Professional Documents
Culture Documents
Coram: Farwell J
Cited Belmont Park Investments Pty Ltd -v- BNY Corporate Trustee Services
Ltd and Another SC (Bailii Summary, SC, SC Summary, UKSC 2009/0222,
Bailii, [2011] UKSC 38, [2011] Bus LR 1266, [2011] 3 WLR 521)
Complex financial instruments insured the indebtedness of Lehman Brothers.
On that companys insolvency a claim was made. It was said that provisions
in the documents offended the rule against the anti-deprivation rule. The
courts below had upheld .
Walford_MilesHL1992
References: [1992] 2 AC 128, [1992] 1 All ER 453, [1992] 2 WLR 174, [1992] ANZ
Conv R 207
Coram: Lord Ackner
Ratio: The buyers and sellers of a company agreed orally for the sellers to deal with
the buyers exclusively and to terminate any negotiations between them and any
other competing buyer. The sellers later decided not to proceed with their
negotiations with the buyers and went on to sell the company to another party. The
buyers sued for breach of the oral agreement. The sellers defence was that the
parties were still in negotiations and the oral agreement was an agreement to
negotiate in good faith.
Held: The oral agreement was unenforceable. An agreement to negotiate in good
faith was unworkable in practice because while negotiations were in existence,
either party was entitled to withdraw from those negotiations at any time and for
any reason. Such an agreement was uncertain and had no legal content.
Lord Ackner said: The reason why an agreement to negotiate, like an agreement to
agree, is unenforceable is simply because it lacks the necessary certainty. The same
does not apply to an agreement to use best endeavours. This uncertainty is
demonstrated in the instant case by the provision which it is said has to be implied
in the agreement for the determination of the negotiations. How can a court be
expected to decide whether, subjectively, a proper reason existed for the
termination of negotiations? The answer suggested depends upon whether the
negotiations have been determined in good faith. However, the concept of a duty
to carry on negotiations in good faith is inherently repugnant to the adversarial
position of the parties when involved in negotiations. Each party to the negotiations
is entitled to pursue his (or her) own interest, so long as he avoids making
misrepresentations. To advance that interest he must be entitled, if he thinks it
appropriate, to threaten to withdraw from further negotiations or to withdraw in fact
in the hope that the opposite party may seek to reopen the negotiations by offering
him improved terms. Mr Naughton, of course, accepts that the agreement upon
which he relies does not contain a duty to complete the negotiations. But that still
leaves the vital question: how is a vendor ever to know that he is entitled to
withdraw from further negotiations? How is the court to police such an agreement?
A duty to negotiate in good faith is as unworkable in practice as it is inherently
inconsistent with the position of a negotiating party. It is here that the uncertainty
lies. In my judgment, while negotiations are in existence either party is entitled to
withdraw from these negotiations, at any time and for any reason. There can be
thus no obligation to continue to negotiate until there is a proper reason to
withdraw. Accordingly, a bare agreement to negotiate has no legal content.
As to a lock out agreement, Lord Ackner said: There is clearly no reason in 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. and B, by agreeing not to
negotiate for this fixed period with a third party, locks himself out of such
negotiations. He has in no legal sense locked himself into negotiations with A. What
A has achieved is an exclusive opportunity, for a fixed period, to try and come to
terms with B, an opportunity for which he has, unless he makes his agreement
under seal, to give good consideration.
Statutes: Law of Property (Miscellaneous Provisions) Act 1989 2
This case is cited by:
Cited Cobbe v Yeomans Row Management Ltd and Others ChD ([2006] 1
WLR 2964, Bailii, [2005] EWHC 266 (Ch))
A developer claimed to have agreed that upon obtaining necessary planning
permissions for land belonging to the respondents, he would purchase the
land at a price reflecting its new value. The defendant denied that any legally
enforceable agreement . .
M.J. Antony has a summary and analysis of the case in the Business Standard:
The question of punishing a corporation came up recently in the Supreme Court in a
criminal case filed by Iridium India Telecom Ltd against Motorola Incorporated. The
allegations were cheating and criminal conspiracy. The magistrate in Pune started
proceedings against Motorola. It moved the Bombay High Court against the
prosecution. The high court quashed the proceedings giving several reasons, one of
them being that a corporation was incapable of committing the offence of cheating
as it has no mind. According to the high court, although a company can be a victim
of deception, it cannot be the perpetrator of deception. Only a natural person is
capable of having a guilty mind to commit an offence.
However, the Supreme Court set aside the high courts finding and asserted that a
corporate body can be prosecuted for cheating and conspiracy under the Indian
Penal Code. The offences for which companies can be criminally prosecuted are not
limited only to the specific provisions made in the Income Tax Act, the Essential
Commodities Act, and the Prevention of Food Adulteration Act. Several other
statutes also make a company liable for prosecution, conviction and sentence.
