The aim of commercial negotiation is generally to achieve a mutually agreeable result, hopefully win-win, but in reality where neither party wins or loses. This carries with it a subjective platform from which each party approaches the commercial negotiations. This platform, if not mapped and understood by both parties sufficiently early in negotiations, could result in negotiations degenerating or in some circumstances give rise to undesirable disputes following the conclusion of negotiations or after a contract has been executed.
An essential feature of successful commercial negotiations is the establishment of the commercial parameters of a commercial negotiation with appropriate disclosure of information that may affect the transaction and negotiating terrain is made. Such information is often encompassed in a Terms Sheet, or its equivalent such as a Heads of Agreement, Memorandum of Understanding or Letter of Intent. A prudent commercial negotiator will not only disclose appropriate information when necessary, but also keep a record of all disclosures that are made during negotiations to avoid any confusion or disputes at a later date.
In recent times the Courts have ensured that a party who has not conducted their negotiations in good faith, and has failed to disclose necessary information to their counterpart, will be prevented from reaping any benefits from their failure to disclose, which is sees as misleading and deceptive conduct.
Scope of disclosure in negotiations
Parties in contractual negotiations are generally entitled to remain silent and not obliged to disclose anything unless there is a special circumstance existing between the parties, such as unequal bargaining power or one party knowing material facts the other could not know, which might materially affect the unknowing party’s negotiating interests such as in Magill v Magill (2006) 226 CL R 551.
Silence may, however, amount to misleading and deceptive conduct under statute.
A representation that is made in the course of negotiations for a contract is presumed to continue in force until it is withdrawn or altered. Negotiations that successfully end in contract give rise to a presumption that the representations made procuring the contract agreement are true at that point in time. Knowledge of facts that are untrue at the time the negotiations are concluded, agreeing to a contract makes the representation fraudulent and the party relying on the untrue facts can seek remedies against the party who made the false representations.
In EK Nominees Pty Ltd v Woolworths Pty Ltd  NSWSC 1172 the NSW Supreme Court reconfirmed the importance of appropriate disclosure in commercial negotiations.
- Negotiations between EK Nominees and Woolworths had taken place over three years, commencing in 1998, for the development and lease of a supermarket site. A formal agreement for Woolworths to lease the site was contingent on the approval of Woolworths’ Board, which was received in 2001 and disclosed to EK Nominees.
- Despite claiming that it was genuinely interested in the site, Woolworths secretly conducted negotiations for use of a different supermarket site while it was negotiating with EK Nominees. In 2002, Woolworths decided not to proceed with the EK Nominees site. By this time EK Nominees had invested substantial funds into the development of the site, expecting it to be used by Woolworths in accordance with their representations.
- EK Nominees successfully injuncted Woolworths from entering into the alternate lease agreement on the grounds that Woolworths had engaged in misleading and deceptive conduct.
- The Court held that notwithstanding that a final agreement had not been reached, Woolworths had engaged in misleading and deceptive conduct by:
- making a false disclosure of their interest in the EK Nominees site
- failing to disclosure their secret negotiations
which demonstrated positive representations that Woolworths would proceed with the negotiated arrangements.
In a more recent case, BBB Constructions Pty Ltd v Aldi Foods Pty Ltd  NSWSC 1352, involving similar facts, the supermarket chain Aldi was successful in demonstrating it had made consistent and appropriate representations to BBB Constructions throughout the course of their commercial negotiations.
- BBB Constructions and Aldi were negotiating the lease of a supermarket space in a building which was to be constructed by BBB over the course of 12 months in 2006 and 2007.
- Aldi informed BBB that their involvement in a formal lease agreement would be subject to approval from their Board.
- Unlike Woolworths, Aldi did not at any stage in the negotiations receive this Board approval, nor disclose to BBB that approval had been received.
- As the negotiations progressed, BBB became increasingly frustrated at Aldi’s unwillingness to settle on the formal terms of the lease agreement. Despite reconfirming their interest in the project on several occasions, Aldi clearly and continually sought amendments to the agreement.
- In the mean time, BBB held negotiations with a rival supermarket chain for use of the premises and had undertaken to begin construction work on the site on the assumption that Aldi was not going elsewhere.
- Aldi eventually declined to proceed with the formal agreement and BBB claimed that they had been mislead and deceived by Aldi and that it had engaged in unconscionable conduct analogous to the conduct engaged in by Woolworths, and that Aldi should be forced to enter into a formal agreement with BBB .
- The Court rejected all of BBB ’s allegations and held that:
- Unlike the unreliable and inconsistent account of events that was provided by the principal of BBB , the directors of Aldi were able to prove their intentions at most stages of the negotiation process with documents that reflected their intention to slowly negotiate a formal agreement, and their view that no representation would be binding until such an agreement was concluded.
- This case was differentiated from EK Nominees v Woolworths as BBB was aware at all times that the approval of Aldi’s Board was required for a binding agreement to be reached, and as such BBB prematurely commenced construction on the supermarket site and were not entitled to claim its losses from Aldi.
When negotiating, parties should, at all times, document their respective rights and entitlements during the negotiation period.
If a party’s previously represented position changes and the other party is relying on the represented position to its detriment, the first party can no longer stand by in silence.
Documenting representations that each party makes provides a clear record of material disclosures in the course of negotiations. Once negotiations have concluded, these documents provide a basis upon which representations that have been made during the negotiation process can be enforced.
Term sheets - an insurance policy for commercial negotiations
To get commercial negotiations off to the best start possible it is very useful to document the commercial parameters of a commercial negotiation. Such a document can be an invaluable tool in progressing effective negotiations, as well as be an invaluable insurance policy and record of the agreed material commercial terms negotiated between the parties, making it very difficult for a party to renege on promises made during negotiations.
One mechanism that can be used is a Term Sheet, which is a relatively informal document in which the negotiating parties set out:
- the main aspects of their relationship
- the material conditions or pre-conditions that will affect the commercial negotiations, and
- as commercial negotiations progress, the material terms intended to form part of a formal legal document that is to be finalised subsequent to the commercial negotiations being concluded and the terms of the transaction agreed.
Term sheets are usually not legally binding, which allows parties to leave the negotiation process at any time. A Term Sheet does, however, need to be prepared with care in order to avoid making any unintended binding commitments.
A Term sheet can be legally binding, either in full or in part, if it includes terms expressing it to be legally binding, for example in relation to confidentiality, good faith obligations and/or restrictions on negotiations with third parties for a certain period and occasionally even obligations to pay a non-refundable fee in return for the exclusive negotiation period.
A Term Sheet gives the parties the opportunity to:
- focus on the primary commercial aspects of the deal and reach agreement in principle on the issues that are most important to them without having to consider every detail
- identify potential deal breakers early on in the negotiations before any significant legal costs have been incurred
- obtain a certain level of commitment from each other before proceeding to the next step, even if it is likely that ‘commitment’ is not enforceable
- secure rights to a particular asset where government funding or a third party investment is depending on such rights, as a way to satisfy that condition relatively quickly and cheaply
- have the key elements of the transaction set out in writing (whether or not legally binding) making it considerably easier to both draw up and negotiate the subsequent formal legal contract.
When utilised appropriately a Term Sheet can be worth far more than the paper it is written on.