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The Negotiation Stage Part I The negotiation stage M02_HALS8786_02_SE_C02.indd 17 7/19/12 3:47 PM M02_HALS8786_02_SE_C02.indd 18 7/19/12 3:47 PM 2 Negotiating the contract Introduction Lord Atkin once remarked that: ‘Businessmen habitually . trust to luck or the good faith of the other party . .’.1 This comment2 provides more than an insight into the motivations of businessmen. It also implicitly acknowledges a limitation of the common law in policing the activities of contractors: the law no more ensures the good faith of your contractual partner than it guarantees your good fortune in business dealings. However, this might not be an accurate description of the purpose of the law relating to pre-contractual negotiations. In an important judgment that was notable for its attempt to place the legal principles under discussion in a broader doctrinal and comparative context Bingham LJ in the Court of Appeal observed that:3 In many civil law systems, and perhaps in most legal systems outside the common law world, the law of obligations recognises and enforces an overriding principle that in making and carrying out contracts parties should act in good faith . It is in essence a principle of fair and open dealing . English law has, characteristically, committed itself to no such overriding principle but has developed piecemeal solutions to demonstrated problems of unfairness. This judgment makes it clear that the gap between civil and common-law jurisdictions is exaggerated by observations at too high a level of generality. While it is true to say that the common law does not explicitly adopt a principle of good faith, it is as obviously untrue to say that the common law encourages bad faith. Rather the jurisdictional difference is one of control technique. The common law takes a more fragmented approach with several doctrines providing redress in respect of narrowly defined examples of bad faith between contractors, frequently without any acknowledgement of the shared purpose of the different doctrines.4 Notwithstanding Bingham LJ’s observations about exaggerated caricatures Lord Hope, himself a product of the Scottish ‘mixed’, i.e. civil and common- law-based jurisdiction, has more recently confirmed the gap between common and civil law systems:5 1 Phoenix Ins Co v DeMonchy (1929) 141 LTR 439 at 445. 2 Which is confirmed by several empirical studies. See Macaulay, ‘Non-contractual Relations in Business: A Preliminary Study’ (1963) 28 Am Soc Rev 55; Beale and Dugdale, ‘Contracts between Businessmen: Planning and the Use of Contractual Remedies’ (1975) 2 Brit J. Law & Soc 45, Bernstein, ‘Opting out of the Legal Sysytem: Extralegal Contractual Relations in the Diamond Industry’ (1992) 21 J Legal Stud 115. 3 Interfoto Library Ltd v Stiletto Ltd [1989] 1 QB 433. 4 ‘Anglo-Australian contract law . has developed . with greater emphasis upon specifics rather than the identification of a genus expressed in wide terms’: Service Station Association Ltd v Bennett & Associates Pty Ltd (1993) 117 ALR 393 at 406 per Gummow J. 5 R (European Roma Rights Centre) v Immigration Officer at Prague Airport [2004] UKHL 55, [2005] 2 WLR 1 at paras 59–60. M02_HALS8786_02_SE_C02.indd 19 7/19/12 3:47 PM 20 Chapter 2 Negotiating the contract There are differences between the systems as to how powerful the penetration of the principle [of good faith] has been. They range from . the civilian tradition where . the principle is expressly recognized and acted upon, to . the common law where a general obligation to conform to good faith is not recognized . The preferred approach in England is to avoid any commitment to over-arching principle, in favour of piecemeal solutions. The key purpose of the transaction-based approach adopted in this book is to bring into clearer focus the common threads running through the principles of law which are con sidered in this part of the book. In any doctrinal, rather than functional, exposition of the law of contract, these links are often obscured. However, the problem is not simply one of unperceived interrelationships within the traditional conception of the law of contract. Rather there are problems deriving from the definition of the boundaries of contract itself. A proper account of how the law regulates the bargaining process cannot respect the borders of a rigid map of the law of civil obligations. To do so would be to ignore the important role of contiguous areas of civil liability, such as the law of tort or restitution. The identification of common purpose in disparate doctrines may help to refinea consistent approach to the policing of contractual negotiations in a way which avoids some of the difficulties attending an approach based upon a requirement of good faith. One of the most pressing of these difficulties is that of definition: what is good faith? Some commentators deny that the