It is time to enforce negotiating in good faith

In the important non-construction industry case of Walford v Miles (1992) 1 All ER 453, the House of Lords lost a golden opportunity of doing away with one of the greatest heresies of English law, namely, that an agreement to negotiate is not recognised as an enforceable contract as it is in Scottish law.

This point was first decided in terms in the well-known building contract case of Courtney & Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd, (1975) 1 All ER 716, where Lord Denning MR said:

'If the law does not recognise a contract to enter into a contract (when there is a fundamental term yet to be agreed) it seems to me that it cannot recognise a contract to negotiate. The reason is because it is too uncertain to have any binding force ...'

In that case Lord Denning MR (and Lord Justice Diplock) rejected the contrary view expressed by Lord Wright - who was one of the great masters of the common law - in Hillas & Co Ltd v Arcos Ltd (1932) 147 LT 503 at 515:

'There is then no bargain to negotiate, and negotiation may be fruitless and end without any contract ensuing; yet even then, in strict theory, there is a contract (if there is good consideration) to negotiate, though in the event of repudiation by one party the damages may be nominal, unless a jury think that the opportunity to negotiate was of some appreciable value to the injured party.'

Lord Denning's law-making in the Courtney & Fairbairn case has caused untold commercial inconvenience, but it has been slavishly followed in England even though, as argued in the note on the case in Building Law Reports, it was, to say the least, very doubtful law. This is a view which seems to be shared by the editor of Keating's Building Contracts, 5th edn., 1991, page 24, note 14, who asks : 'But in principle... should there not be such a contract where the parties contemplate negotiations by skilled and experienced persons?'

In Walford v Miles the facts are unimportant. It is enough to say that the issue arose in the context of a 'lock-out agreement' to purchase land and a business subject to contract, which is a common commercial happening. It is different from an option to purchase where one of the parties agrees, for good consideration, for a specified time, not to negotiate with anyone except the other party in relation to his sale of the property. This can constitute an enforceable contract.

However, a 'lock-out agreement' is one to negotiate in good faith for an unspecified period and, so the House of Lords has held, is not enforceable. The House also refused to imply a term in the agreement to that effect for an unspecified period, on the basis that the seller was not obliged to conclude a contract with the purchaser and (somewhat speciously) because he would not know when he was entitled to withdraw from the agreement.

The House of Lords took the view that a court could not be expected to decide whether, subjectively, a proper reason existed for the termination of the negotiations. It followed, therefore, that the alleged agreement, collateral to the negotiations which were proceeding, was unenforceable. In fact, in my view there was good consideration for the agreement because (a) the appellants agreed to continue the negotiations and not to withdraw and (b) they provided a letter of comfort from their bankers, as requested by the other party, stating that the bank was willing and able to provide the necessary finance of some œ2 million.

The decision was cogently criticised on technical and practical grounds in Journal of Business Law for July 1992, and it is to be much regretted. It is not a strong authority in any case since only one judgment was delivered - that of Lord Ackner, the remaining Law Lords merely concurring with him.

Other common law jurisdictions, eg Canada, recognise a duty to negotiate in good faith and this ought to be the law in England too.

Unfortunately, the House of Lords as constituted took a highly technical view and preferred the reasoning of Lord Denning to that of the equally eminent Lord Wright.

Lord Ackner's approach seemed to place importance on the fact that 'this is a negative agreement - B, by agreeing not to negotiate for this fixed period with a third party, locks himself out of such negotiations. He has in no legal sense locked himself into negotiations with A. What A has achieved is the exclusive opportunity, for a fixed period, to try and come to terms with B, an opportunity for which, unless he makes his agreement under seal, to give good consideration.'

But what is wrong with that? Why should A spend considerable time and money negotiating with B if he can withdraw at any time?

Across the Atlantic, many of the United States cases (eg, Channel Home Centers Division of Grace Retail Corporation v Grossman (1986) 795 F 2d 291) have held that an agreement to negotiate in good faith is an enforceable contract, provided it is supported by consideration.

That ought to be the law of England also but unfortunately it is not. Perhaps in the future a differently constituted House of Lords will adopt a more realistic approach and bring our law into line with that of other systems.