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CAN THE LAW COMPEL BUSINESS PARTIES TO NEGOTIATE? Francis Botchway Consult before you legislate; Negotiate before you litigate; Compensate before you retaliate …1

ABSTRACT Many businesses, national or international, would opt to negotiate differences between or among themselves. There are circumstances, however, where disputing parties are compelled to negotiate or re-negotiate out of necessity induced by law, by custom or by comparative efficiency expectations. This work evaluates the legal basis of international business negotiations and argues that negotiation is not always a choice, in many cases, it is the choice. It also argues that even though English law is quite ambivalent about the place of good faith in negotiations, contractual negotiations, including those mandated by the law must be carried out in good faith.

Introduction: The discipline and practice of negotiation as a business phenomenon and as a means of settling disputes is now well-established. There are specialists in business organisations, international organisations, government departments and law firms dedicated to this endeavour.2 The commonality of negotiations as a pre-contractual mechanism as well as a



LL.B., LL.M., LL.M., Ph.D. Reader in Law, University of Hull Law School.

1

Pascal Lamy (Former E.U. Trade Commissioner), speech at U.S Chamber of Commerce, Brussels, 7 March

2001. Excerpt in E-U Petersmann, Prevention and Settlement of Transatlantic Economic Disputes: Legal Strategies for EU/US Leadership (in Transatlantic Economic Disputes: The EU, The US and the WTO, E-U Petersmann and Mark Pollack eds, 2003) at p. 3. 2

See ROGER FISHER AND WILLIAM URY, GETTING TO YES: NEGOTIATING AGREEMENT

WITHOUT GIVING IN ix (1981). Bar training in the UK has negotiation in the curriculum. Law Schools around the world have modules or programmes on negotiations. The most famous being the Harvard Program on Negotiations. The Personal Performance Centre based in Canada, the Centre for Energy and Mineral Resources

Electronic copy available at: http://ssrn.com/abstract=1610183 1

dispute resolution process is such that its legal basis and framework are often taken for granted. The literature on the subject seems to focus on the process, deal making, and the art of negotiation itself.3 There is hardly any discussion of the law surrounding the subject.4 This is understandable since any juridical framework for negotiations may necessarily have to be national, yet modern business often transcends national jurisdictions. Much more interesting is the fact that any prescription on the nature and content of negotiations is fortuitous seeing that any two negotiations are hardly identical in content, participation and outcome. What is possible to articulate and modelise, and what does exist in law relating to negotiations is the legal grounding of any particular negotiations. The exploration and articulation of the legal foundation of negotiations is the preoccupation of this article.5 This work identifies five key reasons in law as providing the requisite source and mandate for negotiations. These are: the text of legislation, including treaties; the text of pre-existing agreements, including fundamental change in the circumstances of an existing agreement; orders by adjudicatory bodies; duress and custom. If the entreaties of the law are to be followed, they must be Law at Dundee, Dalhousie University's Negotiation and Conflict Management Programme, the Centre for Effective Dispute Resolution in London, all run programmes on Negotiations. See for example, www.cedr.co.uk 3

See for example, ROBERT MNOOKIN, BARGAINING WITH THE DEVIL: WHEN TO NEGOTIATE AND

WHEN TO FIGHT (2010). JESWALD SALACUSE, MAKING GLOBAL DEALS (1991), ROGER VOLKEMA, THE NEGOTIATIONS TOOLKIT: HOW TO GET EXACTLY WHAT YOU WANT IN ANY BUSINESS OR PERSONAL SITUATION (1999).R. SHAPIRO & M. JAKOWSKI (Eds), THE POWER OF NICE: HOW TO NEGOTIATE SO EVERYONE WINS (2001). ROGER FISHER AND WILLIAM URY, supra note 2. HOWARD RAIFFA, THE ART AND SCIENCE OF NEGOTIATIONS (1982). 4

Robert Mnookin is one of the few experts in the field that dealt with some of the legal aspects on negotiations. See for example, Bargaining in the Shadow of the Law: The Case of Divorce YALE LAW J. 88 (1979). 5 Negotiations in the context of this work exclude Conciliation, Mediation and Arbitration. These are generally referred to as Alternative Dispute Resolution mechanisms. Although Negotiations is an alternative to court process for resolving disputes, its treatment here excludes the others. Negotiations here refer to the direct discussion of a business arrangement between two, or occasionally, more parties or their representatives without the involvement or recourse to a third party, except occasionally, the court.

Electronic copy available at: http://ssrn.com/abstract=1610183 2

followed in good faith. The existence of the doctrine of good faith in the law and its relevance to negotiations will be discussed in the last section of this work. In all of this, the preoccupation is mainly with negotiation as a means of resolving or avoiding disputes and not necessarily as a transaction process or international relations underpinned by public international law.

2) The Legal Basis i) Legislation By far the most authoritative basis for business negotiations is legislation. Legislation here is broadly construed to include not only domestic statutes but also international treaties and regulations. Countries generally anchor their policies in legislation in order to firm up, and assure stakeholders of the seriousness of, the policy. This is particularly so in the economic sectors of countries. Legislation in this field covers investments (Bilateral Investment Treaties and Investment Codes), trade, securities, competition/antitrust, tax, etc. Bilateral Investment Treaties (BITs) have become an essential framework for international economic co-operation. They deal with issues such as most favoured terms of investment, types and size of investments, guarantees of protection and dispute resolution.6 Various types and forms of dispute resolution are accepted, consolidated or prescribed in the BITs. Even where adversarial or conventional modes of dealing with disputes are prescribed, amicable settlement is emphasised as the ultimate objective. It is that objective which implicates or 6

See for example, Egypt –United Kingdom: Agreement for the Promotion and Protection of Investments, 14

ILM 1470 (1975). See also Emmanuel Laryea, International Norms, Rules and Practices of Resource Investment and Implications for Africa (in F. Botchway eds, Resource Investment and Africa’s Development, (forthcoming) (2011). Jeswald Salacuse & Nicholas P. Sullivan, Do BITs Really Work? An Evaluation of Bilateral Investment Treaties and their Grand Bargain (in 46 HARVARD INT. L. J. 67, 2005).

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explicitly undergirds negotiations. For example, Articles 8 and 9 of the Egypt–UK Agreement on Investment Promotion and Protection recommend arbitration as a means for resolving disputes arising from the Agreement only when “agreement cannot be reached … through conciliation or otherwise” or where diplomatic initiatives failed.7 Even more emphatic is Article 11 of the Australia-Vietnam Agreement on Investment Promotion and Protection.8 It states that “the contracting parties shall endeavour to resolve any dispute between them connected with this Agreement by prompt and friendly consultations and negotiations”.9 The same goes for Article 7(2) of the Treaty between the USA and the Argentine Republic Concerning Reciprocal Encouragement and Protection of Investment. This provides that investment disputes should first be resolved by consultation and negotiation. 10 In a way, it can be argued that these provisions are not necessarily definitive, mandatory or certain. 11 They are often couched in language that permits elastic interpretation including an interpretation that could subsidiarise negotiations to more conventional definitive dispute resolution mechanism. This is not necessarily the case with all such provisions. The value of these provisions lies in the fact that they could enhance the willingness of courts or arbitral bodies to insist on the

7

Articles 8 and 9 of the Egypt –UK Agreement on Investments, 14 ILM 1472-1473 (1975).

