Chilli Developments Ltd v The Commission for the New Towns (Known as English Partnerships) & Anor

An express duty of good faith in a lock-out or exclusivity agreement requires the parties to act honestly and bona fide during the agreed period. It does not, without more, oblige a party to continue negotiations indefinitely or to enter the proposed substantive agreement. A party may terminate negotiations where it has genuinely considered the proposal and the other party has failed to satisfy reasonable requirements, provided the negotiations were not a sham and the contractual restrictions were not breached.

The claimant negotiated with the defendants for a development agreement concerning land at Middlehaven. The parties entered two lock-out agreements which restricted dealings with others and included an express duty of good faith.

The claimant alleged that the defendants breached those agreements, induced the breaches, conducted sham negotiations and dealt improperly with another consortium. The trial concerned liability. The central issues were whether the defendants had acted in bad faith, breached the exclusivity provisions, or were barred from terminating negotiations.

1. Claim dismissed. The defendants negotiated with the claimant in good faith and did not breach either lock-out agreement.
2. The express duty of good faith required a genuine willingness to proceed if the claimant could meet the defendants’ requirements. The evidence showed that the defendants gave the claimant a substantial opportunity, treated it as a preferred developer, extended deadlines and continued negotiations despite doubts about its ability to secure finance and deliver the project.
3. The duty did not prevent the defendants from requiring satisfactory finance, guarantees, acceptable development terms or design changes. Nor did it prevent them from setting reasonable deadlines or terminating negotiations when the proposed funding arrangement failed.
4. The restrictions against inviting tenders, negotiating with others or permitting site investigations were not breached. The developers’ information pack was an invitation for expressions of interest, not a tender for the claimant’s land. The land was identified as reserved for the claimant in the later development documentation.
5. The meeting with Placemakers did not establish a breach. The claimant’s position was respected, and the evidence did not show that the defendants invited Placemakers to tender for the claimant’s land or acted on Placemakers’ ultimatums.
6. Walford v Miles [1992] AC 128 concerned a different agreement and the general difficulties of an implied duty to negotiate in good faith. Its observations did not determine the issue of alleged sham negotiations under an express contractual duty. The court also considered the tentative observations in Petromac Inc v Petroleo Brasileiro SA [2006] 1 Lloyd’s Rep 121.
7. The allegation that the negotiations were a sham was serious and unsupported by the documentary and oral evidence. There was no bar to terminating negotiations after the claimant’s proposed joint venture and funding arrangements failed.