| Date | 11 January 2006 |
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| Judgment | Petromec Inc v Petroleo Brasileiro SA, CA 15 July 2005 |
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| The Issue | Whether the courts will uphold express obligations between the parties to negotiate in good faith. |
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| Implication |
An agreement to enter into good faith negotiations to resolve essential terms for the making of a contract will generally not be enforced. A contract which itself contains an express provision for good faith negotiations may however be enforceable according to those terms. |
printIt is generally thought that the English courts will be reluctant to enforce obligations to negotiate in good faith. There are a number of reasons for this. Such obligations are often thought of as a type of “agreement to agree” and thus too uncertain to enforce. In addition, it will always be difficult, if not impossible to say whether, if negotiations are brought to an end, the termination was brought about in good faith or in bad faith. Moreover, since it can never be known whether good faith negotiations would produce an agreement at all, or what the terms of any agreement might have been, it is impossible to assess any loss caused by the breach of the obligation. The leading case which is often cited in connection with these issues is the decision of the House of Lords in Walford v Miles in 1992. That case concerned negotiations for the sale of a business in the course of which the vendor agreed not to negotiate with any third party and to negotiate only with a single prospective purchaser. This undertaking was against the background that there was no concluded agreement at all between the parties, since everything was “subject to contract”. The House of Lords held that the undertaking to negotiate with only one purchaser was unenforceable because there was no provision saying how long it was to last. The House of Lords also held that it was impossible to imply a term into the agreement that the parties would negotiate in good faith, as that was inherently inconsistent with the position that the parties were negotiating “subject to contract”. Lord Ackner commented “While negotiations are in existence, either party is entitled to withdraw from those negotiations at any time and for any reason. There can be thus no obligation to continue to negotiate until there is a proper reason to withdraw. Accordingly a bare agreement to negotiate has no legal content”. These issues were examined by the Court of Appeal in the more recent case of Petromec v Petroleo Brasileiro. The parties had entered into an agreement for the construction of an offshore oil production platform which had suffered an explosion and fire resulting in it sinking in the deep waters off the coast of Brazil. Under the agreement, Petromec was entitled to be paid the reasonable extra cost of upgrading the vessel in accordance with the specifications, together with the reasonable costs of further alterations or changes required by the operator. These additional costs were to be payable on production of evidence of expenditure which, by a term of the contract, the parties agreed “to negotiate in good faith”. In the event, the parties became rather weary of negotiating variation orders separately and decided to try and negotiate on the basis of a global payment approach. Despite that this approach was not one that had been envisaged by the express terms of the agreement between the parties, the Court of Appeal held that an express obligation to negotiate in good faith may be enforceable in such circumstances. This case was to be distinguished from the decision of the House of Lords in Walford v Miles. In that case everything was “subject to contract” and there was no express agreement to negotiate in good faith. In contrast, the agreement to negotiate in good faith in the Petromec case derived from an express term contained within a complex contract. It was relevant that the obligation was drafted by City of London solicitors. Lord Justice Longmore commented that it would be a “strong thing to declare unenforceable a clause into which the parties had deliberately and expressly entered”. He admitted that the court might have difficulty with the concept of bringing negotiations to an end in bad faith since that would always be somewhat elusive. However, that difficulty should not be an excuse for the court to withhold assistance from the parties by declaring a blanket unenforceability of the obligation. He concluded that to decide that the clause had no legal content would be for the law “deliberately to defeat the reasonable expectations of honest men”. In conclusion, the Court of Appeal commented that it did not consider that Walford v Miles represented binding authority that an express obligation to negotiate would always be completely without legal substance. Plainly there is a considerable difference between an express and an implied obligation to negotiate in good faith. In the absence of an express contract term setting out the obligation to negotiate, the court will regard the undertaking merely as an agreement to agree and as such it will lack the certainty required of a contract. Where however the parties have entered into a written contract including provisions for good faith negotiations, and in particular where legal advisers have been consulted in the drafting of these terms, it may be that the court will conclude that such provisions are enforceable.
CJ-0601
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