This case considers the certainty and enforceability of obligations (often included in preliminary agreements such as binding memoranda of understanding, heads of agreements and term sheets) to use “reasonable endeavours” and to “work in good faith” to negotiate a formal agreement. While the Court in this case recognised that agreements to negotiate have previously been held to be enforceable in certain circumstances (although not yet by the High Court), the promises in this case were unenforceable on the basis that they lacked sufficiently certain content to enable an assessment of whether a party had complied with them. Contracting parties should be mindful of the uncertain effect of such obligations to negotiate in their preliminary agreements, particularly where the key terms of the bargain may not be set out in sufficient certainty.
Pursuant to a Memorandum of Understanding (MOU) between Southern Fairway Investments Pty Ltd (Southern Fairway) and Icon Energy Limited and its wholly owned subsidiary (together referred to asIcon), the parties agreed to negotiate the entry into a gas supply agreement. Relevantly, the MOU provided that:
- the parties would use their reasonable endeavours to negotiate a gas supply agreement (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 concluded and Southern Freeway argued that Icon had failed to negotiate in accordance with the MOU.
McMurdo J in the Supreme Court of Queensland found that:
- the question was whether the agreement to use reasonable endeavours and to work in good faith to negotiate in the MOU imposed obligations which had a sufficiently certain legal content, such that it could be assessed whether a party had failed to negotiate in accordance with the MOU;
- while a case involving the content and certainty of an agreement to negotiate is yet to reach the High Court, the enforceability of such an agreement, in some circumstances, has been accepted in at least 4 intermediate Australian Courts of Appeal;
- there was no existing contractual relationship between the parties to which a standard of reasonableness or good faith could be measured and applied;
- a reasonableness standard is inapt and uncertain in the context of negotiations “about a myriad of commercial interests to be bargained for from a self-interested perspective”;
- while the MOU provided some framework for the negotiations by defining certain matters which were required to be included in the GSA and by specifying the “indicative” terms and conditions, this did not provide the necessary content to the parties’ agreement to negotiate; and
- on the basis of the above, neither the agreement to use reasonable endeavours nor the agreement to work in good faith had sufficiently certain legal content and they were both therefore unenforceable.