Enforcing agreements
Date: 06 November 2009
Authors: Antonio Bueno QC & Deborah Tompkinson
Issue: Vol 159, Issue 7392
Categories: Features, Procedure & practice
In the previous article, we reviewed decisions on the enforceability of clauses in commercial contracts requiring parties to negotiate in good faith.
The article identified a tension between, at one extreme, the refusal to enforce, exemplified in the decision in Walford v Miles [1992] 2 AC 128, House of Lords, and a number of Court of Appeal decisions which distinguished it and enforced such clauses.
We noted the clarification and guidance to be found in the Court of Appeal decision in Petromec Inc Petro-Deep Societa Armamento Navi Appoggio SPA v Petrobras Brasileiro SA [2006] 1 Lloyd’s 121, which this article reviews.
Petromec
This was a complex case. The relevant part for present purposes relates to a number of contracts concerning the purchase, charter and insurance of an oil production platform. The transactions anticipated the need to upgrade the platform at some future stage. As a result of the discovery of a new oil field (Rocandor) while that anticipated upgrade was in progress, changes had to be made to the contract (“the Rocandor Upgrade”). A Supervision Agreement for the Rocandor Upgrade was eventually entered into, involving four of the parties.
One of the issues the court was asked to decide was whether a clause in the Supervision Agreement, requiring two of those parties to negotiate in good faith with regard to the cost of the Rocandor Upgrade, was enforceable.
The court reviewed the rationale for the traditional objections to good faith negotiation clauses. Longmore LJ identified three:
(i) It is an agreement to agree, consequently too uncertain to enforce.
(ii) If negotiations are terminated, it is difficult or impossible to say whether the termination was in good faith.
(ii) It cannot be known whether agreement would have been reached or, if reached, on what terms; consequently, it is impossible to assess any loss flowing from a breach.
He then disposed of all three objections in the context of the present case and distinguished Walford v Miles.
Uncertainty
The clause was contained in a complex, legally enforceable agreement (the Supervision Agreement) and even were the clause unenforceable it would not have affected the rest of the agreement. This was in stark contrast to Walford v Miles, where there was no concluded agreement. More precisely, the relevant clause only related to the cost of the Rocandor Upgrade, over and above the cost of the earlier upgrade. Longmore LJ considered that the cost of the upgrade should be relatively easy to ascertain and if agreement was not reached, the court would itself have to ascertain what the reasonable cost should be.
Assessment of loss
For the same reasons, Longmore LJ did not consider that problems relating to quantification could not be overcome. If a court could assess the reasonable cost of carrying out the upgrade, then, he concluded, absent special factors, the loss consequent on a failure to negotiate in good faith was likely to be the same as the reasonable cost. It was also helpful that, in this case, the contract provided a mechanism to assist the parties in reaching a price, although it is important to note that this fell short of providing a method for fixing it, by which the parties had agreed to be bound.
Was termination made in good faith?
This was the trickiest objection. Longmore LJ conceded that bringing negotiations to an end in bad faith was an elusive concept. That was not, however, a reason for a court to deny assistance to the parties by declaring a blanket unenforceability. It is to be noted that in Petromec there was a pending application to amend to plead fraud, which, if successful, would have disposed of any need to decide whether negotiations had been terminated in good faith. Fraud aside, however, he concluded it should not be particularly difficult to decide whether negotiations were ended in good faith.
How was Walford v Miles distinguished?
As pointed out above, in Walford v Miles there was neither a concluded agreement, nor an express agreement to negotiate in good faith. All negotiations were “subject to contract” and the lock-out agreement itself was unenforceable because it lacked a time limit. The proposed implied term was rejected as unworkable and mutually exclusive with the concept that any agreement reached pursuant to those obligations would have remained “subject to contract”.
The Petromec clause, by contrast, was not a bare agreement to negotiate. It was an express obligation in a complex contract drafted by City solicitors: “It would be a strong thing to declare unenforceable a clause into which the parties have deliberately and expressly entered.”
Although Hillas & Co v Arcos [1932] All ER Rep 494 does not appear to have been cited in Petromec, Lord Justice Longmore’s comments appear to echo Lord Tomlin’s dictum in that case: “without violation of essential principle, the dealings of men may, as far as possible, be treated as effective, and that the law may not incur the reproach of being the destroyer of bargains”; per Lord Tomlin at pg 499.
Whatever legal views may have prevailed following Walford v Miles, they contrasted with prior and subsequent commercial practice and drafting precedent, which continued to recognise imperatives of having to postpone agreement on future or even outstanding matters, particularly in commercial cases.
In addition to those given by Lord Wright in Hillas & Co v Arcos, namely, the fixing of prices or delivery times in the case of sales of goods and times for loading or discharging in cases of carriage by sea, further examples might include price fluctuations for commodities; fire or car insurance, where, in the absence of agreed premium or even a slip or agreed policy terms, an insured may be “held covered”; and in leases, where there is no mechanism for adjusting future rentals; and some patent, copyright and other licensing agreements, where future royalties are to be settled.
Commercial men and their lawyers with experience of commercial drafting have often, therefore, declined to treat an agreement as incomplete and unenforceable merely because it called for some further agreement between them, to carry their commercial objective to fulfilment.
If a legal draftsman, especially in a complex agreement, containing inevitable commercial variables, were to attempt to essay precise formulae to address every future factor or contingency, the resultant drafting could give rise to intolerably complex, and even unworkable agreements.
Agreement is an agreement
The essential premise is that commercial men, who enter into agreements in good faith, with common commercial goals, will satisfactorily deal with matters which, from time to time, need to be resolved.
The courts are reluctant to be seen as “destroyers of bargains”, particularly those made by commercial men in contracts drafted by experienced lawyers.
hey cannot enforce bare agreements to negotiate, which proved fatal in Walford v Miles. Where, however, something is left open, whether “to be agreed from time to time” or to be resolved by “negotiation in good faith”, the important factors are those identified by Longmore LJ in Petromec. If the analysis in Petromec can be applied, then the court will not be left with a bare agreement to negotiate.
Antonio Bueno QC & Deborah Tompkinson are barristers at Clerksroom
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