Emagine Films Ltd v Mister Smith Entertainment Ltd & Anor

An agreement to negotiate in good faith is unenforceable where it requires the parties to negotiate fundamental terms of a new agreement, because the parties must remain free to agree or withdraw. A contractual provision requiring negotiation of detailed terms may remain enforceable where the essential framework is fixed and the negotiations concern only implementation. Where the proposed transaction changes fundamentally, the court may imply a term that the original agreement falls away. The implication of such a term depends on the express wording, commercial common sense, obviousness, necessity for practical coherence, clarity and consistency with the contract.

eMagine Films Ltd agreed with Mister Smith Entertainment Ltd in a term sheet that eMagine would finance a minimum guarantee for the international distribution of the film Teen Spirit. The term sheet contemplated a distribution agreement reflecting an attached producer term sheet and provided for some further negotiation.

The producer later required a substantially different financing structure involving additional equity investment. The parties negotiated without agreement. Mister Smith terminated the negotiations and obtained alternative financing. eMagine claimed that the term sheet remained binding and that the termination was a breach of contract. The central issues were the enforceability and proper construction of the term sheet, whether a term should be implied, and whether Mister Smith was entitled to terminate.

1. Construction and enforceability. Clause 6 required Mister Smith to negotiate detailed terms with the producer, subject to eMagine’s approval, while preserving the headline provisions of the producer term sheet. It allowed limited departures that did not alter the fundamental substance of the proposed distribution agreement. That obligation was sufficiently certain.
2. Clause 6 did not require the parties to undertake a fundamental renegotiation of the distribution agreement. An obligation to negotiate in good faith on essential new terms would be unenforceable. The use of mandatory language such as “will negotiate” did not cure that uncertainty, since each party had to remain free to agree or withdraw.
3. The revised implied term advanced by Mister Smith was incorporated: if the producer would accept only a distribution agreement substantially different from the terms contemplated by the producer term sheet and clause 6, the agreement between eMagine and Mister Smith would fall away. The term was clear, obvious and necessary to give the contract practical coherence, and did not contradict clause 6.
4. By the end of February 2017 it was clear that additional equity was required to preserve any back-end profit share and that the 25% distribution fee was at risk. The producer would therefore accept only a substantially different arrangement. The term sheet fell away, and the parties were negotiating a new agreement.
5. Mister Smith’s termination on 19 April 2017 was not a breach of the term sheet or any other agreement. The alternative arguments based on consent, frustration and conditions precedent did not require determination.
6. Obiter, the judge considered that good faith was a modest requirement involving honesty and conduct that was not commercially unacceptable or unconscionable. The evidence would have supported a finding that Mister Smith acted in good faith and had legitimate grounds to regard the negotiations as having reached an impasse.