8

Australia – Vietnam Agreement on Reciprocal Promotion and Protection of Investments, 30 ILM 1064 (1991).

Consultations and negotiations are to be pursued first even if the dispute is between a contracting party and a national of the other contracting state. See article 12, Id. 9

Id. Article 10 also endorses consultations on issues relating to interpretation of the agreement.

10

31 ILM 205 (1992). Article 5 of the Investment Incentive Agreement between the Government of the USA

and the Government of the Russian Federation also mandates that any dispute between the parties regarding the interpretation of this agreement SHALL be resolved, in so far as possible, through negotiations between the two governments. 31 ILM 777 (1992). 11

See EYAL BENVENISTI, SHARING TRANSBOUNDARY RESOURCES: INTERNATIONAL AND

OPTIMAL USE 162-3 (2002), arguing in favour of vague provisions that allow negotiations.

4

“exhaustion of local remedies”. In this case, negotiation or other less contentions attempts at resolving the dispute.12 In addition to provisions in international investment agreements, or for countries which do not have any such agreement, domestic legislation providing for investments by both foreign and domestic concerns can be found on the statute books.13 These have become much more common in the last two decades as the competition to attract investments intensified.14 Unlike BITs, the thrust of these legislation is more on investment promotion than the provision of a framework for the protection of investment. Many of these investment codes establish institutions for promoting investment and also resolving teething investment problems.15 They also serve as the first destination for investment negotiations. Beyond that, provisions are expressly made for the resolution of disputes arising from investments within the framework of the code. As with BITs, the emphasis is on amicable settlement of investment disputes. Negotiation between the relevant parties or between the institution for investment promotion and the investor is the preferred route for resolving differences. Article 26 of the Mexican Investment Act ordains the Commission on Foreign Investment established by the Act as the “organ of compulsory consultation on foreign investment”. The Law establishing the Albanian Investment Agency empowers it to “assist in the discussion and

12

Courts in England are actually required to stay proceedings and to order parties in disputes who had previously

agreed to go to arbitration to resolve their differences. See DAVID BARNARD & MARK HOUGHTON, THE NEW CIVIL COURT IN ACTION 102 (1993). Austrian Courts or Arbitral bodies may entertain disputes only after efforts at settlement failed in a 3-6 month period. See Beatrix Karl, Settlement of Disputes in Social Security Conventions, (in SETTLEMENT OF DISPUTES IN TAX TREATY LAW, Michael Lang & Mario Zuger, ed, 2002) p. 559. 13

See ICSID, INVESTMENT LAWS OF THE WORLD at 13 (1997).

14

Ibid. Ibid.

15

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drafting of investment contracts …”16. While these may not be explicit basis for negotiations, to argue that “consultation” and “discussions” are denuded or exclusive of negotiations would be absurd.17 In the absence of explicit provisions on negotiations, the provisions on consultations, discussions, amicable settlement of disputes etc can be taken as the legislative basis of negotiations. This is what section 29 of the Tanzania National Investment (Promotion and Protection) Act of 1990 points to by providing that “where any dispute arises between a foreign investor and the Government in respect of any approved enterprise, all effort shall be made through mutual discussions to reach an amicable settlement.” 18 Closely identical provision is made in section 29 of the Ghana Investment Promotion Centre Act, 1994.19 Article 8 of the Albanian Law on Foreign Investment provides for disputes to be settled first by an agreement and failing that, the foreign investor may elect to resolve the matter under any procedure agreed to previously. 20 Section 40 of the Angolan Investment Act also gives primary place of resolving investment disputes to “private arrangement”, failing that arbitration and then court process.21 Where the legislation provides for “private arrangement”

16

See ibid at 13.

17

Francis Botchway, The Context of Trans-Boundary Energy Resource Exploitation: The Environment, the State

and the Methods, COL. J. INT. E’TAL L. & POL. 200-202, 209-211 (2003). 18

30 ILM 905 (1991). Section 5 on the Investment Promotion Centre’s functions is broad enough to empower it

to negotiate. It has residuary power “to do all such things as are necessary or incidental or conducive to the functions specified in this Act”. 19

. Section 29 of the Ghana Investment Promotion Centre Act 1994, provides that “where a dispute arises

between an investor and Government in respect of an enterprise, all efforts shall be made through mutual discussion to reach an amicable settlement". The functions outlined for the Investment Promotion Centre in section 3 of the Act can be interpreted to ordain negotiations between an investor and the government. 20

Supra note 16.

21

Id.

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or “any procedure previously agreed to”22 by the parties involved, the options opened to the parties may be diverse and negotiations would not necessarily be mandatory. Those provisions could be interpreted to mean terms agreed to in the contractual documents. If the contract did not make clear provisions for a particular mode of resolving disputes then negotiation is only one of many possible options. The issue of which option to take in that diverse field would be determined by an anticipation of the most efficient outcome or the best possible results. This is particularly important in view of the fact that many statutes on investment do not have provisions on dispute resolution. The Belarus Investment Act and the Armenian Investment law, for example, do not have explicit provisions on dispute resolution.23 There are other sources of legislative prescription or encouragement for negotiations. Multilateral treaties on economic matters often have provisions that can be used as basis for negotiations. In fact, the GATT/WTO agreement mandates periodic tariff negotiations. Articles 2 and 28 of the GATT form the legal basis for the various trade negotiating rounds.24 The IMF Articles of Agreement, World Bank, OECD and instruments of other international organisations require negotiations as a means of making deals or resolving differences. Article 64 of the Convention on the Settlement of Investment Disputes recommends that any dispute between the contracting states regarding the interpretation or application of the convention must be settled first by negotiations and only if that fails, must it be referred to the ICJ. At

22

For example, Article 43 of the 1995 Algerian Investment Law. ICSID, supra note 13 at 47. Article 42 of the

same statute prescribes prior effort at amicable settlement of expropriation disputes. 23

24

Id. Kennedy, Tokyo, Uruguay and now Development rounds. See M. MATSUSHITA et al, THE WORLD

TRADE ORGANISATION: LAW, PRACTICE AND POLICY 3 (2003).

