Australia: Agreements to negotiate: how binding can they be?

HG Resources and Energy Alert: 31 March 2015

In Baldwin & Anor v Icon Energy Ltd & Anor [2015] QSC 12 (Baldwin v Icon), the Supreme Court of Queensland was given occasion to consider when an "agreement to negotiate" will be legally binding. HopgoodGanim were retained as the solicitors for both Icon Energy Limited (Icon) and Icon's wholly-owned subsidiary Jakabar Pty Ltd (Jakabar) in the proceedings.

In this alert, Partner Martin Klapper and Solicitor Tim Edwards discuss the outcome of the case and make recommendations for persons drafting agreements to negotiate.

Agreement to negotiate

  1. In June 2008, the second plaintiff Southern Fairway Investments Pty Ltd (SFI) entered into a Memorandum of Understanding (MOU) with Icon and Jakabar.
  2. That MOU contained:
    1. a requirement that its signatories were to use their "reasonable endeavours" to negotiate a Gas Supply Agreement (GSA) (the Reasonable Endeavours Requirement);
    2. a requirement that each party must "work in good faith" to progress negotiations towards a concluded GSA (the Good Faith Requirement); and
    3. a schedule which listed the key matters to be negotiated between the parties (Schedule).
  1. The parties did not conclude a GSA, and SFI commenced proceedings against Icon and Jakabar for damages of $221 million for its "lost opportunity" to conclude a GSA on its terms.
  2. Ronald Baldwin was later joined as a plaintiff to the proceedings.At the time the MOU was entered into, he had been retained as an agent of Icon to introduce gas buyers. He claimed that he introduced SFI to Icon and Jakabar. His claim was for damages in the sum of $52.4 million, which was the amount of commission he contended he would have received had the GSA been concluded.Mr Baldwin's claim and SFI's claim were therefore co-dependent.

Key issue

The key issue before the Court was essentially this: did the MOU have "sufficient legal content" to impose certain, legally binding obligations upon Icon and Jakabar to negotiate about a GSA?

To make this a little clearer, the case was about whether the parties were legally obliged to negotiate, not about whether the MOU gave rise to a legally binding GSA.

Arguments made by the parties

Mr Baldwin and SFI argued that the Reasonable Endeavours Requirement and the Good Faith Requirement, when read in conjunction with the Schedule, gave the MOU sufficient certainty to make it binding upon the parties.

Conversely, Icon and Jakabar argued that the MOU lacked that level of "sufficient legal content" for the following reasons:

  1. the Reasonable Endeavour and Good Faith Requirements contained, in this instance, so little legal content that they were uncertain and could not be binding; and
  2. the Schedule did not remedy this uncertainty or "add" the deficit legal content because it said that it was "indicative only" and "submitted as a means of encouraging discussion" (Indicative Only Clause).

Notably, Icon and Jakabar went further than to merely defend the claims brought by SFI and Mr Baldwin; they applied to strike out the claim and statement of claim filed by the plaintiffs.

Justice McMurdo's decision

Ultimately, Justice McMurdo of the Supreme Court of Queensland agreed with the two key arguments put forward by Icon and Jakabar. His Honour held that the Reasonable Endeavours Requirement and the Good Faith Requirement, even when taken together, were uncertain and thus unenforceable at law. Consequently, Icon and Jakabar were not legally obliged to negotiate about a GSA, and both SFI's and Baldwin's claims must fail.

Though similar clauses had been held to be binding by Queensland courts in the past, that was in each instance due to the prior existence of a contractual framework or relationship between the parties. This was not applicable here – SFI, Icon and Jakabar had not agreed to previous MOUs and/or GSAs, and had not previously dealt with each other in any relevant way.

Commercial implications and conclusions

The decision in Baldwin v Icon illustrates that "certainty" is a consideration which must always be at the forefront of the minds of persons drafting or relying upon agreements to negotiate. Agreements to negotiate can be legally binding if drafted correctly.

We recommend that persons drafting agreements that are intended to form legally binding agreements to negotiate take the following precautionary steps, to increase the likelihood that a Court will find that agreement to be certain and binding:

  1. Ensure that clauses requiring the parties to act in good faith or to use reasonable endeavours contain as much "legal content" as possible. This could be done by:
    1. including specific criteria or examples of what would satisfy the requirement in the text of the clause itself;
    2. annexing a draft agreement or set of guidelines (albeit without a limitation such as the Indicative Only Clause referred to above); or
    3. explicitly referring to a pre-existing relationship between the parties.
  1. Ensure that the agreement to negotiate displays an appreciation of the difference between the concepts of "good faith" and "reasonable endeavours". Though not explicitly addressed by McMurdo J in Baldwin v Icon, these concepts are quite distinct and their conflation could conceivably lead to uncertainty. To put it simply, "reasonable endeavours" refers to a standard which the parties must strive to reach, whilst "good faith" is a condition to be placed upon the parties' behaviour and conduct in reaching that standard.
  2. Refer to pre-contractual documents where possible, and ensure that the agreement to negotiate does not rely upon vague or uncertain condition precedents.

© HopgoodGanim Lawyers

Award-winning law firm HopgoodGanim offers commercially-focused advice, coupled with reliable and responsive service, to clients throughout Australia and across international borders.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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