Contract – Lock-out agreement – Good faith – Claimant negotiating to develop land – Defendants terminating negotiations – Whether defendants in breach of duty to act in good faith – Whether negotiations amounting to sham – Claim dismissed
The claimant was incorporated as a special purpose vehicle for the intended development of land that surrounded an enclosed area of water known as Middlehaven, an historical part of Teesside. Negotiations took place with the defendants (EP and TVR) for a development agreement to enable the claimant to build on the land. EP was a combination of the first defendant, which owned the land, and the Urban Regeneration Agency. The second defendant, TVR, was a body that had been created to encourage and coordinate regeneration in the area.
In July 2005, EP terminated the negotiations with the claimant. Prior to that, EP had entered into two lock-out or exclusivity agreements, whereby EP agreed not to deal with others in respect of the land. The first agreement ran from October 2004 to December 2004. The second agreement extended the first to April 2005. Each agreement provided, inter alia, that EP would not invite tenders for, or enter into negotiations for, the sale, development, letting or charging of the land that the claimant sought to develop. Both agreements contained a further provision, according to which each party owed the other a duty of good faith.
The claimant subsequently brought an action for damages from EP for breaches of the lock-out agreements as extended and from the second defendant for inducing those breaches. The defendants denied any wrongdoing.
The claimant alleged that the defendants had gone through the motions of negotiating, and let the claimant incur considerable expense, when, in reality, they did not intend to enter into an agreement with it. Accordingly, the negotiations and the lock-out agreements were a sham.
Held: The claim was dismissed.
The House of Lords had held in a case involving an agreement, which did not contain an express term as to good faith, that while negotiations were running, either party was entitled to withdraw at any time and for any reason. There could be no obligation to continue to negotiate until a proper reason to withdraw arose and a bare agreement to negotiate had no legal content. However, those comments had not been made in the context of alleged sham negotiations. In the present case, the court was entitled to consider the issue of the duty to negotiate in good faith if the facts gave rise to an issue of law: Walford v Miles [1992] 1 EGLR 207; [1992] 11 EG 115 and Petromec Inc v Petroleo Brasileiro SA Petrobas (No 3) [2005] EWCA Civ 891; [2006] 1 Lloyd’s Rep 121 considered.
On the evidence, the court was satisfied that the defendants had negotiated with the claimant in good faith. The documentary evidence did not support the allegation against the defendants and their representatives of serious misconduct, namely that together they had led the claimant to believe that it had a chance of entering into a development agreement with EP when this was not the case because the negotiations were a sham.
The defendants had been genuinely willing to ent
er into lock-out agreements with the claimant and no one else and to extend the deadlines when these were not met. The claimant h
ad been the preferred developer, which was supported by the insertion of the exclusivity clause into both agreements.
Philip Noble and Simon Livingstone (instructed by Watson Burton LLP, of Newcastle upon Tyne) appeared for the claimant; Thomas Leech (instructed by Eversheds LLP, of Newcastle upon Tyne and Dickenson Dees LLP, of Newcastle upon Tyne) appeared for the defendants.
Eileen O’Grady, barrister
