The duty to negotiate in good faith

Abstract

Purpose

Precontractual liability may be imposed when a party acts in bad faith to damage the other party, when a party negotiates in order to discover business secrets with no intention of reaching a final agreement, or when a party to a non‐binding letter of intent terminates negotiations during a later phase of negotiations without legitimate reason. The purpose of this article is to clarify the concept of the duty to negotiate in good faith, either for Civil Law or Common Law system practitioners.

Design/methodology/approach

The paper describes the concept of good faith and fair dealing and its effects on the negotiation process. After establishing this description, we will analyze the differences in the interpretation and the application of the concept of good faith in the pre‐contractual procedure. The article explores the Civil Law approach for this matter, followed by the Common Law approach. In order to illustrate the Common Law System, we will focus on English and American Law, while we will look mainly at German, Brazilian and French Law to illustrate the Civil Law. In the conclusion, we will compare the approaches of the two systems.

Findings

The obligation of good faith in negotiation is found practically in all civil law system countries and generally provides a remedy for a wrongful conduct produced by a bad faith act. However, there is no general rule in Common Law requiring the parties to negotiate in good faith. We are in favor of applying a more expansive view of good faith obligations for international business transactions involving two or more different countries from these two different legal systems (civil law and common law), so as to apply them to the duty to negotiate arising from preliminary agreements and negotiations.Although there is no general rule about pre‐contractual liability in the common law system, we strongly believe that the existing body of case law and statutes may punish a party which engages in unfair conduct at the pre‐contract stage if the parties had signed a letter of intent or a memorandum of understanding, requiring them expressly and clearly to “act in good faith” and/or “to use their best efforts to reach an agreement”.

Originality/value

This article has discussed a relatively unexplored area related to the obligation of good faith in negotiation either for civil law and common law's practitioners. Our research has highlighted the complexity of this matter between these two legal systems, and has helped to the identification of the concept of good faith in a relation between two or more parties.

Citation

Barasnevicius Quagliato, P. (2008), "The duty to negotiate in good faith", International Journal of Law and Management, Vol. 50 No. 5, pp. 213-225. https://doi.org/10.1108/17542430810903896