In Rosalina Investments Ltd v New Balance Athletic Shoes (UK) Ltd(1) – a dispute about the existence of a contract – the High Court found that the parties intended to be bound only when all parties had signed. An open-ended duty to negotiate in good faith was void for uncertainty and the claim was struck out.
Rosalina Investments Ltd and Rosalina Investments UK Ltd held the rights to exploit the promotional and commercial activities and services of Marouane Fellaini, a member of the Manchester United football team. New Balance is the UK branch of a global group whose business includes the manufacture and sale of sportswear, including football boots.
By a written agreement dated 28 March 2013 (the 2013 agreement), Rosalina granted Warrior Sports UK Limited – part of the New Balance group – exclusive rights to use certain image rights associated with Fellaini and procured that the footballer would provide certain promotional services, such as wearing New Balance football boots.
The 2013 agreement, which was novated to New Balance in February 2015, expired in July 2016. For the following six months, the parties corresponded about the possibility of an extension or renewal, and Fellaini continued to wear and promote New Balance products. The relationship between New Balance and Rosalina came to an end in January 2017, when New Balance decided not to extend the 2013 agreement and wrote to Rosalina offering to pay a final sum in recognition of the services provided between July 2016 and January 2017.
Rosalina argued that a new contract had in fact been concluded by 16 September 2016, when a version of the agreement had been circulated and the parties had discussed arrangements for its execution. Rosalina's case was that the email exchanges between the parties in September 2016 showed them to be in agreement with regard to the terms of the new agreement, with only the formality of signature remaining. After 16 September 2016, the parties conducted themselves as though a contract was in place, with New Balance providing boots to Fellaini and preparing a catalogue which featured him wearing New Balance clothing.
New Balance contended that the communications between the parties did not demonstrate that an agreement had been concluded in September 2016. The draft contract had subsequently been amended and both parties had continued to stress the importance of signature. This demonstrated that the parties intended conclusion of a contract by signature only.
Rosalina claimed £2 million in lost retainer and damages. Alternatively, if there was no concluded contract, Rosalina claimed that there was a continuing obligation under the 2013 agreement to negotiate a renewal in good faith, and that New Balance had breached that obligation by withdrawing from the negotiations.
New Balance applied to strike out the claim and for summary judgment to be entered in its favour.
The court held that the issues were suitable for summary determination and that Rosalina's claim was bound to fail. The court made an order to strike out the claim and for summary judgment in New Balance's favour.
Existence of contract Rosalina had submitted that the court should consider communications between the parties only up to 16 September 2016, when it said that the contract was concluded. The court disagreed and, applying the rule in Global Asset Capital Inc v Aabar Block Sarl,(2) made an objective assessment of the parties' intentions by looking at all correspondence between August 2016 and January 2017. On that assessment, the court concluded that it was clear that the parties intended to be bound only when all parties had signed.
In reaching this conclusion, the court noted:
- the persuasive force of the fact that the parties had conducted themselves after 16 September 2016 as though a contract had been concluded. New Balance had continued to provide products to Fellaini, which he had continued to promote. However, that behaviour had carried on equally before 16 September 2016;
- that certain personal guarantees to be signed by Fellaini were not signed and sent to New Balance until early October 2016. Moreover, it was apparent from the correspondence that the delay in October/November 2016 in having the agreement executed by all parties was for the benefit of Rosalina whilst it resolved the matter of the proper company structure for tax purposes. Had discussions with Her Majesty's Revenue and Customs necessitated any changes, the plan was clearly for them to be accommodated within the continuing negotiations before final signature;
- that the language of the parties regarding signatures and in what order they should happen – and later speaking of "amendments/changes" rather than "variations" – was "highly suggestive of a contract which was not yet over the finish line"; and
- the fact that Fellaini had refused, in late December 2016, to attend any further personal appearances on behalf of New Balance until the new contract was signed. Rosalina was unable to satisfactorily explain why it would communicate Fellaini's threat to New Balance other than to force a conclusion to an over-protracted negotiation.
Duty of good faith The court held that the 2013 agreement did not impose any duty of good faith on New Balance. New Balance was the supplicant at renewal; Rosalina and Fellaini were in the position of strength as they had the valuable rights on offer. It therefore made sense for the relevant clause in the contract to impose a duty of good faith on Rosalina and Fellaini not to negotiate with anyone else. The same duty was not imposed on New Balance.
Further, the obligation to negotiate in good faith was not open-ended; it lasted until the expiry of the 2013 agreement in July 2016 and possibly up to 90 days thereafter. Had it been open-ended, the clause would have been void for uncertainty (Petromec Inc v Petroleo Brasileiro SA Petrobras (No 3)).(3) Even if the clause had imposed mutual obligations to negotiate in good faith, by January 2017 – when New Balance declined to sign the agreement – any obligation arising under the 2013 agreement would have lapsed.
The court found that while a contract may impose an obligation on parties to conduct negotiations in good faith, the validity of those provisions will depend on the court being satisfied that the following objections to such clauses identified by Lord Justice Longmore in Petromec do not arise:
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that the obligation is an agreement to agree and thus too uncertain to enforce;
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that it is difficult – if not impossible – to say whether, if negotiations are brought to an end, the termination is brought about in good or in bad faith; and
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since it can never be known whether good faith negotiations would have produced an agreement at all – or what the terms of any agreement would have been if it had been reached – it is impossible to assess any loss caused by breach of the obligation.
The court found that the clause in the 2013 agreement only satisfied the requirements identified in Petromec if it:
- imposed a duty on Rosalina alone as 'vendor' of the rights; and
- was time limited.
As a result, the clause could not ground a claim by Rosalina against New Balance for breach of a duty to negotiate in good faith by reason of New Balance failing to sign before withdrawing from negotiations in January 2017.
This case is a useful reminder of three principles. First, the court will consider the "full run of communications" and activities when assessing parties' intentions to enter into an agreement – not just those up to the date of the supposed agreement.
Second, an obligation to negotiate in good faith must be tightly drafted and time limited in order to be effective. The court will be wary of such a duty which is "naturally repugnant to the adversarial position of the parties when involved in negotiations".
Finally, although each case will turn on its specific facts, where there is a potential commercial contract between experienced parties dealing at arms' length with the advice of solicitors, the court is likely to infer that the parties are not bound unless and until all parties have signed the agreement.
For further information on this topic please contact Parham Kouchikali or Eliot Henderson at RPC by telephone (+44 20 3060 6000) or email ([email protected] or [email protected]). The RPC website can be accessed at www.rpc.co.uk.
Endnotes
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