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both the domestic and international levels, legislation on bankruptcy, social security, labour, tax etc, all have provisions that support negotiations.25

ii) Pre-Existing Agreements and Fundamental Change in Circumstances Apart from legislation broadly mandating negotiations to deal with issues, agreements or business deals between two or more business undertakings, and governments, often prescribe negotiations as a process for dealing with issues arising from the agreement. Sometimes, preliminary conclusions are arrived at but the details or specific matters are left for further negotiations. A deal may indeed be complete for all material purposes but provisions may be made for negotiations to deal with issues that were not contemplated at the time the original deal was concluded. A typical joint venture agreement between two businesses contains a provision like “the parties express the intention that all disputes in connection with this agreement and the execution hereunder shall be settled through friendly negotiations”.26 Much more prevalent since the closing decades of the last century, is the provision for periodic review of business agreements. 27 This could be fixed or be made contingent upon certain predictable event(s). One important factor that provided the basis for 25

See THE CORK REPORT, INSOLVENCY LAW AND PRACTICE (Cmnd 8558); Dan Prentice, Fidelis

Oditah & Nick Segal, Administration: Part II of the Insolvency Act, 1986 (in CURRENT DEVELOPMENTS IN INTERNATIONAL AND COMPARATIVE CORPORATE INSOLVENCY LAW, Jacob Ziegel Eds, 1994) at 65-68. Consumer Credit Act, 1974 section 56. Industrial Relations Act 1971 section 44. On social security, see Beatrix Karl, supra note 12 at 554-556. On tax, see Mario Zuger, Settlement of Disputes in Tax Treaty Law General Report, in Michael Lang & Mario Zuger, eds, supra note 12 at 20-21. 26

Model Joint Venture Agreement in PAUL STEPHAN, et al, DOCUMENTS FOR INTERNATIONAL

BUSINESS AND ECONOMICS: Law and Policy 1003 at 1027, (1996). 27

For example, Article 34(7) of the Energy Charter Treaty mandates review of the Treaty every five years.

Thomas Walde, Revision of Trans-national Investment Agreements: Contractual Flexibility in Natural Resource Development. 10 LAW & AM. 265 (1978).

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revisions of natural resource investment contracts since the 1970s is unexpected yield from resource investments that were not based on additional work by the investing company. This is what is termed windfall profits. To avoid the tension that is generated over the desire to have a share in windfall profits, provisions are made in legislation and investment agreements or contracts to allocate additional profits among the important stakeholders in the deal. These provisions generally set the additional profits tax in ranges or formula. Once the threshold is reached, the parties are obliged to renegotiate the exact amount to be paid. For example, the 1986 Minerals and Mining Law of Ghana provided for Additional Profits Tax at 25 percent of after tax income provided the initial rate of return on the project was realised and 35 percent profit is also made.28 The Egyptian Model Production Sharing Contract provides that the recovery of costs from petroleum produced will be "negotiable, usually 30 to 40 percent."29 More emphatically, clause 19 of the Contract provides that where changes in legislation adversely affect the economic interest of the contractor in a significant manner, the parties "shall negotiate modifications to this Agreement designed to restore economic balance." Furthermore, "after cost recovery, remaining production [must be] split between EGPC and the contractor on negotiable basis".30 The occurrence of an event or sets of events that could engender questions about the viability, validity or fairness of an economic agreement is more generally and controversially 28

Miriam Omalu and Amando Zamora, Key Issues in Mining Policy: A Brief Comparative Survey on the Reform

of Mining Law 17(1) J. ENERGY & NAT. RES. L. 30 (1999). The Additional Profits Tax provision has been repealed in the 2006 Ghana Mining Act. See CHRISTIANAID, TWN, TJN, et al, BREAKING THE CURSE 24 – 31 (2009). Apart from tax policies, other important events that can trigger re-negotiations are plans to assign interest in the project to a different company, passage of new legislation, discovery of a product that was not specifically provided for in the agreement, changes in the market price of the key product, etc. 29

WORLD PETROLEUM ARRANGEMENTS at page 2. Located at

www.gasandoil.com/ogel/members/knowledgebank/welcome.html 30

Id.

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encapsulated under the doctrine of rebus sic stantibus.31 In general, rebus sic stantibus is used as a countervailing response to the contractual doctrine of pacta sunt servanda or sanctity of contracts.32 Contract is generally a set of bargains supposed to have been freely negotiated by persons of appropriate capacity and disposition. A contract so negotiated must be respected at all times. Any attempts to re-negotiate would undermine the freely reached and endorsed testament of business relations. This is derived in part from the Weberian formalistic preoccupation with calculability, certainty and predictability. 33 If business deals are not definitive and could be re-negotiated at any time, then it would be difficult to organise businesses on long terms. In what way then would changes in the circumstances of the deal be a basis for its re-negotiation and reformulation? In the first place, many international business projects are of very long gestation, in some cases spanning generations, and they are often put together by a syndicate of interested parties not necessarily from one country or jurisdiction. Where a developing country is a recipient or a subject of the project, its government is likely to be called upon to make sovereign commitments, which may be matched, by commitments from the home countries of the syndicated parties. This transforms such a deal into an international agreement.34 In that case pacta sunt servanda is applicable.35 But so also is rebus sic stantibus. They are both international law principles governing contractual relations.36 The question then is which 31

This is what is referred to as fundamental change in the circumstances of the contract. Aminoil Award 21 ILM

976 (1982).PETER MUCHILINSKI, MULTINATIONAL ENTERPRISES AND THE LAW 497 (1999). 32

Article 62(1) of the Vienna Convention on the Law of Treaties. See K.B. Asante, Stability of Contractual of

Contractual Relations in the Transnational Investment Process, 28 ICLQ 401-423 (1979). 33

See Francis Botchway, Good Governance: The Old, The New, The Principle and the Elements, in 13

FLORIDA J. OF INT. LAW 159, at 169-171 (2001). 34

35

36

MUCHILINSKI, supra note 31 at 534-535. See also the Texaco Arbitration 17 ILM 1 (1978). Id. at 496. Asante, supra note 32.

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takes priority in cases of conflict? The validity of any agreement traces its origins from a certain known legal system. This also applies to the viability of any principle governing the contract. The emerging legal pluralistic phenomenon appears to be attenuating this. 37 The reality of the business deal, however, is that whether by its location or funding, it would have a juridical system that dominates its governance. This system would invariably be the domestic system supported by international treaties and norms as may be evident in BITs and multilateral agreements such as the ECT. In the recognised legal systems of the world, sanctity of contracts has not been an absolute immutable concept.38 The Civil Law Tradition has long provided for the revision of contracts in appropriate circumstances not necessarily at the instance of the parties. The French concept of imprevision and its German equivalent – Wegfall der Geshaftsgrundlage- permit the adjustment of contractual rights where events which were unforeseen at the time the contract was concluded occurred that made the continuation of the contract onerous or grossly inequitable.39 The Common Law principles of frustration and force majeure, whilst appearing to focus on excusing or discharging one or both parties from the performance of the contract, does not exclude the re-negotiation and reorganisation of the terms of the contract.40 In fact, it is not common for an agreement to be completely discharged on grounds of frustration or force majeure. In many cases, they provide recourse to new negotiations to adapt the deal to the changed circumstances unless the effect

37

Gunther Teubner, ‘Global Bukowina’: Legal Pluralism in the World Society (in Global Law Without A State, Teubner ed., 1997) at 4. 38 Japanese contracts are taken to be more flexible allowing for negotiations to deal with changed circumstances. See CARL GOODMAN, THE RULE OF LAW IN JAPAN: A comparative Analysis 223-224 (2003). 39

Compagnie generale d'eclairage de Bordeaux - Rec. Lebon p. 125. Conseil d' Etat - 30 Mar 1916. Located at

www.conseil-etat.fr/ce/jurisp/index_ju_la11.shtml. P. Garello, The Breach of Contract in French Law: Between Safety of Expectations and Efficiency, IN’T REV. L. & ECON 5 (2002). Asante, supra note 32. 40

This is also the implication from the “High Trees” case in Central London Property Trust Ltd. V. High Trees House Ltd. 1947 KB 130. Where the principle was enunciated that a party which makes a representation altering a continuing legal relationship with another party, that representation is binding until the circumstances change and new negotiations restores the previous relationship.

