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Authored - NJ Contract Law Update - Violation of the Duty to Negotiate in Good Faith: 'You Know It When You See It'
JUNE 25, 2013 | Windels Marx - Commercial Litigation

Some legal issues are so difficult for the courts to define, by objective standards, that litigants are left with a standard not far from the semi-mythical, "You know it when you see it". An agreement to negotiate in good faith may approach this level of uncertainty, especially when dealing with complex documents and multiple interrelated issues--as opposed to a simple matter of, for example, 'attempting to agree' through good-faith negotiations on the purchase price for a piece of real estate, where no other terms may be at issue.

Some sense of the courts' struggles in this area can be gleaned from Sun Pharmaceutical Industries v. Core Tech Solutions, 2013 WL 1942619 (N.J.App.Div. May 13, 2013); which seems to have come to a result in this area more by reference to what was not a violation then what would be. Among the elements at play in that lengthy Opinion, perhaps the most important (although unstated by the Court eo nomine) was the complexity of the transaction itself; such that the possible validity of a particular objection or negotiating strategy would have been equally complex, making it hard to pin the blame on any one side. This was particularly true where each side arguably could have been charged with imperfection in its conduct of the negotiations.

The subject matter of the Court's Opinion was essentially this: When are mutual accusations of imperfect negotiations 'such' that one party will have to face a trial on the issue of having negotiated in bad faith? Can trial be avoided even though there are identifiable instances of imperfect negotiating conduct, perhaps even accompanied by mens rea that may present a triable issue in another business-tort context? And implicitly, does an analysis of a breakdown of negotiations involve not just fault but also causation--i.e., did the deal fall apart due to wrongdoing, or just the weight of negotiations, even if a party misbehaved?

Some of the salient factual and conclusions by the Court in its lengthy narrative included the following:

1 (a) The fact that the letter of intent at issue--the instrument which established the duty to negotiate in good faith--was (a) effective January 30, 2008; (b) provided a 90-day negotiation period; but (c) was not followed-up on by the plaintiff with a draft of an agreement to be negotiated, until twenty days before the end of the negotiation period, and only after certain "studies" were successfully completed. Though the issue was not identified as such, it is unclear why the completion of the studies could not have been a condition, in a draft that could have been created and presented early on, and negotiated conditionally. The Court seems to have been impressed by this delay, as rendering it difficult for the plaintiff to place all of the blame for the unsuccessful negotiations on the defendants.

(b) There was some sense that the plaintiff should have 'gone first' in preparing the draft--and certainly no sense that the plaintiff could not have ventured to do so if it wanted to accelerate matters.

2. The Court also apparently felt that because (in the Court's view) the plaintiff had (a) changed the draft, (b) failed to fully consider defendants' proposed revisions, and (c) otherwise engaged in at least some share of the complications that led to the failure of the negotiations, the 'negotiation duty' was not actionably breached by defendants.

3. There apparently were also substantial points that were simply never agreed upon, Thus, unlike the above hypothetical of a need to simply agree on the price of a piece of real estate and nothing else, here the Court felt uncomfortable taking a position that the deal (a) should have closed--and (b) would have--but for defendants' alleged unilateral conduct.

4. Specific conduct and rhetoric-laden internal emails by the defendants--which would probably, in other business-tort contexts, have led to a triable issue of fact--were not deemed sufficient to do so when dealing with the unique issue of the duty to negotiate in good faith.

The Court also struggled with the precise definition to use for bad-faith negotiation. One standard recited was "renouncing the deal, abandoning the negotiations, or insisting on conditions that do not conform to the preliminary agreement." Again, such a standard seems easier to enforce in a simple context (such as the above real-estate hypothetical), rather than the complex Sun deal; and courts do not like to 'try' amorphous issues. The Court also (a) focused on a definition involving "subterfuges and evasions"; but (b) implicitly seems to have felt that arguable 'subjective insincerity' would not be enough to bridge the gap of proving that an amorphous multi-issue deal was prevented from coming to fruition simply by one party's conduct--especially where the bilateral conduct (c) seemed to have been so extensive, and (d) was difficult to couch as unilateral blame.

The moral of the story is that parties should not count on obtaining relief (or even a trial) when the only thing they have to 'hang their hat on' is a duty to negotiate in good faith, unless the item to be negotiated is sufficiently narrow (and conduct sufficiently reprehensible, without parallel misconduct on the part of the plaintiff) that two factors can be shown: (1) fault can be pinpointed for 'deal cratering', and (2) causation can be made glaring enough to justify the requisite hearing on the merits.

Contact & Legal Disclaimer

Clark Alpert is the author of Guide to New Jersey Contract Law, published by the New Jersey Institute for Continuing Legal Education, originally published in 2007 and updated in November 2011. His updates on New Jersey contract law are based in recent issues and practical methods for addressing similar situations in your practice or business. They are not intended to serve as legal advice. Clark welcomes your questions and comments.


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