The status of express obligations to negotiate in good faith

In two recent decisions, the courts have considered the enforceability of express contractual terms requiring a party to negotiate in good faith and, in each case, found that the relevant terms did not give rise to enforceable obligations: Barbudev v Eurocom Cable Management Bulgaria EOOD [2012] EWCA Civ 548 and Charles Shaker v Vistajet Group Holdings SA [2012] EWHC 1329 (Comm). 

It has long been established that a bare agreement to negotiate is unenforceable. However, judicial commentary has suggested that, in some circumstances, the courts may take a more liberal approach where parties had agreed an express term to negotiate in good faith in a professionally drafted commercial contract. In particular, in Petromec v Petroleo Brasiliero [2006] 1 Lloyd's Rep 121, the Court of Appeal commented (obiter) that it would be "a strong thing to declare unenforceable a clause into which the parties have deliberately and expressly entered".

In both Barbudev and Shaker, however, the relevant terms were held to be unenforceable. The cases re-emphasise that a term requiring a party to negotiate in good faith the terms of a further agreement  is unlikely to be enforced even where expressly included in a professionally drafted commercial contract. Kevin Kilgour considers the decisions. 

	Kevin Kilgour  Associate  +44 20 7466 2584

Barbudev v Eurocom

Barbudev is a decision of the Court of Appeal from April 2012 which concerned a side letter relating to the proposed sale of a cable television and internet business. The side letter, which had been drafted by external lawyers, contained the following term:  "in consideration for you agreeing to enter into the Proposed Transaction … the Purchaser hereby agrees that … we shall offer you the opportunity to invest in the Purchaser on the terms to be agreed between us which shall be set out in the Investment Agreement and we agree to negotiate the Investment Agreement in good faith with you".

Although the Court of Appeal found that, in signing the side letter, the parties intended to create legal relations, the above term was nevertheless unenforceable as it amounted to an 'agreement to agree'. The Court of Appeal did not, however, refer to Petromec in its decision or give any further guidance as to when a term requiring a party to negotiate might be enforceable.

Shaker v Vistajet

Shaker is a decision of the Commercial Court from May 2012, which expressly considered the court's comments in both Petromec and Barbudev. In Shaker, Mr Shaker sought the return of a US$3.55m deposit paid pursuant to a Letter of Intent in respect of a potential transaction concerning the purchase and operation of an aircraft then owned by a company within the Vistajet group. It was accepted that the Letter of Intent was intended to be binding in respect of certain matters including the payment and refund of the deposit.    

The Letter of Intent contained a provision that where "despite the exercise of good faith and reasonable endeavours" the parties "fail to reach agreement, execute and deliver the Transaction Documents before the Cut-Off Date … the Guarantor [i.e. Vistajet] shall within five (5) business days following the Cut-Off Date refund the deposit to [Mr Shaker]".  Vistajet argued that Mr Shaker was not entitled to the return of his deposit as he did not proceed in good faith or use reasonable endeavours to agree the relevant transaction documents, which was a pre-condition for the return of the deposit.

The judge (Mr Justice Teare) referred to Barbudev as authority for the proposition that agreements to use reasonable endeavours to agree or to negotiate in good faith are unenforceable. He said, "The reason for such unenforceability is that there are no objective criteria by which the court can decide whether a party has acted unreasonably and that a duty to negotiate in good faith is unworkable because it is inherently inconsistent with the position of a negotiating party".  The judge went on to decide that, even if the requirement to negotiate in good faith in this case was a condition precedent to the return of the deposit, it was nevertheless unenforceable for the same reasons as a requirement to use reasonable endeavours to agree was unenforceable.

Vistajet relied on the obiter comments made by Longmore LJ in Petromec in seeking to argue that an obligation to negotiate in good faith can be enforceable.  The judge, however, said that the situation in Petromec was quite different from the present case. What had to be negotiated in Petromec was the increased cost of upgrading a vessel as a result of a change to the original specification. Significantly, there were objective criteria by which the extra costs could be assessed in the absence of agreement. The judge said, "I recognise that Longmore LJ said that it is 'a strong thing to declare unenforceable a clause into which the parties have deliberately and expressly entered' but an agreement to negotiate the terms of four further agreements … contains no objective criteria by which such agreements … could be produced for the parties by the court in the absence of agreement.Where there are no objective criteria the court is unable to enforce the parties' agreement to agree".

Conclusion

These decisions suggest that where parties agree a clause requiring them to negotiate in good faith the terms of a further agreement, that clause is likely to be unenforceable even if it is included in a professionally drafted commercial contract. Such a clause is inherently incompatible with the principle that negotiating parties must be free to advance their own interests.  Moreover, it is very difficult to give effect to such a clause.  It will generally be difficult to determine precisely when negotiations failed and whether that failure was as a result of one party's bad faith. It will also be difficult (if not impossible) to foresee whether good faith negotiations would have brought about a future agreement or the terms of any such agreement, leading to obvious difficulties assessing any loss caused by the breach of such a clause. 

Petromec remains an example of a situation in which the court might be prepared to enforce a clause in a professionally drafted commercial contract expressly requiring the parties to negotiate in good faith. However, such a clause is unlikely to have any legally binding effect unless the matter to be negotiated is narrow in scope and can be ascertained by reference to objective criteria in the absence of agreement (e.g. as in Petromec, the reasonable costs of upgrading a vessel). Where the requirement is to seek to agree the terms of a further agreement, rather than some more limited issue, it is unlikely to be enforceable.