Before signing an M&A deal, many parties agree to try to settle any dispute in good faith before turning to the courts. Uzoma Azikiwe, Festus Onyia and John Aga of Udo Udoma & Belo-Osagie look at how these agreements are treated
It is common for parties to commercial agreements to include clauses that require them to negotiate in good faith the settlement of any dispute which arises between them during the performance of a contract before resorting to arbitration or litigation. This is to ensure that, in most cases where the contracts are continuing, the parties will in good faith try to reach a settlement without allowing their dispute or difference to impact significantly on the continued performance of the contract. The agreement which requires parties to negotiate in good faith is also referred to as an "agreement to agree".
At common law, the general principle is that an agreement to negotiate in good faith otherwise known as an agreement to agree is not enforceable. This is largely due to the uncertainty of the terms of an agreement to agree and the imprecise nature of the concept of "good faith" that is often associated with the clause. Besides, in negotiating contract, each party is at liberty to pursue their own interest with a view to obtaining an offer best suited for the party. It was therefore thought that the obligation on parties to negotiate contract in good faith derogated from a party's autonomy, since such an obligation would seem irreconcilable with a party's unfettered right and ability to pursue its own interest in the contract negotiation.
In Walford vs Miles, the House of Lords held that an agreement to negotiate in good faith is unenforceable. According to the court, such agreement is unenforceable for two reasons, namely, the concept of good faith is inherently repugnant to the adversarial position of the parties when involved in negotiations and that a duty to negotiate in good faith is unworkable in practice.
In Yam Seng PTE vs International Trade Corporation, the court said that the obligation on a party to a contract to act in good faith was not compatible with the position of a negotiating party. In the words of the court, a duty to negotiate in good faith is "inherently repugnant to the adversarial position of the parties when involved in negotiations and unworkable in practice".
Agreements to agree and their various guises
Parties looking to enter business relationships often like to put their initial thoughts on such a relationship into writing. This may take the form of preliminary agreements between them. The most common form of these preliminary agreements, which has become a darling of the business community, is the memorandum of understanding (MOU) or the letter of intents (LI).
An MOU or LI is a document which sets out the intention or the preliminary understanding of the parties wishing to enter into a contract in the future and which will guide the parties when they are ready to sign a legally binding contract. The status of an MOU or LI is less than a binding contract because, apart from being a non-committal document intended to guide the parties in executing a binding contractual agreement in the future, the terms often provided in an MOU or LI are uncertain and incapable of satisfying the requirements of a valid contract. However, the utility of an MOU or LI lies in the fact that it operates to keep in the memory the desires of the parties which are to serve as the basis for the contents of a future formal contract between them.
In Star Finance & Property & Anor vs Nigerian Deposit Insurance Corporation, the Nigerian Court of Appeal held that: "a memorandum of understanding cannot be anything more than a document which contains the preliminary understanding of parties willing to enter into a contract or an agreement subsequently based on those conditions contained in that document."
Another form which an agreement to agree may take in Nigeria is an agreement that is made "subject to contract". An agreement is said to be subject to contract when the parties to the agreement make it clear that their intention is that neither of them is to be contractually bound until formal contract is executed. An agreement that is subject to contract is incomplete and remains in negotiation and would not bind the parties who subscribed to it until a formal contract has been executed. The legal consequence of an agreement made subject to contract is that such an agreement is not enforceable as has been decided by the Nigerian Court of Appeal in Niger Classic Investment vs UACN Property Development Co & Anor.
What can and cannot be enforced
There are instances in commercial arrangements where a formal and binding agreement executed by the parties contains some clauses which require the parties to negotiate in good faith the settlement of any dispute or difference which may arise between them in the course of the performance of the contract before resorting to arbitration or litigation. Such good faith obligation clause has been said to be enforceable by the English Court in the case of WN Hillas & Co vs Arcos, where Lord Wright observed that parties to a contract who gave good consideration could bind themselves to a duty to negotiate in good faith. However, the English Court of Appeal rejected Lord Wright's statement in Hillas vs Arcos that parties to a contract who gave good consideration could bind themselves to negotiate in good faith. In Courtney & Fairbairn vs Tolaini Bros (Hotels), Lord Denning held that:
"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 it cannot recognise a contract to negotiate. The reason is because it is too uncertain to have any binding force. It seems to me that a contract to negotiate, like a contract to enter into a contract, is not a contract known to the Law… I think we must apply the general principle that when there is a fundamental matter left undecided and to be subject of negotiation, there is no contract."
In Walford vs Mile, the House of Lords concluded that:
"…although a lock-out agreement, whereby one party for good consideration agreed, for a specified period of time, not to negotiate with anyone except the other party in relation to the sale of his property, could constitute an enforceable agreement, an agreement to negotiate in good faith for an unspecified period was not enforceable and nor could a term to that effect be implied in a lock-out agreement for an unspecified period since the vendor was not obliged under such an agreement to conclude a contract with the purchaser and he would not know when he was entitled to withdraw from the negotiations and the court could not be expected to decide whether, subjectively, a proper reason existed for termination of negotiations. It followed that the alleged collateral agreement was unenforceable and the appeal would therefore be dismissed."
