UK - Obligations To Negotiate In Good Faith: Where Does English Law Stand?

Agreements to negotiate in good faith have historically been regarded by English courts as unenforceable, amongst other things, on grounds of uncertainty. Recent English case law suggested to some a softening of this approach. On closer examination, however, this looks misleading. 

The Starting Point 

The leading judgment on obligations to negotiate in good faith in English law contracts is that of the House of Lords in Walford v Miles ([1992] 2 AC 128). The case concerned a lockout agreement whereby the defendants had allegedly agreed not to deal with any third party with regard to the sale of their business for as long as they were negotiating with the plaintiffs. In order to justify claiming lost profit on the transaction, the plaintiffs sought to persuade the court to read into that agreement a positive obligation upon the defendants to negotiate the terms of the sale agreement in good faith. The court found that there was no binding lockout agreement on the facts, and that even if there had been, there were no grounds to imply such an obligation. Lord Ackner, who gave the leading judgment, went on to say that, as a matter of principle, an agreement to negotiate in good faith was not generally enforceable under English law as being ".. unworkable in practice as it is inherently inconsistent with the position of a negotiating party. It is here that the uncertainty lies." 

A New Departure? 

Earlier this year, the Court of Appeal gave its judgment in the long running saga of Petromec v Petroleo ([2006] 1 Lloyds Report 121) (this firm successfully represented Petroleo in the litigation) and addressed the issue of whether an express obligation in an agreement between the parties to negotiate in good faith was enforceable or not. 

Petromec had agreed to carry out an upgrade of an offshore oil platform in accordance with a different specification to that originally agreed. The contract included a provision whereby Petromec and Petroleo agreed to negotiate in good faith the amount of any additional costs. Although the court was not called upon to decide the issue, Longmore LJ indicated that, had it been, he would have been inclined to find the obligation enforceable. He dealt with the three objections usually raised about enforceability: on the facts: (1) there was little uncertainty as to the outcome of the negotiations, since it was possible to establish clearly what the additional costs would be; (2) while it might be difficult in some circumstances to work out what amounted to a bad faith withdrawal from negotiations, that was not of itself a good reason for a court not to try to do so; and (3) it was clear on the facts what the relevant loss would have been. 

Similar Theme, Different Context 

The same inclination in favour of enforcing, where possible, an express obligation to use good faith is reflected in Cable & Wireless plc v IBM United Kingdom Ltd ([2002] EWHC 2059). The contract in question included a clause which required the parties to "attempt in good faith" to resolve disputes arising between them "through an alternative dispute resolution (" ADR") procedure as recommended to the parties by the Centre for Dispute Resolution". The court rejected the argument put to it that this amounted only to an obligation to use good faith to negotiate and as such was unenforceable. On the contrary, the obligation was sufficiently certain to be enforceable because it laid out the means by which the good faith attempt should be made. If a party were to refuse to participate in the prescribed procedure, it would be in breach of its obligation. The judge did remark that, had the clause simply required the parties to attempt in good faith to resolve their differences, that obligation would have been void for uncertainty. 

So Where Do Things Stand Now? 

Taking Longmore LJ’s comments in Petromec v Petroleo in isolation, and drawing an analogy from Cable & Wireless v IBM, it might be tempting to conclude that an obligation to negotiate in good faith should now be regarded as enforceable under English law. However, setting the facts of both cases in context makes it clear that, in reality, they do little to disturb the established position on this issue. In both cases, the obligation to negotiate in good faith set out the parameters and objectives of the negotiations to an extent that the courts were able to determine that the obligation was sufficiently certain to be enforceable. However, where an obligation to use good faith to negotiate does not sufficiently prescribe the parameters and objectives of the negotiation (for example, a "binding" commitment letter incorporating an obligation to negotiate in good faith and attaching a termsheet setting out the basis of the detailed negotiations to follow) then the English courts are likely to continue to follow the Walford lead and conclude that this type of obligation is unenforceable under English law.

By Stuart Rowson and Sarah Vickers