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of the event is so comprehensive as to obliterate the essence of the entire agreement. 41 In the case of Tsakiroglou and Co. Ltd v. Noblee and Thorl GmbH,42 the House of Lords held that the closing of the Suez Canal and the consequent re-routing of a voyage through the Cape of Good Hope did make the performance of the contract more onerous and expensive but that did not discharge the parties. It means they have to re-negotiate the terms of the shipment in the light of the new and unforeseen development. It appears that many recent model agreements or contracts in the natural resource field regard force majeure not as an event that terminates the contract but as a trigger for negotiations. The Nicaragua Model Concession Contract of 1998 provides in Article 31 that "[n]either Party to the Contract shall be considered in default of the performance of any of its obligations hereunder if the failure to perform or delay in performing such obligations results from events" such as "war, earthquake, fire, flood, hurricane or other natural disaster which could not be foreseen and was beyond the reasonable control of [the] Party". Article 23 of the Oman Model Petroleum Agreement also provides that "[f]ailure on the part of either Party to fulfil any of the conditions of this Agreement shall not be deemed a breach … to the extent such failure arises from force majeure …" If anything, force majeure only allows for extension of time for the performance of the contract. How long the performance is to be delayed and the additional or revised terms for completion can only be negotiated by the parties. It cannot be the arbitrary decision of one party. Specialised arbitral bodies may be the best forum in the event the parties cannot agree on the implications of the particular force

41

Thomas Walde, The Sanctity of Debt and Insolvent Countries: Defenses of Debtors in International Loan

Agreements. (in Judicial Enforcement of International Debt Obligations, D. Sassoon & D. Bradlow Eds, 1987, at 133). 42

[1962] AC 93. Treitel argues that “where a party has entered into a number of contracts, supervening events

may deprive him of the power of performing them all, without depriving him of the power to perform some of them … “ G.H. TREITEL, THE LAW OF CONTRACT 845-846 (1999).

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majeure event. On efficiency grounds, the parties cannot fail to, at least, attempt to renegotiate the terms of the contract as a consequence of the force majeure. Finally, one legal and business development that can fundamentally affect the circumstances of an existing business project is the conclusion of new, but not dissimilar deals, by one of the parties with a third party. This is derived from and may be encapsulated under the Most Favoured Nation (MFN) principle. Governments are continually seeking investments for various sectors of their nations’ economies. The more attractive the prospects of a deal, the more willing governments are in making generous concessions.43 The same goes for multi-national companies.44 Where a company or a government offers terms to a new partner which are more generous than the terms it committed to an existing business, the existing partner may have a legitimate basis to call for equal treatment. Evidence of the emerging prominence of this principle as the legal basis for new deals is found in the ECT of 1994. The overriding objective of the Treaty is to regulate investment relations in the energy sector of member states, mainly European and Central Asian countries.45 Article 10(3) of the Treaty mandates that a contracting party must accord “no less favourable [treatment] than that which it accords to its own investors or to investors of any other contracting party or third party whichever is the most favourable”. The ECT extends this rule to management and other service-oriented areas. Although the strict application of this provision to energy investments would be problematic in view of the varying circumstances of individual countries, all the same, it serves as a solid legal basis for the re-negotiations of business deals where a more favourable term is concluded with a different partner.46 Multi-national companies are not unknown to press for review of investment deals on the basis that new and better terms were

43

CHRISTIANAID, et al, BREAKING THE CURSE (2009), located at http://www.christianaid.org.uk/Images/breaking-the-curse.pdf 44 Ibid. 45 Francis Botchway, Contemporary Energy Regime in Europe, E. L. Rev. 10-12 (2001). 46

Id.

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given a national or a foreign company in a similar business. In an aluminium smelter agreement between a Swiss company and the government of Iceland, a provision was inserted which committed the Icelandic government not to give any foreign aluminium company better power tariff than that which it offered the Swiss company under the Power Contract.47 Governments have also used that logic as basis for a call for review or re-negotiations. In 1967 the Nigerian government called for a re-negotiation of its agreements with multinational companies for exploration and production of petroleum on the basis that better terms have been concluded by the Libyan subsidiaries or affiliates of these companies. 48

iii) Adjudicatory Orders If fundamental change in circumstances is less precisely defined, for example as to time and type of circumstances, or less authoritative as mandate for the negotiations or renegotiation of contracts, orders by adjudicatory bodies to the parties before it to settle the dispute out of court is more immediate, definitive, and often, time sensitive. Generally, courts and similar adjudicatory bodies are expected to and do overwhelmingly pronounce on the merits of the case before them and dispose of it definitively. That is, they reach finality in most cases. Nevertheless there have been cases where the adjudicatory body referred the matter to a “fourth party”, or for our purposes, asked the disputing parties to resolve the issues between themselves, impliedly or expressly, by negotiations. Courts in the common law tradition have inherent power to order appropriate resolution of any dispute brought before them.49 This can be done upon an application by the parties jointly or severally or suo motu.50

47

Article 36 of the Master Agreement between Iceland and Swiss Aluminium Ltd., March 28, 1966. See Asante

supra note 32 at 417. 48

49

Id. See for example, Case Settled, THE TIMES, London, 24 Feb., 2005 at p.2.

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Under rule 1.4(2) of the Civil Procedure Rules in England, the court is empowered to stay proceedings in order to allow the parties time to settle the dispute.51 Statutes establishing adjudicatory bodies also contain provisions that can be interpreted to give the bodies power to recommend or order negotiations as the process for resolving the dispute. The provisions that empower the bodies to grant interim injunction or provisional orders in order to preserve the status quo are particularly useful as a basis for recommending negotiations, even if indirectly.52 There is hardly any formula for determining cases that need to be settled out of court. One set of cases that seem particularly susceptible to infinality in conventional adjudication and therefore likely to engage in continued negotiations are cases involving the location and legal rights to shared resources. The long running dispute between Slovakia and Hungary over the Gabcikovo – Nagymaros project on the river Danube is illustrative of the 50

Order 3 Rule 3(1) of the Civil Procedure Rules. The new Protocol Questionnaire Forms for initiating litigation

in the courts make room for both parties to request a Stay of proceedings while they make efforts to settle the matter out of court. Whether on the basis of an application by one party or jointly or on its own initiative, the court’s Stay Order is usually for a month but can be extended for another month. The parties are expected to report to the court on progress made at the negotiations. See Order 26 rule 4. CHARLES PLANT (ed), BLACKSTONE’s GUIDE TO THE CIVIL PROCEDURE RULES 128-129 and 168-169 (1998). 51

Id. The new civil procedure reforms, since 1999, encourage, to a greater extent, pre-court settlement. See

GARY. SLAPPER & DAVID KELLY, THE ENGLISH LEGAL SYSTEM 220-221 (1999). Even with the establishment of Small Claims Courts which were meant to speed up litigation, at least 20 percent of cases that went to small claims courts in Canada were settled "out of court". In Sweden and Japan, pre-trial reviews aim at settlements in a negotiated or conciliatory manner, and in New Zealand, it is only when mediation fails that adjudication is resorted to. See CHRISTOPHER WHELAN (ed), SMALL CLAIMS COURTS (1990) 31 and 226. 52

Article 47 of the ICSID Convention gives the Arbitration Tribunal power to recommend any provisional

measures to preserve the rights of either party. Article 34 of the same Convention provides that any Conciliation Commission set up to conciliate an investment dispute under the Convention may at any stage in the proceedings and from time to time recommend terms of settlement to the parties.

