Knatchbull -Hugessen & Ors v SISU Capital Ltd

Contractual terms are implied by construing the agreement as a whole. The traditional criteria remain relevant, but they are expressions of the central question: what the contract actually means. Where parties agree to negotiate in good faith for a specified period, the obligation ordinarily ends when that period expires. The court will not extend it by implication. Nor will a court ordinarily imply a free-standing obligation preventing one party from making conditions precedent impossible, particularly where the proposed obligation would impose an uncapped liability inconsistent with the express bargain. Parties may, however, contractually regulate negotiations by agreeing exclusivity, good-faith obligations and recovery of abortive costs.

The claim and counterclaim arose from negotiations concerning the proposed acquisition by SISU or a SISU group company of the Charity’s interest in Arena Coventry Limited. An indicative term sheet was countersigned, but only its costs and exclusivity provisions were intended to be binding.

The Charity claimed up to £29,000 in costs after the proposed transaction failed. SISU advanced a counterclaim based on an alleged implied term that the Charity would continue negotiating in good faith after the six-week exclusivity period and would not render the conditions precedent impossible or materially impede them. The court determined that implication issue as a preliminary matter.

1. Implication of terms. The court adopted the approach in Attorney General for Belize v Belize Telecom [2009] 1 WLR 1988: implication is an exercise in construing the contract as a whole. The traditional criteria remain relevant, but they are different expressions of whether the proposed term spells out what the contract means.
2. Good-faith negotiations. English law recognises no general duty to conduct contractual negotiations in good faith. Parties may depart from that default position by contract, including by agreeing exclusivity, good-faith negotiation obligations and recovery of abortive costs. The term sheet required good-faith negotiations only during the six-week Exclusivity Period. An implied obligation continuing after that period would rewrite the parties’ bargain and was inconsistent with the specified duration.
3. Conditions precedent. The court rejected the proposed free-standing implied term that the Charity would not do anything to make the conditions precedent impossible or materially impede their performance. The express contract gave the Charity a limited right to recover its own costs, while imposing time-limited exclusivity obligations. It gave SISU no corresponding right to recover its costs and no relevant contractual quid pro quo. Implying an uncapped liability for SISU’s expenses would be disproportionate, unreasonable and unsupported by the contractual words.
4. The court left open whether the contractual phrase providing for recovery where the conditions precedent could not be met should be construed as excluding cases in which the Charity itself prevented fulfilment. That issue could operate as a defence to the Charity’s claim but was outside the preliminary issue.
5. The alleged implied term did not exist. The counterclaim was dismissed, leaving the Charity’s claim for costs to be determined.