DO PARTIES HAVE AN OBLIGATION TO NEGOTIATE IN GOOD FAITH?
The enforceability of agreements to agree have been the source of much debate between legal practitioners and the courts alike. There has been development of the common law regarding whether a positive obligation on a party to a contract to negotiate in good faith exists. Several judgments have been passed over the past years where the Courts have discussed the enforceability of these obligations culminating in the decision in Makate v Vodacom (Pty) Ltd (CCT52/15)  ZACC 13; 2016 (6) BCLR 709 (CC); 2016 (4) SA 121 (CC). This article will outline the position in our law today as well as the future implications by the Constitutional Court.
By Megan Lewis (Candidate Attorney at Hayes Incorporated)
Pacta de contrahenda (an agreement to agree) is generally regarded as a kind of contract which has the purpose of creating an agreement in the future. However, and more often than not, parties to an agreement may find themselves in a situation where they are not able to agree on some of the terms of the agreement. In order to resolve this uncertainty in the agreement, the parties may negotiate in good faith and agree to conclude the outstanding terms on a future date. This “agreement to agree” would therefore form part of the concluded contract.
In the event that a dispute may arise where one of the parties to the agreement refuses to negotiate the outstanding term on the future date, the refusal by this party would essentially leave the other party in a situation where they would be unable to implement the agreement.
The question therefore is whether the clause to negotiate in good faith in the agreement can be enforceable at the request of either party, despite it forming part of an agreement to agree and how this has been dealt with in case law to date.
Letaba Sawmills (Edms) Bpk v Majovi (Edms) Bpk  ZASCA 195; 1993 (1) SA 768 (A) (“Letaba Sawmills”)
Prior to 1992, South African courts were hesitant to enforce an ‘agreement to negotiate in good faith’.
The Letaba Sawmills case concerned a term in a lease agreement which gave the parties an “option to renew the rental amount upon expiry of the lease agreement on the basis that if the parties were unable to reach agreement thereto the rental amount was to be determined by an arbitrator’. The parties agreed to enter into negotiations in good faith in order to agree upon the terms and conditions of the lease agreement. In the event that the parties were unable to reach agreement of the terms and conditions thereto, the agreement provided for the matter to be referred to arbitration. The Appellate Court held that the term was not vague and thus enforceable. This became known today as the ‘Letaba principle’.
Premier, Free State, and Others v Firechem Free State (Pty) Ltd 2000 (4) SA 413 (SCA)
This matter relates to the awarding of a tender by the Premier of the Free State Province to the Respondent. Evidence was given by the Respondent’s representative in the court a quo that he was under the impression that should the tender be successful then the successful tender party would be able to negotiate and make additions to the contract that were not specified in the tender document. The SCA noted that he was making reference to negotiations which would take place after the tender had been awarded.
The SCA found that ‘an agreement that the parties will negotiate to conclude another agreement is not enforceable, because of the absolute discretion vested in the parties to agree or disagree’ and found that the tender had been awarded improperly. What is important to note is that this case can be distinguished from Letaba Sawmills in that the agreement referred to Letaba Sawmills provided for a deadlock mechanism whereas the agreement in Firechem did not.
Everfresh Market Virginia (Pty) Ltd / Shoprite Checkers (Pty) Ltd (CCT 105/10  ZACC 30;2012 (1) SA 256 (CC); 2012 (3) BCLR 219 (CC)
This case concerned an option by a party to renew a lease agreement subject to an agreement being concluded between the parties regarding the rental to be paid upon renewal of the lease agreement. Shoprite Checkers (Pty) Ltd (“Shoprite”) refused to agree to the renewal of the lease agreement and applied for an eviction against Everfresh Market Virginia (Pty) Ltd (“Everfresh”). Everfresh in their response submitted that Shoprite was not entitled to the eviction order as Shoprite had an obligation to negotiate the terms of the lease agreement with Everfresh.
The court a quo held that an ‘option to renew a lease agreement on terms to be agreed upon was unenforceable‘.
The issue before the Constitutional Court was whether the Court should intervene to infuse the law of contract with constitutional values. The minority and the majority were both in agreement and acknowledged the importance of infusing constitutional values in the area of contract law. In the minority’s judgment, Yacoob J held that the High Court had an obligation to develop the common law in accordance with section 39(2) of the Constitution in order to incorporate the values of the Bill of Rights into contract law.
Monseneke J in the majority judgment held that the Court could not decide whether or not to the develop the common law in order to determine whether or not contract law should incorporate the value of good faith in the negotiations between parties to an agreement. This was so, because that Everfresh had not raised the issue of the development of the common in the High Court and SCA and this issue was only raised for the first time before the Constitutional Court. The Court therefore dismissed the application by Everfresh.
What is important to note is that the Court went on to say that if it were to entertain the argument by Everfresh, the underlying notion of good faith and particularly the value of Ubuntu in the law of contract, ‘may have tilted the argument in Everfresh’s favour
The current position in our law, as illustrated above, is that a clause in a contract which obliges the parties to negotiate in good faith in the future is enforceable, provided the contract makes provision for a deadlock mechanism in the event that the parties to the contract are unable to reach agreement as to any of the terms of the contract. This was confirmed in a recent case of Makate v Vodacom (Pty) Ltd (CCT52/15)  ZACC 13; 2016 (6) BCLR 709 (CC); 2016 (4) SA 121 (CC), which was decided in April this year confirms the position in our law.
On the flipside, the question is whether a contract which contains a clause that obliges the parties to an agreement to negotiate in good faith but which makes no reference to a deadlock -breaking mechanism is enforceable?
It is evident from the majority judgement in the case of Everfresh that the values of the Constitution and particularly the values of Ubuntu, may render such clauses enforceable. When entering into agreements containing provisions for the parties to agree to certain terms of the agreement at a later date i.e. Heads of Agreement and / or Memorandas of Understanding, the implications of the comments made by the Constitutional Court in the Everfresh matter therefore clearly render a positive obligation on parties to negotiate in good faith.