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point. Unable to settle the dispute over the Gabcikovo- Nagymaros project, in particular its environmental implications, the two countries submitted the dispute to the ICJ for definitive resolution. The ICJ in essence held that both parties were in breach of their agreement for the construction of the hydroelectric project and the entire system of locks over the Danube. Notwithstanding this holding, the court asked the parties to go and work out a way of getting the project done.53 Much more telling is how the arbitral tribunal in the Gut Dam arbitration54 made preliminary findings against Canada and then suspended proceedings with an admonition to the parties to go and negotiate the terms of settlement and report to the arbitral body.55 The terms so negotiated settled the dispute. There are other cases where the body adjudicating basically adopted what the parties had failed to agree on by themselves. This happened in the Delimitation of the Maritime Boundary in the Gulf of Maine between Canada and the United States.56 It means that the court accepted post facto or endorsed the negotiations between the parties and the results thereof. Although such negotiations antedated the court process, and was not at the instance of the court, the court’s adoption of the fundamentals or principles of the negotiations gave legitimacy and force to the negotiations. It also removed the tint of failure or loss by one, or occasionally both sides. Failure to comply with the court’s position, albeit one the parties had failed to adopt previously, would invite legal consequences. These may include ban on doing business, sequestration, garnishment, lien, administration order, retaliation, auction etc. The court process and its outcome therefore amount to backward or ex post facto or reverse negotiations.

53

Benvinisti, supra note11, at 135-136.

54

(Canada / United States) 8 I.L.M. 118 (1969).

55

Id.

56

ICJ Rep. 246 (1984).

16

iv) Duress The principles of duress, deception and undue influence could combine to supply the legal basis for the re-negotiation of a contract. The common law employs “duress” as the operative paradigm but Equity uses the broader “undue influence” doctrine. 57 Ultimately they both work towards the same end. That is, the negativing or vitiation of the consensual foundation of the contract. It is disputed whether the contract would be void or voidable by reason of duress or undue influence. 58 If it is void, a whole new negotiation may have to be initiated, but if it is voidable then it can be ratified by further amendments or discussions. The conception of duress and undue influence has moved from its original “threat of physical violence” to more subtle pressures including the economic duress and exploitation of illiteracy.59 The threat need not be the primary reason for the contract. It is sufficient that it is a reason. A variation or an extension of duress and undue influence is what is described in Equity as “unconscionable bargains.” This is based on the premise that the parties to the transaction were not operating on equal terms. Australian courts are willing to set aside a transaction as unconscionable on grounds of poor literacy in the English language.60 A hint that English courts may follow this example is gained from Mocatta J.’s opinion in the North Ocean Shipping Co. Ltd. v. Hyndai Construction Co. Ltd. In that case, the construction price of a ship was revised upwards due to depreciation in the value of the US dollar. The defendants insisted and were given a 10 percent increase in the contract price. The plaintiffs paid the increased price but sought to recover it eight months later. They argued that it was

57

ANDREW BURROWS & EWAN MCKENDRIK, CASES AND MATERIALS ON THE LAW OF

RESTITUTION 317 (1997). 58

See ROBERT UPEX & GEOFFREY BENNETT, DAVIES ON CONTRACT 130 (2004). Ibid at 123. 60 See Commercial Bank of Australia v. Amadio (1983) 151 CLR 447. Canadian courts are also willing to strike 59

down contracts that are concluded to be unconscionable. See Knupp v. Bell (1968) 67 DLR (2d) 256. Marshall v. Canada Permanent Trust Co. (1968) 69 DLR (2d) 260.

17

unconscionable since they were pressured by the fact that they had concluded contracts based on the completion of the construction of the ship being on schedule. The Privy Council, per Mocatta J, held that this was a case of economic duress. The threat not to build the ship was wrongful and coercive. The court concluded, however, that the plaintiffs acquiesced and affirmed the contract and therefore it could not be set aside.61 In international business negotiations, what might be close to duress may be described as ‘pressure’. This pressure may be exerted by host governments or home governments of multinational corporations. In direct inter-governmental business matters, governments of more powerful countries may also apply pressure to the less powerful state in exacting very favourable deals. Pressure per se may not furnish proper legal basis for negotiations or renegotiations but it does influence the agenda and the outcome of the negotiations. The importance of duress or pressure is better appreciated where it is canvassed as the basis for vitiating an agreement or re-negotiating an agreement that was entered into under undue political or economic pressure.62 Where this is the case, the effect of the duress or pressure may affect particular parts of the deal and it is those parts that may require re-negotiations. For the sake of saving the overall objectives of the deal, the language of “pressure”, “duress” or “undue influence” may not be used. If anything, it would be couched in terms of “fairness”, “equity” and the “interests of the people or shareholders.” The original agreement between Suriname and a Malaysian Timber Company in 1984 for the exploitation of Surinamese timber was re-negotiated for two main reasons. One, the Surinamese government entered into

61

International jurisprudence appears to take the same line that the party complaining about duress must have

objected to it and not ratified the agreement. See the Aminoil Award 21 ILM 976 (1982). 62

For pressure or duress to be considered as legal basis of vitiating an agreement, the party complaining must

have indicated a consistent objection or reservation to the pressure being applied and its effect on the deal or that on the facts of the case, there was justifiable grounds for objection. Threat of physical violence or harm is without doubt a good ground to vitiate an agreement. MUCHILINSKI, supra note 31 at 498-501.

18

the first agreement when it was desperate for money and political votes in the region where the timber concessions were located. Second, NGOs and the media in the US mounted campaigns highlighting the unfairness of the deal to Suriname.63 In 1983, VALCO, a company owned by Kaiser and Reynolds, agreed to re-negotiate the 1962 smelter agreement with the government of Ghana due mainly to the widely publicised unfair terms of the 1962 deal which was entered into by a Ghanaian government desperate to provide electricity to its people and for industrialisation. 64 One inter-governmental business deal that generated much controversy because of the perceived application of unfair pressure was the Malaysian Tenaga Dam project.65 The British government had conditioned the grant of export credit guarantees for the project upon the procurement of security supplies from British companies by the Malaysian government. The deal fell through eventually because of the publicity accorded it, particularly the arms condition. More intriguingly was the call for the cancellation or re-scheduling of debts owed by developing countries on grounds that the lenders, particularly what has now become known as ‘vulture investors’,66 entered into the loan transactions knowing that the governments borrowing the money were corrupt or unstable, or took advantage of the weaknesses in the

63

This is similar to the circumstances of the Mittal Steel -Liberia steel agreement of 2005. See http://www.globalwitness.org/media_library_detail.php/156/en/heavy_mittal 64

See DAVID HART, THE VOLTA RIVER PROJECT (1984). FUI TSIKATA (eds), ESSAYS FROM THE

GHAN-VALCO RENEGOTIATIONS (1986). 65

Ex Parte World Development Movement Ltd [1995] 1 All ER 611.

