Agreement to Negotiate in Good Faith

In the recent case of HSBC Institutional Trust Services (Singapore) Ltd (trustee of Starhill Global Real Estate Investment Trust) v Toshin Development Singapore Pte Ltd, [2012] SGCA 48, the Singapore Court of Appeal upheld a contractual clause directing parties to “in good faith endeavour to agree” in respect of a rent review mechanism arising out of a tenancy agreement. The Court of Appeal also gave some indication on the ambit and scope of the parties’ obligation of good faith during negotiations.

The rent review mechanism in question provided that the rent for each new rental term after the first rental term was to be determined by agreement between HSBC (the landlord) and Toshin (the tenant) or, failing agreement, by “three international firms of licensed valuers” in Singapore appointed either jointly by the parties or by the President (or other designated officer) of the Singapore Institute of Surveyors and Valuers (“SISV”).

However, between July 2010 and early 2011, Toshin, without notice to HSBC, unilaterally approached all eight “international firms of licensed valuers” in Singapore for a valuation report. Seven of those valuers accepted the work. Six prepared valuation reports on the market rental value of the property as at 8 June 2010. The remaining valuer prepared a valuation report as at 31 December 2010. The commencement date of the next new rental term was to have been 8 June 2011.

When HSBC learnt of this (through accidental means) on 16 March 2011, it took the view that the rent review mechanism had been rendered inoperable and sought a declaration to this effect. HSBC argued that the subsequent appointment of any of the valuers who had written a report for the rent review would involve an unacceptable conflict of interests. The High Court held that the rent review mechanism remained operable and dismissed the application. The Court of Appeal agreed and upheld the decision on the basis that (a) the President of SISV could make the necessary appointments of valuers and (b) as professionals and bearing in mind their duties to be independent and impartial between the parties, the valuers could render an independent valuation that would not be affected by their previous work.

The case is significant as it is a well settled principle of law that a so-called agreement to agree between parties is void and unenforceable for uncertainty. Furthermore, the House of Lords in Walford and Others v Miles and Another [1992] 2 AC 128 (“Walford”) had also decided that a bare (oral) agreement to negotiate a concluded contract was unenforceable. Lord Ackner (who delivered the leading judgment) observed (at 138):

“The reason why an agreement to negotiate, like an agreement to agree, is unenforceable, is simply because it lacks the necessary certainty.”

In Singapore, the High Court had held in Sundercan Ltd and another v Salzman Anthony David [2010] SGHC 92 at [25] citing Walford, that “an agreement to negotiate…as is clear from the decision of the House of Lords in [Walford], is unenforceable because it lacks the necessary certainty“. In Sundercan, the issue before the Singapore High Court was whether a contract had been formed and particularly whether there was a mechanism in place to determine the payment schedule by negotiation. However, the High Court considered that “future agreement between the parties was the only mechanism to determine the payment schedule” which was unenforceable (see paragraph [34]).

Now, however, the Singapore Court of Appeal has held that notwithstanding Lord Ackner’s statement in Walford (at 138) that “[a] duty to negotiate in good faith is … unworkable in practice”, that case “does not have the effect of invalidating an express term in a contract which employs the language of good faith” (see paragraph [37]).

The Court of Appeal also drew a distinction between the situation in Walford and in HSBC v Toshin. In Walford, the parties were involved in pre-contractual negotiations, whereas in HSBC v Toshin, the parties were already in a tenancy agreement and in particular were subject to a contractual obligation to “in good faith endeavour to agree on [the new rent for a new rental term] – ie, there was no such obligation before the [tenancy agreement] was entered into” (see paragraph [37]).

In the Court of Appeal’s view, this distinction meant that the positions of Toshin and HSBC were not strictly adversarial. While they did not have identical interests, nevertheless, the parties “[had] committed themselves to a mechanism to resolve how the new rent for (inter alia) the Last Rental Term [was] to be set“. Accordingly, “[u]nlike parties who are merely in pre-contractual negotiations, [Toshin and HSBC were] not free to simply walk away from the negotiating table for no rhyme or reason” (see paragraph [37]).

Citing the Supreme Court of New South Wales decision of Aiton Australia Pty Ltd v Transfield Pty Ltd (1999) 153 FLR 236, the Singapore Court of Appeal considered that where there was a contractual obligation to negotiate in good faith, upholding the provision was in pursuance of the performance of that provision and also “part of the wider contractual duty to co-operate to implement the contract” (see paragraphs [38] and [39]).

Reasons for Upholding Clauses to Negotiate in Good Faith

The Court of Appeal gave two reasons for upholding an express agreement between contracting parties that they must negotiate in good faith.

First, such an agreement was valid because it is not contrary to public policy. In fact, the Court of Appeal considered such clauses to be in the public interest “as they promote the consensual disposition of any potential disputes” (see paragraph [40]). Furthermore clauses of “friendly negotiations” and “confer[ing] in good faith“, “are consistent with [Singapore’s] cultural value of promoting consensus whenever possible. Clearly, it is in the wider public interest in Singapore as well to promote such an approach towards resolving differences” (see paragraph [40]).

Second, “no harm is done” if a party refuses to negotiate in good faith and negotiations break down as a result because the dispute can be resolved in some other fashion. The Court of Appeal also held that this did not render the clause devoid of meaning. Depending on the wording of the clause, the Singapore courts may void the consequence of the offending party’s breach at the request of the prejudiced party (see paragraph [40]).

