Baldwin & Anor v Icon Energy Ltd & Anor [2015] QSC 12

Significance of the decision

This case highlights the risks of relying on clauses which provide that parties will negotiate in good faith or use reasonable endeavours to negotiate.

Justice Philip McMurdo’s decision in the Queensland Supreme Court decision of Baldwin & Anor v Icon Energy Ltd & Anor[2015] QSC 12 indicates that provisions in an agreement to negotiate “in good faith” and “to use reasonable endeavours” to reach a binding contractual agreement will not be enforceable if lacking sufficient legal content and certainty. 

While a case involving the content and certainty of a contract to negotiate is yet to reach the High Court, this decision illustrates that many Memorandums of Understanding will not be enforceable in so far as they purport to bind parties to commence or undertake negotiations.

Background

The plaintiff company was interested in purchasing gas from the defendants. The parties executed a Memorandum of Understanding (MOU), agreeing to negotiate in good faith and using reasonable endeavours to reach an agreement for the supply and purchase of gas. The parties acknowledged and agreed that the MOU was legally binding but that it was not intended to bind the parties to enter into any further agreements contemplated in the MOU. Schedule 2 of the MOU contained a number of potential terms for a gas supply agreement which were “indicative only” and “submitted as a means of encouraging discussion”.

No gas supply agreement was concluded between the parties. The plaintiff company argued that the defendants breached the MOU because they did not negotiate as they had promised.

Was the agreement to negotiate in good faith and using reasonable endeavours enforceable?

Justice McMurdo held that the agreement to negotiate in good faith and using reasonable endeavours to reach an agreement did not impose obligations which had a certain legal content. The standard of reasonableness or good faith required was not sufficiently certain such that it could be assessed whether a party had failed to negotiate in accordance with the MOU.

His Honour distinguished the situation where there was an existing contractual relationship to which the standard of reasonableness could be anchored, as in Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640In that case, the High Court considered the content of a seller’s obligation under an existing contract to use reasonable endeavours to make gas available for delivery.

His Honour also distinguished United Group Rail Services Ltd v Rail Corporation of New South Wales (2009) 74 NSWLR 618. The New South Wales Court of Appeal held in that case that a promise to undertake “genuine and good faith negotiations” as part of a dispute resolution clause in a construction contract was certain and enforceable. Such negotiations were “anchored to a finite body of rights and obligations capable of ascertainment and resolution”. The particular context constrained the promise to negotiate, which made it possible to identify a legal content in the promise to negotiate genuinely and in good faith.

Justice McMurdo noted that in the context of negotiations “about a myriad of commercial interests to be bargained for from a self-interested perspective”, the standard of reasonableness is inapt and uncertain. Further, a duty to carry on negotiations in good faith or reasonably in that context is “repugnant to the adversarial position of the parties when involved in negotiations”.

His Honour also noted that while the Western Australian Court of Appeal in Strzelecki Holdings v Cable Sands Pty Ltd (2010) 41 WAR 318 had decided that breach of an agreement to negotiate a contract in good faith had not been proved, the enforceability of that obligation had not been the subject of any argument or consideration.

Without a sufficiently certain legal content, His Honour concluded the agreement to negotiate in the manner outlined in the MOU was unenforceable.

Terms of agreement to be closely considered

As indicated above, a clause in an agreement requiring a party to act in good faith or to use best or reasonable endeavours may be enforceable depending upon a close consideration of all of the terms of the relevant agreement.

The Court indicated that in some circumstances a contractual promise to negotiate to the end of making an agreement could be enforceable but this was not the case on the current terms.

Also, an obligation in an MOU may be enforceable if sufficiently certain in its terms. For example, a provision under which a party agrees not to negotiate with third parties during an exclusive dealing period may well be binding if properly drafted.

Take away point

Commercial parties should not rely on any document which purportedly requires a party to act in good faith to negotiate, or to use best endeavours to negotiate, another agreement without first seeking a close legal review of the document, as the relevant provision may well be unenforceable.