UK: Implied obligation to negotiate in good faith?

Last Updated: 4 January 1999
Implied obligation to negotiate in good faith?

The court granted an appeal to set aside statutory demands served on the McAllisters by the Society of Lloyds ("Lloyds") on the basis that Lloyds were under an obligation to negotiate a Hardship Agreement with them in good faith, and therefore that the McAllisters had the right to raise a cross-claim for breach of an implied contractual obligation resulting in the loss of the opportunity to enter the Hardship Agreement. - McAllister and anr v's Society of Lloyds (Chancery Division) (judgement delivered 2 December 1998 by Mr Justice Carnwath).

Facts:

The McAllisters were members of Lloyds. They secured an increase in their underwriting capacity with support of Bank Guarantees from Barclays Bank ("the Bank") for £100,000 each, secured on their family home. In 1991 they found themselves in serious financial difficulties and applied to Lloyds for assistance under their hardship scheme. Although an agreement was negotiated the McAllisters required the consent of the Bank which was conditional on making monthly payments to reduce their outstanding indebtedness. In the meantime Lloyds, itself in financial difficulties, proposed a plan to enable Names to accept a financial package in return for settlement of their Lloyds-related litigation.

Under the terms of the settlement agreement the Names were to pay outstanding amounts in relation to a "Finality Statement". The settlement offer in relation to the McAllisters required them to enter into a Hardship Agreement and sign a promissory note in the amount of their Finality Statements. The McAllisters were to use their "best endeavours" to complete the Hardship Agreement before 31 December 1996. On 18 December at a meeting between the McAllisters, the Bank and Lloyds, the offer of the Hardship Agreement was withdrawn and Lloyds withdrew from the negotiations. As the Hardship Agreements were not entered into by the specified date the hardship scheme lapsed.

Statutory demands, claiming the amount in the Finality Statements, were received by the McAllisters on 23 October 1997. Applications to set aside the statutory demands were dismissed on 10 June 1998 by Mr Registrar James.

The McAllisters contended that the statutory demands should be set aside:

(i) either under rule 6.5(4)(a), as they had a cross-claim, for breach of an implied contractual obligation (that Lloyds should negotiate in good faith up to the time limit set by the settlement agreement) resulting in loss of the opportunity to enter into the Hardship Agreement; or

(ii) under rule 6.5(4)(b) as they had grounds for disputing the debt, as particularised in the Statutory Demands, on the basis that, by their letter of 15 November 1996, Lloyds had assumed the McAllisters' responsibility for payments under the Facility Statements (subject only to their using best endeavours to complete by 31 December, which they had done).

Decision

Carnwath J. held that it was arguable that, in imposing a condition on the McAllisters of "best endeavours", Lloyds impliedly accepted a corresponding obligation itself, or at least an obligation not unreasonably to frustrate the conclusion of an agreement. Evidence from all parties indicated that it was the Lloyds representative who broke off negotiations. It was therefore held that the McAllisters had raised a triable issue as to whether the failure of the negotiations was due to unreasonable conduct on the part of the Lloyds representative, and in the view of Carnwath J, it was at least arguable that this was in breach of an implied obligation pursuant to the letter of 15 November.

Carnwath J. further held that there was an arguable case relating to the debt itself, arising from Lloyds apparent acceptance, in the letter of 15 November, of responsibility for the payments under the Finality Statements, subject only to best endeavours on the McAllisters part, and to the substitution of the obligation under the promissory notes.

The Registrar thought that this argument was defeated by the McAllisters failure to deliver the promissory notes unconditionally as required. However, if there was a defect in the response of the McAllisters, it seems to have been waived by Lloyds as they kept the promissory notes, apparently treating them as valid acceptance of their offer. For this reason, it was held that there was at least a triable issue under rule 6.5(4)(b) that there were grounds for disputing the debt sufficient to justify setting aside the statutory demand.

Carnwath J. therefore allowed the appeals and set aside the statutory demands on the basis that the debts were disputed on substantial grounds under rule 6.5(4)(b).

Comment

This case is a reminder that if a contract imposes on party 'A' an obligation to use their best endeavours to reach an agreement by a certain date it is arguable that the other party 'B' impliedly accepts a corresponding obligation not unreasonably to frustrate the conclusion of the agreement. The effect of party B withdrawing from negotiations before the deadline afforded party A the opportunity to at least delay party B's ability to enforce its rights.

This article was first published in a Marcfarlanes' Banking and Insolvency Practice Note in January 1999.

This note is intended to provide general information about some recent and anticipated developments which may be of interest. It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.

If you would like further information or specific advice, please contact Tony Evans at Macfarlanes London Office.

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