Furthermore, the Court of Appeal also considered that such express clauses to negotiate in good faith were similar to “best endeavour” clauses which had been upheld on numerous occasions by the Singapore courts (see paragraph [43]).

In this respect, the Court of Appeal noted at paragraph [45] that the courts should not be too quick to strike down an explicit contractual provision.

“It is important that the courts, as upholders of bargains, give practical effect to agreements entered into by commercial persons, rather than be quick in finding abstract difficulties. The choice made by contracting parties, especially when they are commercial entities, on how they want to resolve potential differences between them should be respected. Our courts should not be overly concerned about the inability of the law to compel parties to negotiate in good faith in order to reach a mutually-acceptable outcome.”

Scope and Ambit of Negotiations in Good Faith

The Singapore Court of Appeal held that “parties are…certainly not disentitled from having regard to their own commercial self-interests in the course of the negotiations so long as their conduct does not involve bad faith” (see paragraph [39]).

The role of the Singapore courts in upholding such clauses is more process than result oriented. As the Court of Appeal noted at paragraph [45],

“The court is not being asked to determine whether it can compel the Parties to negotiate the new rent for the Last Rental Term in good faith or whether they have failed to negotiate such rent in good faith (citations omitted). The court is also not being asked to decide whether either of the Parties may, in its own self-interest, withdraw from the negotiations on the new rent for the Last Rental Term. Instead, what the court has to determine here is whether [Toshin], in unilaterally obtaining valuations (in the form of the Toshin valuations) of the market rental value of the Demised Premises in advance of the Rent Review Exercise, has breached its duty to “in good faith endeavour to agree” on the new rent for the Last Rental Term (by disabling itself from fulfilling this obligation in the light of the advantage it has gained) and, if the Respondent has indeed breached this duty, what the consequences would be. … Our courts should not be overly concerned about the inability of the law to compel parties to negotiate in good faith in order to reach a mutually-acceptable outcome.”

The Court of Appeal held at paragraph [45] that “the concept [of good faith] is reducible to a core meaning“.

“At its core, the concept of good faith encompasses the threshold subjective requirement of acting honestly, as well as the objective requirement of observing accepted commercial standards of fair dealing in the performance of the identified obligations. This encompasses a duty to act fairly, having regard to the legitimate interests of the other party.”

Whilst the Court of Appeal noted that “[t]he common threads connecting most attempts to define ‘good faith’ are fairness and honest dealing” (see paragraph [47]), it also cautioned that “what constitutes reasonable commercial standards of fair dealing in the context of an express contractual duty of good faith will depend heavily on the commercial nature and purpose of the contract in question” (see paragraph [49]).

Scope and Ambit of Negotiations in Good Faith in Rent Review Mechanism

Although the Court of Appeal’s statements at paragraphs [49] to [56] relate to the obligation of the parties to negotiate within the purview of a rent review mechanism, they could perhaps also apply to other similar clauses which require parties to co-operate with each other to achieve a common purpose e.g. price reviews clauses etc.

According to the Court of Appeal, “[f]aithfulness to the common purpose incorporates an obligation during the course of negotiations not to attempt to unfairly profit from the known ignorance of the other” (see paragraph [50]). A party should not take action or a course of action which would give it an “unfair advantage“.

The Court of Appeal added that insofar as there is “an obligation not to take advantage, in the course of negotiations, of the known ignorance of the other party…it is not the taking of any or every advantage that is to be eschewed, but only the taking of an unfair advantage that would afford one party a commercially-significant insight into the conduct of the negotiating process” (see paragraph [52]).

Despite the fact that parties do not have identical interests in such a negotiation exercise, the exercise “envisages not an adversarial process but joint action and collaboration by the Parties, either by genuinely endeavouring to agree on the new rent [or failing which] by jointly appointing the three valuation firms…” (see paragraph [50]).

The Court of Appeal also noted that when parties enter into negotiations, “reasonable commercial standards of fair dealing must necessarily dictate the disclosure of all material information which could have an impact on the negotiations and/or the ultimate determination of the new rent” (see paragraph [51]).

Furthermore, when there is a breach of the clause to negotiate in good faith and that breach is then remedied (as the Court of Appeal held had happened in HSBC v Toshin), parties “ought to [resume their] endeavour to ‘in good faith…agree’ on the new rent” (see paragraph [55]). The entire rent review mechanism would only be voidable in a situation where there was an unremedied breach of the duty to “in good faith endeavour to agree” on the new rent. In other words, if Toshin had failed to remedy the breach by disclosing all the valuation reports, and parties had come to an agreement on the new rent, that new rent would be voidable at the instance of HSBC.

Conclusion

The Court of Appeal’s decision in HSBC v Toshin adopts a very commercially sensible and practical approach to contractual provisions to negotiate in good faith. The Singapore court is merely seeks to ensure that parties conform to the process of negotiating in good faith. In the words of the Court of Appeal,  “[o]ur courts should not be overly concerned about the inability of the law to compel parties to negotiate in good faith in order to reach a mutually-acceptable outcome” (see paragraph [45]). While the scope and ambit of the obligation to negotiate in good faith necessarily remains fact specific and inexact, the core concepts of acting honestly, fairly and to the accepted commercial standards of fair dealing are unobjectionable and intuitively understandable by commercial parties.

About Shaun Lee

International Dispute Resolution and Arbitration lawyer. Fellow of the Chartered Institute of Arbitration. Panel of Arbitrators and Panelist for DNDR at the KLRCA.
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