66

See Congress to Clip the Wings of Vulture Funds, located at http://current.com/items/89173050_congress_to_clip_the_wings_of_vulture_funds Last visited 22/08/2008. Bush to act on Vulture Funds, located at BBC Newsnight website, http://news.bbc.co.uk/1/hi/programmes/newsnight/6370385.stm last visited 22/08/2008. In the case of Donegal International v. Zambia, the English High Court ordered the Zambian government to pay less than half the 55million dollars the Investment Fund was asking for in a vulture fund transaction in which the Investor bought $3.2 million debt Zambia owed. See Zambia Pays Vulture Fund $15m, located at http://news.bbc.co.uk/1/hi/business/6589287.stm, last visited 22/08/2008.

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borrowing government to exact very generous terms.67 In other words, the lenders failed to do thorough due-diligence check, one that should have covered “good governance”. Not only could the lenders be accused of applying unfair pressure by taking advantage of the vulnerabilities of dictatorships,68 but also the dictatorial regimes could be said to have coerced or defrauded their own people into agreements that were inimical to their development. 69 The problem with duress or undue influence as basis for negotiating or vitiating a previous agreement is that it is difficult to ascertain, nebulous and subjective. 70 How do we distinguish incompetence on the part of a party and the yield to unfair pressure? It is relatively easier to ascertain and deal with procedural undue influence or unconscionability- relating to fraud, misrepresentation, and duress - than substantive unconscionability - relating to price, outcomes and value.71 If pursued too far, wariness about an agreement being tainted by an allegation of duress could lead to a paternalistic intrusion into the skills and competence of an opposing party to a negotiation. It is perhaps due to the difficulty in mapping the parameters and elements of undue influence or duress and its consequences that the English courts have not yet allowed it as a complete defence to the enforcement of contracts.

v) Custom 67

M. SORNARAJAH, INTERNATIONAL LAW ON FOREIGN INVESTMENT 343 (1994). See also RICARDO SOARES DE OLIVEIRA, OIL AND POLITICS IN THE GULF OF GUINEA 96-100 (2007). ALEX VINES et al., THIRST FOR AFRICAN OIL: ASIAN NATIONAL OIL COMPANIES AND ANGOLA AND NIGERIA 7-27 (Chatham House Report) (2009). John Lungu, Copper Mining Agreements in Zambia: Renegotiation or Law Reform? 117 REV of AFR. POL. ECON. 403-415 (2008). 68 Ibid. Also see Javier Blas and William Wallis, US Investor Buys Sudanese Warlord’s Land, FINANCIAL TIMES, 9 Jan, 2009. Located at http://www.ft.com/cms/s/0/a4cbe81e-de84-11dd-9464-000077b07658.html 69 See Sean D. Murphy, Democratic Legitimacy and the Recognition of States and Governments, 48 ICLQ, 545 (1999). In Somalia v. Woodhouse Drake & Carey (Suisse) SA (The Mary) (1992) 3 WLR, 744, the Court stated the grounds for determining the capacity of Government to enter into agreements as follows: It must be a constitutional government, have effective and stable administrative control over the territory and be largely recognised by the international community. 70 J. Beatson, Duress, Restitution, and Contract Renegotiation, in (THE USE AND ABUSE OF UNJUST ENRICHMENT, J. Beatson eds., 1991) at 109-110. BURROWS & MCKENDRICK at 318. 71

Id.

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The final basis for negotiations is Custom. Custom is a nebulous concept. It could mean “habitual behaviour of people in a particular community,” 72 “practice accompanied by belief of obligation,”73 “consensus and compliance with reason,” 74 or “conduct amounting to a settled practice”75. All of these have two things in common; universality and enforceability. Custom must be generally known by those affected and there must be a sense of its enforcement. For custom to attain juridical status it must be reasonable, certain, lawful, not against the express or implied terms of the contract and be universally accepted by the trade or profession. 76 Two main types of custom must be distinguished in this context. The first is that which operates among people in a social community. The second is that which is found in business or trade. Both sets of customs are relevant and they condition negotiations. Certain countries, regions or societies are known to be less litigious than others. Those who do not fancy the court process or third party adjudication tend to have systems of disputes-resolution and deals-making that are very akin to negotiations.77 Asian societies in general, and the Japanese in particular, are notable in this respect.78 The Wa or (Harmony) Principle generally forms the basis of Japanese legal thought. It mandates the pursuit of group rather than individual interest.79 Problems in contractual relations must be worked out in the mutual interest and benefit of the parties. Negotiations arising from the Japanese culture of dispute

72

73

74

75

76 77

78

BEN CHIGARA, LEGITIMACY DEFICIT IN CUSTOM: A DECONSTRUCTIONIST CRITIQUE 1 (2001). Id. Id at 2. North Sea Continental Shelf cases, ICJ Rep. 4 (1969). The Fisheries Case, ICJ Rep. 47 (1974). F.M.B. REYNOLDS, BOWSTEAD & REYNOLDS ON AGENCY 130-134 (2006). YOSIYUKI NODA, INTRODUCTION TO JAPANESE LAW 207 (1976) Alex Hoffmann, Dispute Resolution With Japanese Business Partners (in Structuring International

Transactions, Denis Campbell, eds, 1997) at 287. Chin Kim & Craig Lawson, The Law of the Subtle Mind: The Traditional Japanese Conception of Law 28 ICLQ 491 (1979). 79

Id.

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avoidance is therefore imperative in business dealings. Article 1 of the first constitution of Japan in seventh century A.D. stated that “above all else esteem concord (wa); make it your first duty to avoid discord”.80 Confucian ethic also enjoins peacemaking, restoration of harmony in the context of permanent relationships.81 To the Japanese therefore, it is both a cultural and legal obligation to negotiate issues between parties directly. Japanese contracts typically contain clauses providing that in the case of dispute or frustrated expectation, the parties should negotiate in good faith to settle the dispute or accommodate the contractual basis in an amicable friendly manner.82 The second type of custom that is relevant as a basis for negotiations is trade or business custom. It is this custom that must be shown to be universally accepted by the trade or profession and must not be contrary to the clear or implied terms of the contract.83 Where a contract is regulated by a particular law or legal regime, that regime can and does make provision for the accommodation and enforcement of trade customs and usage. The Vienna Convention on International Sale of Goods typified this when it provided in article 9(2) that “parties are considered, unless otherwise agreed, to have impliedly made applicable to their contract or its formation a usage of which the parties knew or ought to have known and which in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned.” In the Law of Agency for example, an agent has implied authority to act in the execution of his express authority in accordance with the usage and customs of the particular market, place or business in which he is employed.84 80

Chin Kim & Craig M. Lawson, The Law of the Subtle Mind: The Traditional Japanese Conception of Law, in

28 ICLQ 505 (1979). 81

82

83

Id. at 501-502. Id. at 291. The custom must be also recognised as imposing a binding obligation. Drexel Burnham Lambert v. El Nasr

(1986) Lloyds 356. Produce Brokers co. Ltd. v. Olympia Oil and Cake Ltd. (1916) AC 314. 84

Ex Parte Howell (1865) 12 L.T. 785. Sutton v. Tatham (1839) 10 A&E 27.

