Obligations to negotiate in good faith – are they binding?

I recently delivered some training in Beijing and Shanghai to lawyers and other interested members of the public. The topic of the training seminar, which was co-sponsored by Melbourne Law School, China Business Law Journal and Thomson Reuters, was Bridging the Divide: Drafting and Negotiating Contracts in Cross-border Deals.

The purpose of the training was to identify the challenges that arise when lawyers draft contracts in cross-border deals, and the strategies that they can adopt to overcome these challenges. In particular, the training considered the impact of the following three factors on these challenges: law; language; and attitudes towards the nature and purpose of contracts.

All of these factors are interrelated and are integral to the way in which contracts are drafted and negotiated.

In relation to the first two factors, I suggested that the way in which we draft and negotiate contracts is inevitably shaped by the law and the language in which contractual rights and obligations are expressed. Different legal systems have different ways of perceiving and expressing concepts, and the differences are particularly pronounced in the area of contract law.

Consider, for example, the differences between common law and civil law systems in terms of the ways in which contracts are interpreted, and also the length of contracts.

In common law jurisdictions, the traditional approach to interpreting a contract has been based on the notion that the legal relationship between the parties is governed by the “four sides” of the contract; in other words, the relationship is defined exclusively by what is written in the contract itself. This is reflected in the following:

• the use of an “entire agreement” clause, under which the parties confirm that the agreement constitutes the entire agreement between the parties and supersedes any previous written or oral agreements;
• the “parol evidence” rule, which prevents courts from looking at extrinsic evidence (particularly oral evidence) when interpreting a contract;
• the literal approach to the interpretation of contracts, under which courts prefer to interpret contracts by reference to the meaning of the written words rather than the purpose for which the contract was signed; and
• the principle that “a deal is a deal” (as reflected in the Latin phrase: pacta sunt servanda) and that the parties to a contract should perform their obligations strictly in accordance with the contract.

A former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre. Andrew’s new book is a compilation of China Business Law Journal’s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at www.vantageasia.com