The court allowed the prosecution to go on, stating that companies and corporate
houses can no longer claim immunity from criminal prosecution on the ground that
they are incapable of possessing the necessary mens rea for the commission of
criminal offences. The legal position in England and the United States has now
crystallised to leave no manner of doubt that a corporation would be liable for
crimes of intent. This is the position all over the world where rule of law supreme.
In its ruling, the Supreme Court reiterated the legal position on two counts: (i) the
scope of jurisdiction of the High Court in quashing criminal proceedings under
Section 482 of the Criminal Procedure Code; and (ii) the fact that companies can be
prosecuted for offences involving mens rea. On the second count, the Supreme
Court merely reiterated the principles laid down in the previous case of Standard
Chartered Bank v. Directorate of Enforcement [(2005) 4 SCC 405].
The Supreme Court, however, did not have the opportunity to rule on certain other
important aspects of the case, which relate to the liability of a company for
misstatements or non-disclosures in an information memorandum issued in
connection with an offering of securities. That would be the subject-matter of the
prosecution that would continue now that the Supreme Court has flashed the green
signal.
The criminal complaint pertains to a charge of cheating under section 420 read with
section 120B (conspiracy) under the Indian Penal Code (I.P.C.). The allegation is that
Motorala Inc., the respondent in the case and the primary contractor for the Iridium
system/project, floated a private placement memorandum (PPM) to obtain
funds/investments to finance the Iridium project. The project was represented as
being the worlds first commercial system designed to provide global digital hand
held telephone data and it was intended to be a wireless communication system
through a constellation of 66 satellites in low orbit to provide digital service to
mobile phones and other subscriber equipment locally. Several financial institutions
invested in the project based on the information contained in the PPM. However, it
is alleged that the representations were false and that the project turned out to the
commercially unviable resulting in significant loss to the investors.
The facts of the case provide the basis for potentially interesting legal issues.
First, it must be noted that the complaint has been brought under the I.P.C. (being
the general criminal law) and not under any specific corporate or securities
legislation. That is understandable because the PPM did not pertain to a public
offering of shares, and hence the relevant prospectus provisions (and concomitant
liability issues therein) are not attracted. The transaction appears to be in the
nature of a private placement and hence governed contractually rather than as a
matter of public securities laws. Whether or not the use of general offences of
cheating and conspiracy to offerings of corporate securities would enure to the
benefit of the complainant or the respondent remains to be seen.
Second, the issuer has placed reliance on the extensive nature of risk factors and
disclaimers in the PPM as a defence against criminal liability. Although the High
Court was persuaded by the existence of such cautionary language in the PPM, the
Supreme Court did not place much importance to risk factors, at least at the present
stage of deciding whether to allow the prosecution to continue. The validity of, and
weightage given to, disclaimers and risk factors in a PPM is sure to be tested.
Finally, the court would have to draw a clear line on the facts as to whether there
was deception and inducement fraudulently and dishonestly on the part of the
issuer company, or whether it was merely a case of bad business judgment.
Although the distinction may be fairly stark as a matter of law, it may not always be
quite as clear on a given set of facts and circumstances.
Contractual Liability
For decades, there has been substantial uncertainty regarding when the law will
impose precontractual liability. The confusion is partly due to scholars failure to
recover the law in action governing precontractual liability issues. In this Article,
Professors Schwartz and Scott show first that no liability attaches for
representations made during preliminary negotiations. Courts have divided,
however, over the question of liability when parties make reliance investments
following a preliminary agreement. A number of modern courts impose a duty to
bargain in good faith on the party wishing to exit such an agreement. Substantial
uncertainty remains, however, regarding when this duty attaches and what the duty
entails. Professors Schwartz and Scott develop a model showing that parties create
preliminary agreements rather than complete contracts when their project can take
a number of forms and the parties are unsure which form will maximize profits. A
preliminary agreement allocates investment tasks between the parties, specifies
investment timing, and commits the parties only to pursue a profitable project.
Parties sink costs in the project because investment accelerates the realization of
returns and illuminates whether any of the possible project types would be
profitable to pursue. A party to a preliminary agreement breaches when it delays
its investment beyond the time the agreement specifies. Delay will save costs for
this party if no project turns out to be profitable and will improve this partys
bargaining power in any negotiation to a complete contract. Delay often
disadvantages the promisee, and when parties anticipate such strategic behavior,
they are less likely to make preliminary agreements. This disincentive is unfortunate
because a preliminary agreement often is a necessary condition to the realization of
a socially efficient opportunity. Thus, contract law should encourage relation-specific
investments in preliminary agreements by awarding the promisee his verifiable
reliance if the promisor has strategically delayed investment. Professors Schwartz
and Scott study a large sample of appellate cases showing that: (1) parties appear
to make the preliminary agreements described in the model and breach for the
reasons the model identifies, and (2) courts sometimes protect the promisees
reliance interest when they should, but the courts imperfect understanding of the
parties behavior sometimes leads them to err.