In holding the agreement to negotiate in good faith as unenforceable in the Walford case, the court reasoned that such a contract appeared to be indefinite as it neither specified the time when the arrangement or negotiation would be concluded nor any mechanism by which one party thereto could conclude the negotiation. In such a scenario, the clause imposing obligation on the parties to negotiate in good faith was declared unenforceable for contractual imprecision.
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Good faith obligations have always formed part of Nigerian jurisprudence |
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Under Nigerian law, aside the contract of insurance (which is founded on the principle of good faith and some other statutes that make specific provisions for good faith obligation in a contractual relationship), there is no general duty on a party to negotiate a contract in good faith. However, Section 169 of the Evidence Act, 2011 says:
"When one person has either by virtue of an existing court judgment, deed, or agreement, or by his declaration, act or omission, intentionally caused or permitted another person to believe a thing to be true and to act upon such belief, neither he nor his representatives in interests shall be allowed in any proceedings between himself and such person or such person's representative in interest, to deny the truth of that thing."
In Rivers State vs Akwa Ibom State & Anor, the Supreme Court of Nigeria explained that the purpose of the provision of Section 151 of the now repealed Nigerian Evidence Act, which is identical to section 169 of the current Nigerian Evidence Act, is to ensure that parties to an agreement act honestly and in good faith. In the words of the court: "Section 151 of the evidence Act creates Estoppel. The rule of estoppel is based on equity and good conscience. The object being to ensure honesty and good faith thereby securing justice between the parties. Estoppel is explained as a rule where a person shall not be allowed to say one thing of one time and the opposite of another time."
This means that under the Nigerian law, if parties to a contract had agreed that they would negotiate in good faith, any dispute arising from their contractual relationship prior to arbitration or litigation, such agreement would be subjected to the same principles governing contract and if found valid, would be enforced by Nigerian courts. A contract is said to be valid if there is an offer which is accepted by the other party to the contract; if the parties have contractual capacity and had furnished consideration; if there is intention to create legal relationship between the parties and all the terms of the contract are determinate.
Nigerian courts will however, not lend their support to the enforcement of any contract where the fundamental terms are uncertain, indeterminate or imprecise. Nigerian courts take the view that there is no contract capable of being enforced where a fundamental term in the contract is left undecided. In Tsokwa Oil Marketing Co vs Bank of the North, the Nigerian Supreme Court said that: "One of the fundamental principles of the law of contract is that parties must reach a consensus ad idem in respect of the terms thereof otherwise the contract cannot be regarded as enforceable". The point is covered that where there is a fundamental term left undecided, there is no contract.
Conditioning litigation or arbitration on good faith negotiation
As decided in Ogbebor vs Utagba Rubber Estate & Anor, the court's duty is to interpret an agreement made by parties in enforceable terms but not to rewrite the agreement. Therefore, Nigerian courts would enforce a clause which imposes an obligation on the parties to negotiate the settlement of their dispute in good faith before resorting to litigation or arbitration.
One of the mechanisms which the Nigerian courts can adopt in holding parties bound to such terms in their contracts is to construe such a clause as a condition precedent, which must be fulfilled by the parties before they resort to litigation or arbitration. The parties' autonomy to provide the terms of their contract extends to the right to provide for a condition precedent in the contract. A condition precedent is an event or series of events that could delay or postpone the vesting of a right until the occurrence of the event provided for in the contract. An agreement that parties will negotiate in good faith the settlement of their dispute before resorting to litigation or arbitration, is a condition precedent because it suspends the exercise of the parties' right to have the dispute determined by litigation or arbitration until after they have held good faith negotiations to settle their dispute.
In the Mobil Producing Nigeria Unlimited vs Suffolk Petroleum Services (2017 LPELR-41734 (CA) the arbitration clause contained in the parties' agreement required the parties to use reasonable efforts to resolve all disputes arising out of or in relation to the contract through good faith negotiations. The contract further provided that if negotiations within the parties' project teams failed to resolve the dispute, then either party could submit the matter to arbitration. The respondent (Suffolk) launched an action in court without attempting to resolve the matter through good faith negotiations as stipulated in the arbitration clause. The appellant (Mobil) applied for a stay of the court action pending reference of the matter to arbitration but the respondent argued that the appellant had not complied with the conditions precedent (ie, attempting good faith negotiations) and was therefore not entitled to insist that the matter be referred to arbitration. The court held, however, that it was the respondent who initiated the court proceedings that ought to have complied with the condition precedent.
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Courts would enforce a clause which imposes an obligation on the parties to negotiate the settlement of their dispute in good faith |
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Although the issue of whether or not the obligation to undertake good faith negotiation before referring the matter to arbitration did not arise for determination in the matter, it is instructive to note that the court held that it was the party who commenced litigation in breach of the arbitration clause who had the obligation to comply with the condition precedent to the commencement of the arbitration by initiating and undertaking good faith negotiation. This decision shows that the court considered the agreement to undertake good faith negotiation prior to commencing either arbitration or litigation as constituting a condition precedent to the exercise by the parties of their rights to make a resort to arbitration or litigation.
