Parties entered into a ‘heads of agreement’ to jointly develop mining rights. The agreement anticipated execution of a joint venture in the future. However, they failed to reach final agreement and a few years later negotiations were terminated. Sijehama alleged breach of ‘heads of agreement’ and claimed damages. It succeeded at trial.
A contract to contract is not binding, but this was not a contract to contract - it was an agreement to negotiate in good faith which he considered was enforceable; he was influenced by the doctrine of freedom of contract and the fact that the two organisations had intended the agreement to be binding. His Honour set out factors which suggested the obligations should not be legally enforced, including that the term ‘negotiation’ contemplates the possibility of frustrating failure and do not assure success, and that the subject matter of the proposed lease had not been determined. He then weighed these against the factors indicating the agreement should be enforced; including the reference to an ‘agreement’ and the clear intent expressed in the agreement that it should have ‘full and binding effect’. Finding the agreement binding, he then discussed general principles relating to agreements to negotiate. After discussing some authorities suggesting contracts to negotiate should not be enforced (Lord Denning, for example, holding such contracts were too uncertain to have binding force and that no court ‘could estimate the damages because no one could tell whether the negotiations would be successful … or if successful what the result would be’) his Honour dismissed them, finding that where parties have agreed to negotiate or consult in good faith ‘they should be held to that promise’ and that courts could assess an appropriate measure of damages for ‘loss of chance’ based on future probabilities – it would be for the party claiming loss to demonstrate that loss sufficiently.
Consequently his Honour held disagreed with the view expressed in some earlier English decisions that ‘no promise to negotiate in good faith would ever be enforced by a court’ – the proper approach depends on the construction of each particular contract and that in many cases such an agreement will be binding – especially where power is given to a third party to settle uncertainties. However, in this case the promise was too vague to be enforced; no ‘external arbitrator was nominated to resolve outstanding differences’ of which there were several and a court is not equipped to fill in the ‘blank spaces’.