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Duty of care between negotiating parties

04 October 2010

Daventry District Council v Daventry & District Housing Ltd [2010] EWHC 1935 (Ch), 30 July 2010

The case of Daventry District Council v Daventry & District Housing Ltd found that negotiating parties who had agreed to negotiate in good faith did not owe a duty of care to each other, unless their relationship went some way beyond that of arm’s length counterparties.

Rectification on the grounds of mistake was refused where a party’s solicitors had agreed to a clause due to unclear instructions.

The parties negotiated a transfer contract under which the claimant (the Council) transferred its council housing and housing department staff to the defendant (DDH), a charity created for that purpose. The transfer was intended to be a collaborative exercise that began a close, long-term working relationship. During negotiations, the parties signed documents which referred to "partnership principles" and committed to ensuring "the best possible deal … for both parties without causing any detriment to the other" and to achieving "a fair and equitable solution".

There was a £2.4m pension scheme deficit for the staff being transferred to DDH. Throughout the negotiations, the Council believed that DDH would pay the deficit. However the Council’s solicitors, DDH’s solicitors and DDH’s board believed that the Council would pay the deficit. One of DDH’s representatives realised that there was a misunderstanding, but did nothing to correct it. Consequently, the parties’ solicitors agreed to a clause that stated that "the Council shall make a payment of £2.4 million …" and the transfer contract was signed.

The Council claimed rectification of the clause for either mutual or unilateral mistake. In the final alternative, the Council claimed that DDH had breached a duty of care that it would not seek to benefit from the Council’s misunderstanding or mistake, but would draw such misunderstanding or mistake to the Council’s attention, so that the contract terms would accurately record each party’s intentions.

Rectification for mistake

Vos J refused to grant rectification for mutual or unilateral mistake. As regards common intention mistake, the judge accepted that the parties had a common intention that DDH would pay the deficit. However he held that this common intention did not continue until execution of the transfer contract, because the Council’s solicitors’ approval of the clause changed the Council’s objectively viewed intention that DDH would pay. Further, the judge held that the requirements for unilateral mistake were not met in light of the Council’s solicitors’ approval of the clause.

Duty of care between negotiating parties

The court held that, absent any documents, no duty would exist between parties negotiating a commercial agreement, even if such parties were public or charitable bodies. While DDH had accepted the principle of fair play and agreed to negotiate in good faith in the documents, this was not sufficient to give rise to any duty. Vos J noted that the alleged duty "would make the negotiation of commercial transactions unworkable, uncertain and risky". In the interests of certainty, whatever negotiating parties said about behaving well, a duty of care would only arise where their relationship went some way beyond that of arm’s length counterparties. There might be such a relationship if one party offered a service or assumed a responsibility towards the other.

Comment: Historically, English courts have been unwilling to recognise obligations of good faith during negotiations. In Walford v Miles [1992] 2 AC 128, Lord Ackner expressed the view that as a matter of principle, an agreement to negotiate in good faith was not generally enforceable under English law as it was uncertain and inherently inconsistent with the position of a negotiating party. A more liberal approach was taken in Petromec Inc v Petroleo Brasiliero SA Petrobras (No 3) [2005] EWCA Civ 891, where Longmore LJ in the Court of Appeal suggested obiter that an agreement to negotiate in good faith might be enforceable (in relation to an alleged termination of negotiations in bad faith) where the term was of comparatively narrow scope and expressly agreed by the parties in a professionally drafted commercial contract. The limited application of the Petromec decision appears to have been confirmed by Toulson LJ, who distinguished Petromec and cited Walford v Miles in the first instance case of BBC Worldwide Ltd v Bee Load Ltd [2007] EWHC 134.

The Daventry case demonstrates that in relation to obligations of good faith during negotiations, the English court continue to favour certainty in commercial negotiations. While the court inferred an agreement to negotiate in good faith from documents between the parties, it did not ascribe any legal consequences to this agreement. Moreover, it held that the close relationship between the negotiating parties was insufficient to found a duty of care, and applied rectification principles strictly.

Further information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution. For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 (0)20 3088 3710.