Duty to Negotiate in Good Faith: Much Ado About Nothing?
Much ado has been made over the North Carolina Business Court’s ruling this past summer in RREF BB Acquisitions, LLC v. MAS Properties, LLC, 2015 NCBC 58, recognizing a cause of action for so-called “duty to negotiate in good faith.” Undoubtedly, this is a noteworthy development in the law of contracts and a caveat for practitioners and their business clients. A closer consideration, however, reveals that the claim may not be as novel as it appears at first blush and the risk of unintended liability perhaps not as significant. Below are four relevant points for consideration.
1. The claim is based in contract, not tort.
Describing the claim as “duty to negotiate in good faith” could be misleading since this suggests an independent legal duty. In actuality, the claim is predicated on the parties’ entry of a binding preliminary agreement to negotiate some prospective transaction and is more aptly described as “breach of preliminary agreement to negotiate.” The added duty of good faith is merely a variation of the duty of good faith and fair dealing implied in every contract. Stated another way, the duty to negotiate in good faith is the duty of good faith and fair dealing recognized in the context of a preliminary agreement to negotiate. In this way, the duty to negotiate in good faith is not a new development. The new development is recognizing an agreement to negotiate as something other than an unenforceable “agreement to agree.”
Some have misinterpreted the duty-to-negotiate claim as a stand-alone legal theory, believing that if the parties get far enough in negotiations, the law implies a duty to continue negotiating. This is inconsistent with precedent in other jurisdictions and clearly not what Judge McGuire intended in RREF, as he defined the claim as being based on an “agreement to continue negotiating.” Op. ¶ 88. An implied duty spontaneously arising from participation in negotiations is not the theory recognized in RREF, which is based in the law of contracts and predicated on a binding preliminary agreement to negotiate.
2. Intent is the key to enforceability.
A common argument in opposition to the duty-to-negotiate claim is that it validates “agreements to agree,” which contract principles dictate are unenforceable as a matter of law. As indicated above, this is a legitimate objection and one that cuts to the heart of the claim. In the seminal opinion Teachers Ins. & Annuity Assoc. of Am. v. Tribune Co., 670 F. Supp. 491, 497-498 (S.D.N.Y. 1987), the court said that the theory lies at the intersection of two competing interests: on one hand, it is fundamental to contract law that mere participation in negotiations creates no binding obligation; on the other, courts should enforce agreements intended to be binding. To balance these interests and avoid trapping parties in unintended obligations, the court found there must be a clear expression of intent to overcome the strong presumption against enforcement. Thus, it has been said that the “doctrinal key” to enforcement of preliminary agreements to negotiate is the parties’ intent to enter such agreements.
In the reported cases, this heightened intent requirement is almost always based on an express agreement to negotiate some ultimate transaction. The language of agreement is most commonly incorporated in a letter of intent, commitment letter or other documentation used in this preliminary phase. Without a clear and definite expression of intent to contract to negotiate, there can be no corollary duty to negotiate in good faith.
3. Recovery is limited to reliance damages.
The prevailing theory on damages for breach of duty to negotiate in good faith is to award reliance damages, meaning recovery of any out-of-pocket expenses and lost opportunities as the consequence of the breaching party’s actions. This is premised on contract principles that damages must be capable of proof to a reasonable degree of certainty and reasonably foreseeable as a consequence of breach at the time the contract is made. This is further consistent with the interest the parties logically seek to protect in contracting to negotiate: compensation for actions taken in reliance on good faith negotiations should the other party unjustly walk away.
There is a minority position that would expand potential recovery to include expectation damages or damages based on breach of the contemplated ultimate transaction. However, to access these damages, the claimant must first prove that “but for” the breaching party’s conduct, the parties would have concluded their deal. See SIGA Techs., Inc. v. Pharmathene, Inc., 67 A.3d 330, 345 (Del. 2013). Meeting this standard is a high burden and requires the fact finder to speculate in most scenarios, preventing satisfaction of the reasonable certainty standard. Thus, recovery for breach of duty to negotiate should be limited to out-of-pocket expenses and proven lost opportunities.
4. Per se liability under Chapter 75 is unlikely.
In RREF, the court found that the same conduct supporting a claim for duty to negotiate in good faith could also constitute unfair or deceptive conduct within the meaning of N.C.G.S. § 75-1.1. Because of this correlation, it has been questioned whether a claim for duty to negotiate in good faith could constitute a per se violation of § 75-1.1 with treble damages. This conclusion is improbable since the origin of the duty to negotiate is the law of contracts. It is well-established that a breach of contract, even if intentional, cannot support a claim under § 75-1.1 without separate “substantial or aggravating circumstances.” It follows then that a claim for duty to negotiate based on abandonment or termination of negotiations alone could not support per se liability under § 75-1.1. Only if the claim were coupled with separate substantial or aggravating circumstances could a court find liability under both theories.
Though the above points and analysis are based on precedent, the precedent is from other jurisdictions or otherwise non-binding. Whether the duty-to-negotiate claim will be recognized in North Carolina and, if so, its precise contours remains to be determined by our appellate courts. Until then, parties should be generally mindful of the claim and take steps to guard against unintended undertakings, including using pre-negotiation agreements to specifically define duties (or the lack thereof) in negotiations.