phrase can be given any sensible meaning6 other than as excluding7 from its ambit particular behaviour that can be characterised as bad faith. Others have pointed out that the meaning of the phrase in common parlance would only extend to cover deliberate deception, whereas, for example, the law of misrepresentation seeks to control both intentional, careless and wholly innocent misdescription.8 The prob- lem of definition is made worse by the breadth of work expected of the idea of good faith, for it is a principle used to regulate all episodes in the life of a contract from negotiation to termination. The structure of this book, by examining these episodes separately and sequentially, exposes such over-ambition and is sensitive to the differing policy objectives which influence the law relating to the distinct phases in the life of a contract. As Lord Hope and Bingham LJ observed, the approach of the common law to the control of so-called bad faith has been piecemeal and fragmented. This is certainly true in relation to the policing of contractual negotiations. However, the lack of orchestration in this area should not be allowed to obscure the considerable breadth of the legal control exercised under various rubrics. This regulation is effected via several distinct doctrines, the most obvious of which is the law of misrepresentation, but which also include estoppel by convention, the objective test of agreement and the ‘snapping up’ principle, mistaken identity, proprietary estoppel, the law of restitution as applied to ‘failed contracts’, collateral contracts and the duties to disclose and negotiate in good faith. We will first consider estoppel by convention, where the parties to the contract are stopped from questioning what they have already ‘agreed’. 6 See e.g. Summers (1968) 54 Virg Law Rev 195. 7 Ibid., p. 196. See generally Brownsword paras 1.79–1.103 in Furmston (ed.) (2010) The Law of Contract, 4th edn. 8 See Collins (1997) The Law of Contract, 4th edn, p. 181. M02_HALS8786_02_SE_C02.indd 20 7/19/12 3:47 PM Estoppel by convention 21 Estoppel by convention The law will sometimes restrain an individual from going back on some commitment he has made. Most of this book is devoted to one such circumstance, i.e. where that com- mitment is enforceable as a contract. Where no action for breach of contract is available perhaps because one of the basic requirements of a contract cannot be established, a party may nevertheless be prevented from acting inconsistently with an earlier undertaking by a doctrine known as estoppel.9 Estoppel is the generalised idea that a person will sometimes be prevented or ‘estopped’ from resiling from an earlier commitment or position. Although this generalised idea is helpful, it is necessary at the outset to understand that there exist a number of different types of estoppel. Where the undertaking is one to give someone an interest in or over land the applicable type of estoppel is called proprietary estoppel and is examined later in this chapter. However, where there is no express promise but parties merely proceeed on the basis of a common or shared assumption, a so-called estoppel by convention may arise when: . the parties have acted in their transaction on the agreed assumption that a given state of facts is to be accepted between them as true then as regards the transaction each will be estopped against the other from questioning the truth of the state of facts so assumed.10 For the doctrine to operate, the party alleged to be estopped must have acquiesced in the mistaken assumption of the party claiming the benefit of the estoppel, both parties must have proceeded on the basis of the shared assumption and it must be unjust to now allow the party who seeks to do so to resile from their shared understanding.11 It is not necessary that the assumption was induced by any unambiguous representation12 or promise13 made by any party. However, both parties must have conducted themselves on the basis of such a shared assumption which has been said to require communications to pass between the parties.14 To the extent that such communication is a requisite of the doctrine, estoppel by convention represents a powerful tool to protect the reasonable expectations of negotiating parties. It has been applied in this way in a number of recent decisions after a considerable period of doctrinal obsolescence.15 A good illustration of its use is provided by Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd.16 The facts of the case are as follows. The claimants received a loan from the defendant bank. When a further loan was sought by a foreign subsidiary owned by the claimants, a guarantee was executed in respect of all monies which might be owing to the bank by the 9 For an excellent introduction to the concept of an estoppel, see Cooke (2000) The Modern Law of Estoppel, ch.
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