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There is no such implied authority where the custom is unreasonable unless the principal had actual notice of the said custom at the time when the authority was conferred.85 There is also no such exception where the custom is against the law. 86 In some trades or professions there are no statutes to regulate particular practices but customs have evolved and have been accepted as obligatory and in some cases codified by the trade or profession. In the absence of comprehensive rules on mergers and acquisitions for example, the “City” in London has enunciated a code on mergers.87 The same goes for mortgage and other business in finance.88 One important objective of these trade customs is the promotion of harmony and the avoidance of disputes that fester into the “outside” domain. This clearly entails negotiation of issues and the resolution of disputes where they arise by means of negotiations or mediation or even through internal judicial mechanisms. The courts recognise and enforce these inhouse customs and codes of conduct by the use of the doctrine of “domestic remedies”. 89

3. Good Faith in Negotiations A question arises as to whether if the law can compel parties to negotiate, can it also compel them to negotiate in good faith? Would the parties negotiate simply out of fear or obligation under the law or they have an additional duty to do so in good faith? This is a difficult question mainly because the assessment of the elements of good faith is fluid. In English law there is no general doctrine of good faith. In Walford v. Miles,90 the parties in the course of negotiations for the sale of a business had agreed that the vendor will not negotiate with any

85

Hanker v. Edwards (1887) 57 L.J. Q.B. 147.

86

Anglo Overseas Transport (U.K) Ltd v. Titan Industrial Corporation 2 Lloyds 152 at 160 (1959).

87

PANEL ON TAKEOVERS, THE CITY CODE ON TAKEOVERS AND MERGERS (2009).

88

For example the Banking Code located at www.bba.org.uk

89

C. AMERASINGHE, LOCAL REMEDIES IN INTERNATIONAL LAW (1990). THOMAS HAESLER, THE EXHAUSTION OF LOCAL REMEDIES IN THE CASE LAW OF INTERNATIONAL COURTS AND TRIBUNALS (1968). 90 [1992] 2 AC 128.

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other third party except the prospective single buyer, the plaintiff/claimant in this case. There was no contract and everything was ‘subject to contract’. In a question whether the agreement not to negotiate with any other party was enforceable, the House of Lords held that bare agreement to negotiate was not enforceable, and they could not imply a term to negotiate in good faith. The court then stated that good faith is incompatible with the adversarial system of law practice. In the words of Lord Ackner “each party to the negotiations is entitled to pursue his (or her) own interest, so long as he avoids making misrepresentations ... A duty to negotiate in good faith is as unworkable in practice as is inherently inconsistent with the position of a negotiating party” .91 Others have argued that good faith is so vague that its discretionary dimensions would be difficult to contain, and that it is a paternalistic intrusion into the autonomy of parties and their freedom to contract.92 In many ways, the opposition to the introduction of the doctrine of good faith into English law is premised on a conception of the doctrine as an overarching principle that can be called in aid of an argument ad infinitum. For the purposes of this article, our concern is with the operation of the doctrine in contractual negotiations and not its relevance to the entire gamut of contract law. There have been some academic writing and judicial pronouncements urging a more nuanced approach or a disaggregation of the doctrine and applied in specific circumstances. 93 Five years after Walford v. Miles, Lord Steyn, while saying that it was unnecessary to introduce a general duty of good faith in English contract law, intimated that “where in specific contexts duties of good faith are imposed on parties our legal system can readily accommodate such a well tried notion. After all, there is not a world of difference between the

91

Ibid, at 138. Brownsword, Positive, Negative, Neutral: the Reception of Good Faith in English Contract Law, (in Brownsword et al., eds, Good Faith in Contract: Concept and Context (1999). Bridge, Does Anglo-Canadian Contract Law Need a Doctrine of Good Faith? (1984) 9 Canadian JBL 385. Gillette, Limitations on the Obligation of Good Faith (1981) Duke Law Journal 619. Snydermann, What’s So Good About Good Faith? (1988) 55 Chicago Law Rev. 1335. 93 See Raphael Powell, Good Faith in Contracts, 9 CURRENT LEGAL PROBLEMS 16 (1956). J.F. Burrows, Contractual Co-operation and the Implied Term (1968) MLR 390. E. A. Farnsworth, Good Faith Performance and Commercial reasonableness Under the UCC (1962-63) CHICAGO LAW REV. 666. 92

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objective requirements of good faith and the reasonable expectations of parties.”94 Much more authoritatively, the Court of Appeal, in the case of Petromec Inc. v. Petroleo Brasileiro SA, where the issue turned on whether the courts would enforce express obligations of the parties to negotiate in good faith, distinguished Walford v. Miles and ruled that an agreement to enter into good faith negotiations to deal with essential terms of a contract will, as a matter of general principle, not be enforced. But where an existing contract provides expressly for negotiations in good faith to resolve outstanding issues, that contractual term would be enforced by the courts.95 In the Civil law tradition, there is a broad recognition of the place of good faith in contracts. Section 242 of the German Civil Code, 1134 of the French Civil Code and article 1375 of the Italian Civil Code all provide clearly for good faith in contractual negotiations, execution and performance.96 This is why in its proposals for European Contract Law, the Lando Commission recommended in article 1.106(i) that “in exercising his rights and performing his duties each party must act in accordance with good faith and fair dealing”.97 To some extent this recommendation has been transformed into various pieces of EU directives, for example, the directive on Commercial Agency98 and the Unfair Terms in Consumer Contracts Regulations of 1999.99 The United States Uniform Commercial Code (UCC) refers to good faith in several provisions. For example, section 1-203 states that “every contract or duty within this Act imposes an obligation of good faith in its performance or 94

Johan Steyn, Contract Law: Fulfilling the Reasonable Expectations of Honest Men, 113 LQR 433 at 439 (1997). 95 Petromec Inc. v. Petroleo Brasileiro SA, CA 15 July, 2005. 1 Lloyd’s Reports 121 (2006). 96 See OLE LANDO & HUGH BEALE, THE PRINCIPLES OF EUROPEAN CONTRACT LAW Part I (1995). 97 The language here is very similar to article 1.7(i) of the UNIDROIT Principles which states that “each party must act in accordance with good faith and fair dealing in international trade.” Located at http://www.unidroit.org/english/principles/contracts/principles2004/integralversionprinciples2004-e.pdf For helpful commentary on the UNIDROIT principles, see ibid. Michael Bonnell, The UNIDROIT Principles of International Commercial Contracts and European Contract Law: Similar Principles For the Same Purposes, 26 UNIFORM LAW REV. 229- 246 (1996). Herbert Kronke, The UN Sales Convention, the UNIDROIT Contract Principles and the Way Beyond, 25 JOURNAL OF LAW AND COMMERCE 451 (“005). Naomi Julia Barnes, Good Faith Under the UNIDROIT Principles: A Struggle for Meaning, located at http://www.dundee.ac.uk/cepmlp/car/html/CAR9_ARTICLE14.pdf 98 Directive 86/653/EEC, implemented by Regulation SI 1993/3053 (1993). 99 SI 19999/2083 (1999).

