Be specific with MOU negotiation clauses to support enforcement and minimise risk

The Supreme Court of Queensland has recently considered an agreement-to-negotiate clause in a memorandum of understanding (MOU) in Baldwin & Anor v Icon Energy Ltd & Anor [2015] QSC 012.

Background

Parties entered into an MOU under which they agreed to deal exclusively with each other for a specified period and ‘use their reasonable endeavours to negotiate by 30 August 2008 (and in any event no later than 30 October 2008) a Gas Supply Agreement using the principles set out in Schedule 2 and including the following key factors ...’.

The ‘key factors’ were conditions to be included in the proposed gas supply agreement, including the term of the agreement, the amount of gas to be supplied and the priority to be given to the foundation customer.

Schedule 2 concluded with this statement:

These terms and conditions are indicative only and are submitted as a means of encouraging discussion. This is not an offer capable of acceptance and does not create or reflect any binding obligations between the parties or any of their respective affiliates or managed funds. It is understood for the avoidance of doubt that this document does not obligate any party to enter into any further agreement.

Schedule 1 also contained a statement that the parties did not intend that the MOU or the conduct of the parties would bind them to enter into any further agreements.

Unlike many governmental MOUs, this one was contained in a deed and specifically stated that it was legally binding on the parties.

The parties did not conclude a gas supply agreement within the timeframe and one party claimed that this was because the other party failed to negotiate in accordance with the MOU.

Decision

The Court analysed a number of cases decided by Australian Courts of Appeal where a contract to negotiate has been found to be enforceable. Ultimately, the Court distinguished these cases from the current facts, noting that they concerned clear processes that the parties had agreed to follow should any dispute arise under an already existing agreement.

The Court said that:

• the question to be addressed was whether the MOU imposed obligations to the extent that it could be determined whether a party had failed to negotiate in accordance with its promises
• a requirement to negotiate reasonably or in good faith is inconsistent with the adversarial nature of commercial negotiations where the parties are entitled to pursue their own interests
• the requirements in the MOU for the parties to work in good faith and use reasonable endeavours to negotiate would need to be read together and found to constitute an enforceable standard
• it is difficult to measure and apply a standard of reasonableness or good faith where there is no existing contractual relationship on which to base the standard of reasonableness.

The Court decided that the agreement to work in good faith and the agreement to use reasonable endeavours to negotiate lacked certainty and were unenforceable.

However, the Court found that the provisions of the MOU concerning the exclusivity period were enforceable because they were sufficiently certain and compliance could be easily measured.

Relying on the boilerplate severance clause, the Court found that the enforceable provisions could be severed from the unenforceable agreement to negotiate and could be sued on separately. As the MOU was in the form of a deed, the lack of consideration or value paid by the parties would not prevent it from being enforced.

Conclusion

This case confirms that an agreement to negotiate will only be enforceable if the negotiation process is so clearly defined that the acts or omissions of a party can be objectively assessed to enable the Court to determine whether the agreement has been breached. Unless it is in the context of an existing contractual relationship, an agreement to negotiate may not be enforceable if it requires the parties to negotiate in good faith or to act reasonably.

If you want to be able to enforce arrangements of this kind, then you need to specify what it is that each party is to do in such a way that it is possible to determine whether or not the obligations have been performed.

For government officers, this case shows that even an MOU can expose your department to risk if it includes unusual provisions like the ones in Baldwin. If you are considering entering into an MOU that includes provisions that are out of the ordinary, it is a good idea to seek legal advice first to make sure of its status.

^{The information in this publication is provided for general purposes only. It is not to be relied on as a substitute for legal advice. Crown Law and the Department of Justice and Attorney-General accept no liability for losses caused by reliance on the material in this publication. Formal legal advice should be obtained for particular matters.}