceable. The key lessons to be learned from this case are:

  1. If you wish to be able to enforce an agreement to mediate or negotiate you must include within the agreement sufficient certainty of what you mean by that to allow the courts to discern enforceable obligations. Bare or general agreements to negotiate or mediate are unenforceable.
  2. Think very carefully about the wording of settlement agreements or agreements providing for settlement. If you wish to prevent a party from litigating/ arbitrating at a later date your agreement must be in clear terms and must resolve, by compromise or otherwise, the matters in dispute.

Masons represented Hyundai - the successful party both at first instance and on appeal. The Court of Appeal's decision is currently the subject of an application for leave to appeal to the Court of Final Appeal.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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