Good faith in commercial contracts

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Jacobs -v- Skidmore Owings [2013] CILL.  TCC.  Coulson J.

Facts

Jacobs and Skidmore were in litigation.  They settled the litigation with a settlement deal whereby Skidmore promised to award Jacobs one or more contracts giving them not less than 33,500 hours of consultancy services work to do at certain rates.  If this did not happen within 2 years, Skidmore would pay Jacobs £15 per hour, up to the shortfall, up to a maximum of 33,500 hours.

Apart from a small contract for £20,000, during the 2 year period Skidmore only offered Jacobs one job.  Jacobs turned this down because they had no experience of working in the Middle East and the fast track nature of the project was too challenging.  After 2 years Skidmore offered no more work and refused to pay the shortfall payment (£488,000).  Jacobs sued and Skidmore resisted as they said the deal was just an agreement to agree and that they had discharged their obligation by offering work.

Held

  1. Jacobs had acted reasonably in turning the Middle Eastern project down.  Skidmore had to consider awarding contracts and Jacobs had to consider accepting them.  They both had to act in good faith to make the agreement work.
  2. An agreement can fail where it is nothing more than an agreement to agree (e.g. “let’s talk about working together some time“).  Nevertheless an agreement is not incomplete merely because it calls for some element of further agreement between the parties.  There was enough agreed to create a framework within which the parties should act in good faith.

Commentary

Commercial agreements are very often vague around the edges, even messy.  The courts nowadays tend to accept that it is the court’s job to make commercial agreements between business people work wherever possible.  Previously, the concept of reasonableness was often used, nowadays the judges are more ready to use the concept of good faith but the effect is the same.  In the TCC in particular, which has four strong high court judges, there is a trend towards pragmatism and business common sense.

For more information, help or advice please contact Rob Langley on 0191 211 7975 or email[email protected].