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enforcement”. The Restatement (second) explains good faith to broadly encompass “honesty in fact and the observance of reasonable commercial standards of fair dealing.”100 Australia, which for a while held the same position as England101 began inroads into the Walford ruling in the Coal Cliff Collieries case in 1991, where Kirby P held that although a statement in the heads of agreement for a coal mine development entreating the parties to “proceed in good faith to consult together upon the formation of a more comprehensive and detailed agreement” was unenforceable for being vague and uncertain, such agreements were not prima facie unenforceable, and could be enforced depending upon the construction of each particular contract.102 More recently in 2009, the New South Wales Court of Appeal in the case of United Group Rail Services v. Rail Corporation of New South Wales103 held that a mandatory clause in a contract to refer a dispute to senior representatives of the two companies to “meet and undertake genuine and good faith negotiations” to resolve the dispute or settle their differences was certain, valid and enforceable. There are specific instances that English law clearly requires or places emphasis on good faith. These include contracts of insurance, cases of duress, equitable estoppels and capacity. Apart from insurance, the doctrines of duress, equitable estoppels and capacity almost all relate to procedural rather than substantive terms in the contract. The advocates of good faith would prefer acceptance of the doctrine for substantive purposes.104For the purposes of negotiations, both the procedural and the substantive aspects are relevant. Quantitative and qualitative criteria can be used to assess whether the negotiation instructed by law was held in good faith. Some of the apparently easier ways of achieving this include 100

Restatement (Second) of Contracts, Section 205 (1981). ALAN MORRISON (eds), FUNDAMENTALS OF AMERICAN LAW 368-369 (1996). Every contract or duty in chapters 1301-1310 imposes an obligation of good faith. 101 See Austotel Property Ltd. V. Franklins Selfservice Pty Ltd (1989) 16 NSWLR 582. 102 Coal Cliff Collieries Pty Ltd. v. Sijehama Pty Ltd. (1991) 24 NSWLR 1. 103 [2009] NSWCA 177. 104 See for example, Hutchinson, Good Faith in South African Contract Law, in Brownsword et al., eds, Good Faith in Contract: Concept and Context (1999).Summers, Good Faith in General Contract law and the Sales provision of the UCC 54 Virginia Law Rev. 195 (1968). Deakin & Michie eds, Contracts, Co-operation and Competition: Inter-Disciplinary Perspectives (1997).

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the timelines and venue of the negotiations, the standing of the representative parties, value of the offers and counter offers, indications of ‘efficient breach,’ threats of litigation, communication and choice of words and the feasibility of envisaged outcomes.105 In sum, we can argue that the recognition of good faith in contractual negotiations would not be such a revolutionary or gargantuan disruption to English law. Indeed its recognition would permit problems of bad faith to be dealt with in a more direct manner and enable judges to develop effective and coherent way of dealing with complaints of unfair dealing.106 It would also help in the protection of reasonable expectations of contracting parties, and contribute significantly to an environment of trust and co-operation that would enhance, in the long run’ the autonomy of the parties. To the direct question, whether in English law parties have an obligation to negotiate in good faith, the answer is yes, provided that obligation was a certain term in an existing contract. Even if not, a good faith obligation can be subsumed under already existing doctrines in English law such as unconscionable bargains, duress, capacity, equitable estoppels, legitimate expectations, fair dealing, etc.107

Conclusion This article sought to articulate the foundation in law of the right or obligation to negotiate or re-negotiate business deals. It has brought together varied but related grounds that can sustain a call for negotiations. It is apparent that some of these grounds are firmer than others. Orders by adjudicatory bodies, for example, are striking and much more effective than contingent or even legislative grounds. This is because, court orders to negotiate are backed by direct or veiled sanctions, and must be completed and/or reported on within set times. 108 Courts are,

105

See for example United Group Rail Services, supra note 102. Roger Brownsword, General Considerations, in Furmston ed, The Law of Contract (2007) at 89-95. 107 Ibid. 108 In Dunnett v. Railtrack plc [2002] EWCA Civ 303, the respondent was refused costs because it had refused 106

the court's suggestion to use alternative means of resolving the dispute.

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however, not enthusiastically disposed to order an "out of court" settlement. An application to a court for an "out of court" negotiation that is cast in a paradigm of efficiency as denominated by time, cost and harmony is likely to receive better reception from the court than one that directly challenges its jurisdiction. A call on the court to defer its jurisdiction in order for "local remedies"- including negotiations- to be exhausted can also be effective. This is particularly due to the fact that the court option is always available. The interpretation of a provision in a contract or legislation as calling for negotiations may not be without challenge. Provisions such as "the contracting parties shall endeavour to resolve any dispute between them connected with this agreement by prompt and friendly consultations and negotiations"109 are not strictly mandatory or clear-cut. The language is permissive and subject to varied interpretation. Thus, although legislative (including treaty provisions) and contractual terms offer preliminary indications for negotiations, the authority of such provisions and their efficacy may themselves require assistance from the courts. Much more nebulous and controversial are the contingent and customary circumstances as bases for negotiations. Cultures that are thought to be averse to litigation and see negotiations as customary obligation are beginning to change significantly. 110 The adoption of Western and modern methods of economic development come with the paraphernalia of rule of law and dispute resolution with the court system as its centrepiece. The "face to face" conclusion of deals and resolution of disputes may have been prevalent at a rudimentary level of economic development, but as businesses become cosmopolitan and trans-national, it is difficult and inefficient to insist on customary resolution of business differences. The requirement by trade custom for negotiated resolution also suffers from 109

110

Australia - Vietnam Agreement on Investment Promotion and Protection, 30 ILM 1064 (1991). See generally FRANK K. UPHAM, LAW AND SOCIAL CHANGE IN POSTWAR JAPAN (1987). NODA,

supra note 62 at 18. There are those who argue that the "no litigation" culture of Japan for example is a myth. See John Owen Haley, Myth of Reluctant Litigant 4 J. of JAPANESE STUDIES 359 (1978).

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similar limitations. At any rate, where the custom is disputed, the court would be required to pronounce on its validity using the fact of the custom as evidence. The court would also be called upon to pronounce on the merits and implications of any alleged fundamental change in the circumstances of a deal that necessitates a re-negotiation. The same goes where a party seeks to avoid or re-negotiate an agreement that was alleged to be tainted by duress or pressure or that the previous agreement was unfair or inequitable. In other words, the court process either directly or by its omnipresent effect, is critical to all the legal grounds of negotiations. So President Kennedy’s admonition “Not to negotiate out of fear nor fear to negotiate” can be re-stated to say that business parties need not negotiate out of fear of the law, but they will have to respect the law and deal in good faith when in the circumstances discussed herein, the law commands them to negotiate.

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