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Obligation to negotiate in good faith?

DATE: 24.06.2011

 

Traditionally the common law has refused to recognise a duty to negotiate in good faith in run of the mill transactions between parties acting at arm’s length on the basis that such obligations are too uncertain.  This means that in Ireland and England it has traditionally not been possible to enforce an obligation to negotiate in good faith.

What does an obligation to negotiate in good faith involve?

A number of continental European jurisdictions, however, recognise a duty to negotiate in good faith, including Belgium, France, Germany, Italy, the Netherlands, Poland, Portugal, Spain and Switzerland.  Although varying from country to country, where the duty to negotiate in good faith does exist, it tends to impose the following obligations on each party to the negotiation:

(a) the duty to inform the other party, where reasonable, of all important points which, if known to the other party, could influence that party’s decision on whether to enter into the contract and which that party could not have discovered by himself;

(b) the duty to observe reasonable diligence in the performance of pre-contractual and contractual obligations;

(c) the duty to observe moral and ethical standards of behaviour, where they are not already implied by law; and

(d) the duty not to break off negotiations without reasonable cause in circumstances where the other party reasonably anticipates that an agreement will be signed.

Where the duty arises, it applies to all stages of the commercial relationship.  Where one party is in breach of such an obligation, the other party may seek an order of damages, which are generally limited to damages for actual loss.  The non-defaulting party cannot, however, seek an order forcing the other party to continue negotiations.

In certain jurisdictions, the duty to negotiate in good faith can be excluded by a contractual provision to that effect.  However, in most countries, since it is not possible to exclude wilful or fraudulent actions or gross negligence, the possibility of excluding the duty to negotiate in good faith will also be ruled out.

Has there been a shift in the law?

Historically, there has been judicial resistance to an obligation of good faith and this is reflected in the leading judgment on this issue, the decision of the House of Lords in Walford v. Miles [1992] 2 AC 128.    Lord Ackner confirmed that an agreement to negotiate in good faith is “unworkable in practice as it is inherently inconsistent with the position of a negotiating party.  It is here that the uncertainty lies”. 

The issue has been considered more recently by the Court of Appeal in the case of Petromec v. Petroleo [2006] 1 Lloyds Report 121.  This case involved a provision of a contract whereby Petromec and Petroleo agreed to negotiate in good faith any additional costs incurred in the upgrade of an offshore oil platform in accordance with a difference specification to that which the parties had originally agreed.  The negotiations in question were not, however, governed by the good faith provision.  Longmore LJ considered that had it been necessary for the court to consider the issue in order to give judgment, he would have been inclined to find the obligation enforceable.  There was little uncertainty as to the outcome of the negotiations as it was possible to establish what the additional costs would be.  In some cases it may be difficult to determine what amounted to a bad faith withdrawal from negotiations, however, this was not a sufficient reason for a court not to try to make such a determination.  It was clear to the Court, on the facts of the case, what the relevant loss would have been.  However, Longmore LJ held that since the traditional view is that any obligation to negotiate, is problematic in its enforceability, it is inevitable that any such obligation could be held to exist, it will be restrictively construed in accordance with its exact wording.

It could be suggested that the case of Cable & Wireless plc v. IBM United Kingdom [2002] EWHC 2059 also demonstrated an inclination in favour of enforcing an express obligation to use good faith.  The contract in question included a clause whereby the parties were required to “attempt in good faith” to resolve disputes by way of alternative dispute resolution.  The court found that the obligation was sufficiently certain to be enforceable.  The parties had not simply agreed to attempt in good faith to negotiate a settlement but went further by identifying a particular procedure, i.e. the ADR procedure. Had the clause simply required the parties to attempt in good faith to resolve their differences, rather than laying out the means by which the good faith attempt should be made, that obligation would have been void for uncertainty.

Petromec and Cable & Wireless both seem to turn on the fact that the obligation to negotiate in good faith was sufficiently certain to be enforceable in the circumstances of each case, rather than representing a dramatic new departure in this area of law.  Petromec suggests  that there are certain situations where an agreement to negotiate in good faith may be enforceable.  Where the parameters and objectives of the negotiation are not set out, it would seem likely that the English courts, and possibly their Irish counterparts, would continue to follow Walford v. Miles and conclude that an obligation to negotiate in good faith is, as it has always been, unenforceable.

Irish law

This issue has been recently considered by the Irish High Court in the case of Triatic Limited v. Cork County Council [2006] IEHC 111.  Laffoy J considered Walford v. Miles and Petromec and concluded that she found the reasoning in Walfordpersuasive, particularly on the facts of the case before the Court, which had considerable scope for uncertainty.  Laffoy J observed that Petromec concerned the enforcement of an express provision in a contract under consideration, where the other contracting party agreed to negotiate certain extra costs with Petromec “in good faith”.  Laffoy J went on to cite Mance LJ’s judgment in that case, in which he stated that “it would be a strong thing to declare unenforceable a clause into which the parties have deliberately and expressly entered.”

The refusal to recognise an obligation to negotiate in good faith has not left a gap in Irish law as the courts tend to turn to other principles and doctrines such as that of unconscionable bargain to achieve the same result.

The special position of contracts involving consumers

Where consumers are involved however, a duty to negotiate in good faith does arise, by virtue of the European Communities (Unfair Terms in Consumer Contracts) Regulations 1995-2000, which provide that an unfair term in a consumer contract will not be binding on the consumer.  A contractual term will be regarded as unfair where, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract, to the detriment of the consumer.  Factors to be considered include the strength of the bargaining position of the parties, whether the consumer had an inducement to agree to the term, whether the goods or services were sold or supplied to the special order of the consumer, and the extent to which the seller or supplier has dealt fairly and equitably with the consumer whose legitimate interests he has to take into accounts.

Conclusion

Although the more recent case law has not radically departed from settled case law on the issue, it would appear that there may be situations where an obligation to negotiate in good faith may be enforceable, particularly where parties are clear as to the parameters and objectives of their negotiation.

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