In the recent decision of Baldwin & Anor v Icon Energy Ltd & Anor [2015] QSC 12, McMurdo J of the Supreme Court of Queensland held that terms in a memorandum of understanding (MOU) which required the parties to use their reasonable endeavours to negotiate and work in good faith to develop a gas supply agreement (GSA) were uncertain and unenforceable.

Senior Associate Jason de Lacy and Partner Ren Niemann review this decision and its implications.

The facts

Pursuant to a MOU between Southern Fairway Investments Pty Ltd (Southern Fairway) and Icon Energy Ltd (Icon) and its wholly owned subsidiary (collectively referred to as the defendants), the parties agreed to negotiate the entry into a GSA.  The MOU provided that:

  • the parties would use their reasonable endeavours to negotiate a GSA by a certain date in accordance with a set of ‘indicative’ terms and conditions and specified other key matters to be included in the GSA, and
  • each party must work in good faith to progress the GSA in the manner contemplated.

No GSA was agreed and Southern Fairway argued that the defendants had failed to negotiate in accordance with the MOU.  Southern Fairway claimed approximately $221 million in damages for (amongst other things) lost opportunity.

The issue

The key issue in Baldwin & Anor v Icon Energy Ltd & Anor [2015] QSC 12 was whether clauses in the MOU requiring the parties to negotiate in good faith and use reasonable endeavours to negotiate a GSA were enforceable.

Southern Fairway submitted that the MOU was sufficiently certain as the subject matter of the negotiations was agreed in extensive terms and the content of the agreement to negotiate was defined by the well-recognised expression ‘reasonable endeavours’.

The defendants’ primary argument was that the clauses were uncertain because they had no legal content, and could therefore not be enforced.

The decision

While the Court recognised that agreements to negotiate have previously been held to be enforceable in certain circumstances, McMurdo J accepted the defendant’s position and held that standards of reasonableness and good faith cannot be measured by a court unless there is a framework of certain rights or obligations by which that standard can be measured and applied.  Accordingly, the claims were struck out for the following reasons:

  • there was no pre-existing contractual framework between the parties
  • a reasonableness standard is inappropriate and uncertain in the context of negotiations, and
  • while the MOU provided a limited framework for the negotiations, this did not provide the necessary content to the parties’ agreement to negotiate in good faith and using reasonable endeavours.

The practical implications

An agreement to negotiate in good faith or using reasonable endeavours will of itself be very difficult to enforce in the event that negotiations are not successfully completed.  Where such an obligation is proposed, consideration should be given as to whether the key terms of the pre-contractual document are sufficiently certain to be the subject of a binding MOU.