(d)  Other solutions to the problem of pre-contractual liability

The Draft Common Frame of Reference (DCFR) provision on liability for wasted pre-contractual expenditure draws on the good faith element evident in a number of the solutions discussed above, and of those solutions is closest in nature to the German approach.72 While parties are in general free to negotiate and not liable for failure to reach agreement,73 the negotiating process gives rise to a duty to negotiate in accordance with good faith and fair dealing, and not to break off negotiations contrary to such good faith and fair dealing.74 A specific example of conduct in breach of the duty is stated in the Article to be entering into or continuing negotiations with no real intention of reaching an agreement.75 Breach of the duty imposed by the Article results in liability for any resultant losses­ .76 The enunciation of such a duty in a model Code such as the DCFR avoids the need to classify the duty imposed as promissory, contractual, or tortious in nature – it merely arises as a result of the relevant provision – though the stated measure of losses recoverable (‘any loss caused’) certainly appears wide enough to encompass both what could be styled as ‘performance measure’ losses (lost profit, for instance) as well as the ‘restoration measure’ losses typically argued to be constituted by wasted pre-contractual expenditure.77 The DCFR approach does, however, raise questions about the uncertainty surrounding the question when a party may walk away from negotiations, an uncertainty inherent in any duty defined in good faith terms. These questions are discussed more fully in the discussion in Chapter 6 on good faith in relation to performance (as well as, to some extent, in the following section on duties of disclosure).

A further possible solution, conceivably maintainable in any jurisdiction, would be to argue for the existence of a preliminary contract

72The Italian Civil Code also contains a specific duty to negotiate a contract in good faith: Codice civile Art. 1337.

73DCFR Art. II.-3.301(1).

74DCFR Art. II.-3:301(2). The Article states that this duty cannot be excluded or limited by contract (or, one assumes, a unilateral promise made by one party to the other that it shall not enforce the duty).

75 Art. II.-3:301(4). 76 Art. II.-3:301(3).

77The official commentary to the Article states that recovery encompasses expenses incurred, work done, loss on transactions made in reliance of the expected contract, and ‘in some cases loss of opportunities’, though ‘the aggrieved party cannot claim to be put in to the position in which that party would have been if the contract had been duly concluded’ (see para. H of the Official Commentary to Art. II.-3:301). Why such an exclusion applies given the breadth of the wording of the Article is not explained.

governing the question of liability for negotiating costs. In the Red Owl case, for instance, might such a contract have been argued to have existed based upon the communications issued by Red Owl? Such an argument would have been unlikely to have been successful, given that the assurances issued by Red Owl made no mention of responsibility for any preliminary expenditure. On the other hand, there is no reason why negotiating parties might not theoretically enter into such a preliminary agreement. Indeed, the Common law and mixed legal system use of the device of an implied contract, under which a quantum meruit must be paid, is capable of utilisation in cases where work has been done, but no clear express contractual intent may be gleaned from the parties’ dealing.78

A final possible approach would simply be to argue that, in a case like Red Owl, there ought not to be any liability, given the absence of any explicit assumption of responsibility by Red Owl for any of Hoffman’s expenditure. Mr Hoffman should, it might be argued, have been more cautious before embarking on extensive expenditure with no certainty of any contract at the end of it. This approach of denying voluntarily based precontractual liability is largely the approach of English law. Promissory estoppel has a much narrower application in England than in the US, English law insisting that its use must relate to some pre-existing right of the claimant and, moreover, that it may only act as a defence but not a cause of action. No pre-existing right was present on the facts of Red Owl, nor was Mr Hoffman seeking simply to raise a defence to a claim by Red Owl. English law would therefore have been unlikely to grant Mr Hoffman the recovery he sought.

