In the recent case of Baldwin & Anor v Icon Energy Ltd & Anor [2015] QSC 12, the Queensland Supreme Court has provided useful consideration of the enforceability of an agreement to negotiate.

The facts

The second plaintiff, Southern Fairway Investments Pty Ltd, entered into a memorandum of understanding (MOU) with the defendants. The second defendant, Jakbar Pty Ltd, was a subsidiary of the first defendant, Icon Energy Pty Ltd. Under the MOU, the parties agreed to negotiate toward entering into a gas supply agreement (GSA). However, no GSA was ever concluded between the parties. Accordingly, the second plaintiff initiated proceedings against the defendants alleging that they had breached the MOU by failing to perform the promise to negotiate toward concluding a GSA. The plaintiff company alleged that it had suffered damages in excess of $220m attributable to the lost opportunity of concluding the GSA.

The first plaintiff, Ronald Baldwin, was appointed as agent of Icon Energy for the purpose of introducing potential buyers of gas sourced from the relevant petroleum authority. If a GSA had been concluded, the first plaintiff would have been entitled to commission on the transaction.

The first plaintiff alleged that his contract with Icon Energy contained an implied term to the effect that the first defendant was required to negotiate with the plaintiff company, with a view to concluding the GSA. The first plaintiff claimed that the breach of this alleged implied term caused him loss in excess of $50m. As the court observed, before the first plaintiff’s claim could succeed, it would be necessary for the second plaintiff’s case to be successful, as the merits of Mr Baldwin’s claim were intricately linked to the allegations made by the plaintiff company.

The MOU provided inter alia, that the parties were to use their reasonable endeavours to negotiate a GSA using the principles set out in a schedule of terms. The MOU also specified an indicative range for the term of the GSA and the quantity of gas to be supplied thereunder. Importantly, the relevant schedule contained a statement to the effect that the terms and conditions contained therein were indicative only, and were submitted as a means of encouraging discussion.

The defendants applied to strike out the statement of claim and the claim on the basis that the pleading disclosed no reasonable cause of action.

The issues

The plaintiffs alleged that the requirement to negotiate under the MOU was limited to the details set out in the schedule of terms. Essentially, it was alleged that the terms contained in the schedule would form the basis of the GSA, though they might be expressed more formally in an executed GSA.

In contrast, the defendants alleged that the clear statement contained in the schedule to the effect that the terms were indicative only and provided to facilitate discussion, was contrary to the plaintiffs’ assertion. It was submitted that the provisions of the MOU were such that it lacked the requisite degree of certainty to be enforceable.

As against the first plaintiff, the defendants alleged that the agency contract did not contain any such implied term to negotiate toward entering into the GSA with the second plaintiff. In addition, the defendants argued that insofar as the pleading addressed the plaintiff company’s claim for damages, it was defective in the premises where the quantum of damages was not particularised with any material facts which substantiated the calculation.

The decision

The court identified that the central issue was whether the terms of the MOU were sufficiently certain in order to allow an assessment to be made, as to whether or not a party had complied with the obligation to negotiate.

The court conducted a comprehensive review of appellate decisions considering the extent to which an agreement to negotiate is enforceable under Australian law. Whilst there is a degree of divergence in the views espoused by the various judges involved, the prevailing view, which was accepted by the court in the instant case, is that an obligation to negotiate could potentially achieve the requisite degree of certainty to be enforceable, in circumstances where the obligation is contained within a pre-existing contractual framework.1

The best example of such an obligation is where a dispute resolution clause requires the parties to negotiate toward resolving the dispute under the contract. Absent an established contractual framework however, it would seem to be overwhelmingly difficult to persuade a court to enforce an agreement to negotiate, especially where such negotiations necessarily involve complex commercial considerations. Indeed, it has been said that such considerations fall well beyond the expertise of the courts.2

Many of the decisions cited in the instant case considered the enforceability of obligations that encompassed phrases such as, ‘to use reasonable endeavours to negotiate’, or ‘to negotiate in good faith.’ The MOU in fact contained clauses incorporating both phrases.

This presented a difficulty for the court as there are divergent views as to whether or not the terms are synonymous in this context. Indeed, the court observed that it has been suggested within this context that ‘good faith’ requires honesty but not reasonableness.3 In other words, previous authority was recognised which expressed the view that an offer made during negotiations in good faith need not pass some objective test of reasonableness.4 Moreover, it has been suggested that an obligation to act in good faith is a negative proposition, requiring a party to abstain from acting in bad faith.

Insofar as the meaning of reasonable endeavours is concerned, recent High Court authority suggests that the obligation requires a party to act reasonably, with the extent of such reasonableness being determined by the surrounding circumstances, the individual commercial considerations of the party, and any standards arising from the provisions of the contract.5 This necessarily involves an objective assessment by the court.

The inclusion of both phrases in the MOU gave rise to the question as to whether the draftsmen had intended to incorporate two separate standards, or alternatively, whether the parties had intended for the terms to be synonymous. The court alluded to the fact that should it have become necessary, it might have been able to resolve the ambiguity, perhaps by attributing a similar meaning to both provisions, having regard to the likely intention of the parties in the circumstances.

In any case, because the underlying agreement to negotiate was not contained within a pre-existing contractual framework, the court concluded that the term was not sufficiently certain. Indeed, the court observed:

‘A duty to carry on negotiations in good faith or reasonably in a context such as the present is, as Lord Acknew said, "repugnant to the adversarial position of the parties when involved in negotiations".’ 6

In this regard, the schedule of indicative terms did not contain the required content so as to render the agreement to negotiate sufficiently certain. Insofar as the pleading addressed the quantum of damages, the court found that it was deficient in the premises where no facts were pleaded as to the amount of revenue that might have been derived under the GSA as against the costs incurred, though the pleading did specify the expected cost of the pipeline and the gas.

In consequence, the court struck out the statement of claim, but refused to strike out the claim. It was relevant that the plaintiffs also alleged that the defendants had breached an exclusivity clause under the MOU, to the effect that the defendants could engage in no negotiations with third parties during the exclusivity period.

Whilst insufficient facts were included in the pleading to support the allegation, the court could not rule out the possibility that the plaintiffs might be able to re-plead their claim with sufficient particulars with which to continue with the proceedings, based on the alleged breach of the exclusivity clause. It would of course be necessary to sever the exclusivity clause from the unenforceable parts of the MOU.

Best practice

As the case demonstrates, an agreement to negotiate, other than one contained within a pre-existing contractual framework, is unlikely to be enforceable in the event that negotiations are not successfully completed. Where such an obligation is proposed, careful consideration should be given as to whether an obligation to negotiate ‘in good faith’, or with ‘reasonable endeavours’, should be incorporated, given the possibility that a court might attribute different meanings to such provisions.