Pre-contractual Negotiations

PRE-CONTRACTUAL NEGOTIATIONS

The memorandum of understanding (MOU) and other types of uncertainty

Memorandums of understanding, letters of intent, heads of agreement, subject to contract communications etc all properly fall within the issue of whether legal relations were intended. To determine this issue, courts try to ascertain the objective intentions of the parties.

As a general rule, these types of documents will not be treated as contractual although the outcome depends very much on the particular facts of the case and the conduct of the parties. Even if a Court finds that a contract was not entered into,  these documents may generate legal liability in other ways either through the mechanism of estoppel or possibly because they infringe the Trade Practices Act or its state equivalents.

What about unclear or ambiguous agreements

The modern approach is to uphold contracts despite lack of clarity, where possible.

Deferred agreements

Some contracts simply amount to an agreement to agree. These are usually unenforceable. The crucial question to ask is, what if the parties cannot agree about this or that? If the answer is that the contract does not provide a mechanism to deal with the lack of agreement on that point or those points, and they are important (e.g. price, quantity, scope of works etc) then the contract is likely to be unenforceable.

Agreements to Negotiate

These are called “Lock-In agreements”. The traditional position is that the law does not recognise a legally binding commitment to continue to negotiate or to negotiate should trouble arise.

What about  Lock-Out Agreements?

Lord Ackner said in Walford-v-Miles [1992] 2 AC 128,   that such an agreement is quite possible at law:

“There is clearly no reason in the English contract law why A, for good consideration, should not achieve an enforceable agreement whereby B agrees for a specified period of time, not to negotiate with anyone except A in relation to the sale of his property” – at [139].

Misrepresentations and Puffery

The distinction between a misrepresentation and mere puffery is one tested objectively – would a reasonable person in the position of the person receiving the information have been led into error by the statement? Statements like “this car is a prestige auto” or “this book is one you won’t be able to put down” have been held to be mere puffery as have statements describing land as “fertile and improvable,” a statement that a second rate house was a “desirable residence for a family of distinction”and a statement describing land as an “uncommonly rich water – meadow”.

However in Senanayake –v- Cheng [1966] AC 63, a business was described as “gold mine” and “flourishing”. This statement provided the representee with the remedy of rescission under the general law.

Statutory Misleading and Deceptive Conduct

Gibbs J in Parkdale Custom Built Furniture Pty Ltd –v- Puxu Pty Ltd (1982) 149 CLR 191 at 197-199 concluded that the focus of statutory misleading and deceptive conduct   is on how the conduct is received by the other party rather than on what is intended by the person engaging in the conduct.

This is the most crucial aspect of the prohibition of misleading conduct. It imposes on commercial people an absolute obligation not to lead others into error.

Silence may amount to misleading or deceptive conduct.  For example, silence is actionable where what has already been said is incorrect: Bevanere Pty Ltd –v- Lubidineuse (1985) 59 ALR 334, or where a failure to reveal some extra fact is misleading because what has been revealed is only half the truth: Colliers Jardine (NSW) Pty Ltd –v- Balog Investments Pty Ltd (1995) ATPR (Digest) 46-140.

Only in so far as a failure to speak or act would be misleading or deceptive can there be said to be a “duty to disclose” under s52 and its counterparts. Such would be the case where one party has generated a reasonable expectation in the other party, as in Arbest Pty Ltd –v- State Bank of New South Wales Ltd (1996) ATPR 41-481, where the bank was held to have engaged in a misleading course of conduct by not warning the applicant that funding for a development project was not assured and that a valuer had given a very negative assessment of the proposed redevelopment.

The Person Allegedly Misled

It is necessary to show that the person receiving the wrong information was led into error. If misleading information is provided for one purpose and it is then used and passed on to a third party for quite a different purpose not contemplated by the original party, there is no liability in the originator of the information. In Dalton –v- Lawson Hill Estate Pty Ltd [2005] FCAFC 169, for a fee, a water drilling contractor provided the property owners documentation stating flow rates but the flow rates were incorrect. The documentation was later used by the owners when selling the property and the purchaser was misled by it. The drilling contractor was held not liable to the purchasers.

When someone has been misled in connection with the making of a contract, the only questions that can arise are whether the person was in fact misled and if so, whether that was an unreasonable reaction. The person to whom the statement was made is not expected to be reasonable in the sense of the familiar ‘reasonable person’ but instead may be somewhat gullible or naïve so long as he or she is not unusually stupid: CRW Pty Ltd –v- Sneddon (1972) IAR (NSW) 17 at [28].