Such a view on the likely English approach is consistent with the decision in Regalian Properties plc v. London Docklands Development Corporation,79 where the court took the view that, unless some benefit is conferred by one negotiating party on the other which is capable of founding a claim in restitution, expenditure undertaken by the first party merely in prospect of a contractual relationship is irrecoverable in English law. It is a view which is also consistent with the English law position that there will in general be no common law duty imposed on contracting parties to negotiate a contract in good faith, or to use ‘best endeavours’ or

78For a summary of the approach of the English courts, see the judgment of Christopher Clarke J (at para. 171) in MSM Consulting Ltd v. United Republic of Tanzania [2009] EWHC 121 (QB), (2009) 123 Con LR 154. For Scotland, see Pillans & Wilson v. Castlecary Fireclay Co Ltd 1931 SLT 532.

79[1995] 1 WLR 212, [1995] 1 All ER 1005 (Ch).

‘reasonable endeavours/diligence’ to reach agreement,80 and that parties are therefore generally free to walk away from contract negotiations without incurring any liability to each other for so doing. That position was strongly asserted by the House of Lords in Walford v. Miles,81 though an express duty to negotiate a specific contractual matter may be enforceable in English law if the matter to be negotiated is capable of precise and objective determination,82 a view which is supported by the fact that express duties to use best efforts or endeavours to reach an agreement have been enforced in the English courts.83 That has also been the recently expressed view of the Scottish courts, which have upheld undertakings to use reasonable endeavours to reach contractual agreement so long as objective criteria exist against which to measure the reasonableness of the parties’ endeavours.84 What the remedy ought to be for breach of such an obligation is, however, a trickier matter.85

(e)  Conclusion on pre-contractual liability

It will be apparent, having regard to the comparative excursus undertaken above, that there remains a high degree of jurisdictional divergence

80Scandinavian Trading Tanker Co. AB v. Flota Petrolera Ecuatoriana (‘The Scaptrade’) [1981] 2 Lloyd’s Rep 425, 432; Star Steamship Society v. Beogradska Plovidba (‘The Junior K’) [1988] 2 Lloyd’s Rep 583; Antclizo Shipping Corp. v. Food Corp. of India No. 2 (‘The Antclizo’) [1992] 1 Lloyd’s Rep 558.

81[1992] 2 AC 128, HL. It is a view shared by other Common law jurisdictions: see, for instance, Coal Cliff Collieries Pty Ltd v. Sijehama Pty Ltd (1991) 24 NSWLR 1.

82See Petromec Inc v. Petroleo Brasileiro SA Petrobas [2005] EWCA Civ 891, [2006] 1 Lloyd’s Rep 121. In Australia, such an undertaking may also be valid, assuming it is precise enough: see the judgment of Kirby P in Coal Cliff Collieries Pty Ltd v. Sijehama Pty Ltd

(1991) 24 NSWLR 1; likewise, in Scotland, McCall’s Entertainments (Ayr) Ltd v. South Ayrshire Council (No. 1) 1998 SLT 1403.

83Re Anglo-Russian Merchant Traders Ltd [1917] 2 KB 679; Coloniale Import-Export v.

Loumidis Sons [1978] 2 Lloyd’s Rep 560. See also the Australian case of Hospital Products Ltd v. United States Surgical Corp (1984) 156 CLR 41.

84R & D Construction Group Ltd v. Hallam Land Management Ltd [2009] CSOH 128, where a duty on a party to ‘use reasonable endeavours’ to agree a price for the sale of land was deemed an enforceable obligation; cf. Scottish Coal Co Ltd v. Danish Forestry Co Ltd

[2009] CSOH 171, where an obligation to conclude a ranking agreement between the seller of a coal mine and the purchaser’s bank, analysed by the court as an agreement to agree, was held not enforceable because of the absence of any objective criterion to judge the reasonableness of the endeavours of the parties to agree (see the judgment of Lord Glennie at para. 66).

85Specific enforcement of the obligation may well be impractical, which leaves damages. Presumably damages will require to be measured either on a loss of a chance basis, or by reference to wasted expenditure.