Friday, October 16, 2009

'Agreements in Principle' and Binding Contractual Relationships

The Kluwer Arbitration Blog highlights a recent decision of the ICSID – Azpetrol International Holdings v. The Republic of Azerbaijan – which discusses important principles of contract law. Prof Andrew Newcombe has posted a note on the decision here; and he says:


"The question before the tribunal in Azpetrol was whether an exchange of emails between counsel for the parties resulted in a binding settlement agreement. Applying English contract law principles, the tribunal found that there was a binding settlement agreement. As a result, the tribunal held that it lacked jurisdiction under Article 25(1), ICSID Convention, because there was no longer a legal dispute between the parties. The award serves as a cautionary tale for counsel negotiating settlement agreements."


The decision is available here; and the relevant analysis of the Tribunal is found from page 24 (paragraph 67) onwards. This includes an interesting discussion of whether the requirement of ‘intention to create legal relations’ was present; and whether ‘agreements in principle’ are on their own binding. On this point the Tribunal noted:


"(The Tribunal) is not persuaded that the term “agreement in principle” is inevitably used in English law and in the practice of English lawyers to refer to a non-binding agreement. The Claimants did not produce any authority which went that far. The authorities on which they relied (Attorney-General of Hong Kong v. Humphreys Estate, [1987] AC 114; Cobbe v Yeoman Management Ltd., [2008] UKHL 55) show that the term can be used in that way but those cases concerned agreements for the sale of land, one of the rare cases in which English law provides that a contract must be evidenced in writing in order to be binding, and they do not suggest that the term is invariably used in that way. Similarly, the leading commentary (Chitty on Contracts) does not, in the Tribunal’s view, sustain the broad principle advanced by the Claimants."


A connected issue in this regard pertains to pre-contractual liability in general. What liability arises in pre-contractual negotiations? Is there a duty in common law to negotiate in good faith? The Harvard Law Review recently published an article in this regard authored by Professors Alan Schwartz and Robert Scott – “Precontractual Liability and Preliminary Agreements”.

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