Are agreements to negotiate in good faith enforceable?

The question of whether an agreement to negotiate in good faith is sufficiently certain so as to be valid and enforceable has been unclear. Some courts have likened such clauses to ‘agreements to agree’ and have therefore held such clauses to be too uncertain to be enforceable. Other courts have suggested that such clauses can, depending on their wording, be enforceable.

The issue was considered by the New South Wales Court of Appeal in its decision in United Group Rail Services Limited v Rail Corporation New South Wales [2009] NSWCA 177, delivered on 3 July 2009.

The court considered a detailed dispute resolution clause in an engineering contract, which included a provision which required the parties to have their respective senior representatives ‘meet and undertake genuine and good faith negotiations with a view to resolving the dispute or difference’. The court held that the clause was not uncertain, and was valid and enforceable. The court accepted that it may well be difficult to establish that a party had failed to comply with the obligation, but noted that ‘uncertainty of proof … does not mean that this is not a real obligation with real content’.

The court observed that there may be a difference between the situation applying in United Group (where commercial parties had promised to undertake genuine and good faith negotiations to resolve disputes arising from performance of a fixed body of contractual rights and obligations) and a clause which provides for good faith negotiations in bringing about a commercial agreement in the first place.

What is the effect of an obligation to negotiate in good faith?

The court also provided some guidance as to what the effect of an obligation to negotiate in good faith may be in practice. Such an obligation does not necessarily import any requirement to act in the interests of the other party to the contract. However, while the process of negotiation of a commercial dispute is essentially a self-interested activity, the parties, by including an obligation of good faith, do not leave its conduct unconstrained.

The content of the relevant clause in United Group involved the notions of honesty and genuineness. That required the parties to bring an honestly held and genuine belief about their mutual rights and obligations and about the controversy to the negotiations, and to negotiate by reference to such beliefs. The court suggested, by way of example, that:

  • a party may not be entitled to threaten a breach of contract in order to bargain for a lower settlement sum that it genuinely recognises is due
  • a party would not be entitled to pretend to negotiate, having decided not to settle what is recognised to be a good claim, in order to drive the other party into expensive arbitration that it believes the other party cannot afford, and
  • if a party recognises, without qualification, that a claim or some material part of it is due, the obligation may require payment to be made.

Implications

The Court of Appeal’s decision in United Group has provided some welcome clarity and guidance in this area of law.

It is not unusual for parties to a commercial contract to include language in the contract (such as a good faith negotiation clause) as a prompt or basis for future commercial discussions, without necessarily intending such language to be promissory or enforceable. However, United Group suggests that, ordinarily, good faith negotiation clauses will be held to be enforceable and given real content.

Parties who are in a commercial dispute, and subject to an obligation to negotiate in good faith, need to give consideration to the constraints on their conduct. A party is not (without more) under an obligation to act in the interests of the other party, and is entitled to act in a self-interested manner so long as it is proceeding by reference to an honest and genuine assessment of its rights and obligations. However, where a party is under a clear appreciation as to the weakness of its legal position, a good faith obligation may place real limitations on what conduct is legitimate during a negotiation.