Agreement to Negotiate is Unworkable as a Contract
The buyers and sellers of a company agreed orally for the sellers to deal with the buyers exclusively and to terminate any negotiations between them and any other competing buyer. The sellers later decided not to proceed with their negotiations with the buyers and went on to sell the company to another party. The buyers sued for breach of the oral agreement. The sellers’ defence was that the parties were still in negotiations and the oral agreement was an agreement to negotiate in good faith.
Held: The oral agreement was unenforceable. An agreement to negotiate in good faith was unworkable in practice because while negotiations were in existence, either party was entitled to withdraw from those negotiations at any time and for any reason. Such an agreement was uncertain and had no legal content.
Lord Ackner said: ‘The reason why an agreement to negotiate, like an agreement to agree, is unenforceable is simply because it lacks the necessary certainty. The same does not apply to an agreement to use best endeavours. This uncertainty is demonstrated in the instant case by the provision which it is said has to be implied in the agreement for the determination of the negotiations. How can a court be expected to decide whether, subjectively, a proper reason existed for the termination of negotiations? The answer suggested depends upon whether the negotiations have been determined ‘in good faith’. However, the concept of a duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties when involved in negotiations. Each party to the negotiations is entitled to pursue his (or her) own interest, so long as he avoids making misrepresentations. To advance that interest he must be entitled, if he thinks it appropriate, to threaten to withdraw from further negotiations or to withdraw in fact in the hope that the opposite party may seek to reopen the negotiations by offering him improved terms. Mr Naughton, of course, accepts that the agreement upon which he relies does not contain a duty to complete the negotiations. But that still leaves the vital question: how is a vendor ever to know that he is entitled to withdraw from further negotiations? How is the court to police such an ‘agreement’? A duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with the position of a negotiating party. It is here that the uncertainty lies. In my judgment, while negotiations are in existence either party is entitled to withdraw from these 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.’
As to a lock out agreement, Lord Ackner said: ‘There is clearly no reason in English contract law why A, for good consideration, should not achieve an enforceable agreement whereby B, agrees for a specified period of time, not to negotiate with anyone except A in relation to the sale of his property.’ and ‘B, by agreeing not to negotiate for this fixed period with a third party, locks himself out of such negotiations. He has in no legal sense locked himself into negotiations with A. What A has achieved is an exclusive opportunity, for a fixed period, to try and come to terms with B, an opportunity for which he has, unless he makes his agreement under seal, to give good consideration.’
Lord Ackner
[1992] 2 AC 128, [1992] 1 All ER 453, [1992] 2 WLR 174, [1992] ANZ Conv R 207
Law of Property (Miscellaneous Provisions) Act 1989 2
England and Wales
Citing:
Cited – Courtney and Fairbairn Limited v Tolaini Brothers (Hotels) Ltd CA 1975
There was an agreement between a site developer and building contractors who introduced a financier to provide money for the development project. The question arose whether the developer had entered into a binding and enforceable contract to employ . .
Cited by:
Cited – Cobbe v Yeomans Row Management Ltd and Others ChD 25-Feb-2005
Principles for Proprietary Estoppel
A developer claimed to have agreed that upon obtaining necessary planning permissions for land belonging to the respondents, he would purchase the land at a price reflecting its new value. The defendant denied that any legally enforceable agreement . .
Cited – Pitt v PHH Asset Management CA 29-Jun-1993
. .
Cited – MRI Trading Ag v Erdenet Mining Corporation Llc CA 8-Mar-2013
The Commercial Court had found the result of an arbitration award ‘obviously wrong’, and ineed bizarre.
Held: The appeal failed. The award was flawed, in failing to take account of the trading context between the parties: ‘The overall . .
Lists of cited by and citing cases may be incomplete.
Land, Contract
Leading Case
Updated: 31 October 2021; Ref: scu.223726