Also, it is noteworthy that Section 4(1) of the Law Reform (Contracts) Law of Lagos State (Chapter L81, Laws of Lagos State 2015 provides that parties to a contract will act in accordance with principles of good faith and fair dealings in exercising their rights and performing their obligations in the light of the nature and purpose of the contract. Section 4(2) of the Law further provides that a court may, in appropriate cases, award damages for non-pecuniary losses such as inconveniences, annoyance, emotional distress and any consequential losses arising from the breach of the duty to act in good faith and fair dealings in the performance of their contractual rights and obligations.
Parties to an agreement have a duty to fulfil any condition precedent which they created in their agreement. As decided by the Nigerian Supreme Court in Abalogu vs SPDC, if a party to an agreement attempts to resile from an undertaking in the agreement, the Nigerian courts will invoke the principle of promissory estoppel and hold that the party is estopped from acting in a manner that is contrary to the agreement.
Therefore, if a party that has agreed to resolve a dispute in good faith negotiations before resorting to either litigation or arbitration, resorts to litigation or arbitration without undertaking the good faith negotiation, the innocent party is at liberty to apply to the court to suspend the exercise of further jurisdiction in respect of the matter, pending compliance with the good faith obligations imposed by the agreement.
Nigerian courts have always given effect to the intention of the parties as expressed in a contractual document, provided that the terms conveying such intentions are clear, certain and unambiguous. Therefore, for any obligation on parties to an agreement to attempt negotiation in good faith with a view to settling their dispute/difference prior to arbitration or litigation to be legally enforceable in Nigeria, the clause embodying such an obligation must be sufficiently certain, unambiguous and must leave no room for conjecture
Taking care of your agreement to agree
Nigerian courts will enforce an obligation to negotiate in good faith if the terms of such clauses are certain and leave no room for conjecture or speculation. The basis for the enforcement of such clauses is because they will constitute binding contracts between the parties which must be respected and honoured by the principle of pacta sunt servanda.
About the author |
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Uzoma Azikiwe Partner, Udo Udoma & Belo-Osagie Lagos, Nigeria T: +234 14622307-12 W: www.uubo.org Uzoma Azikiwe is a partner and the head of the firm's litigation, arbitration and alternative dispute resolution team. He provides advice in maritime, aviation, employment and energy matters, and his specialisations include advising multinationals on oil, gas and environmental matters; the provision, manning and maintenance of vessels; cabotage issues; and telecommunications, construction, administrative and constitutional law. He trained as an international commercial arbitrator with several Nigerian and international arbitration organisations, including the ICC Institute of World Business Law, the Chartered Institute of Arbitrators in the UK, Chartered Institute of Arbitration (Nigeria) and Chartered Institute of Mediation and Conciliation. He obtained a diploma in international commercial arbitration at St Anne's College, Oxford, UK and has benefitted from PIDA training in international commercial arbitration, PIDA training in international commercial contracts and training by the Chartered Institute of Taxation of Nigeria. He has published several articles on commercial law, including "The Doctrine of Undisclosed Agency Revisited", as well as on environmental law and arbitration. |
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Festus Onyia Partner, Udo Udoma & Belo-Osagie Lagos, Nigeria T: +234 14622307-12 W: www.uubo.org Festus Onyia is a partner at Udo Udoma & Belo- Osagie and specialises in civil, corporate and commercial litigation, arbitration and alternative dispute resolution. His other practice areas include labour, employment/industrial relations and tax litigation. He has attended several seminars and trainings across his core practice areas and trained as an international commercial arbitrator with several Nigerian and international arbitration institutions, including the International Chamber of Commerce (ICC) in Paris where he attended the Advanced PIDA Training in International Commercial Arbitration. He was a member of the international task force appointed by the ICC Commission on Arbitration and ADR on the revision of the ICC Rules as Appointing Authority in UNICTRAL and other Ad Hoc Proceedings. Festus has made presentations and written several articles across his practice areas which have been published in reputable international journals, such as The European, Middle Eastern and African Arbitration Review, The Middle Eastern and African Arbitration Review, International Financial Law Review Dispute Resolution Guide, Chambers International Arbitration Country Practice Guide. Festus is the Alternate Chairman of the Energy and Power Committee of the Nigerian Institute of Chartered Arbitrators. |
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John Aga Senior associate, Udo Udoma & Belo-Osagie Lagos, Nigeria T: +234 14622307-12 W: www.uubo.org John Aga is a senior associate at Udo Udoma & Belo-Osagie. He specialises in civil, corporate and commercial litigation, arbitration and alternative dispute resolution. His other practice areas include project finance, public private partnership, maritime and shipping, oil & gas, securities, insolvency, election petition and electoral disputes. John is a brilliant and an astute litigation lawyer and has handled several debt recovery cases. He has also acted as a lead defence attorney for diverse individuals and corporate organisations in white-collar cross- border crime cases. John also trained as a digital and electronic evidence analyst. |