The Duty to Bargain in Good Faith Introduction | Kessler, Gilmore & Kronman | August 28, 2012


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by Kessler, Gilmore & Kronman

Occasionally the thesis has been advanced that once parties have entered into negotiations for a contract, neither can break off arbitrarily without compensating the other for his reliance damages. The case law and literature, on the whole, however, have displayed the good sense to reject this idea. If the utility of contract as an instrument of self·government is not to be seriously weakened, parties must be free to break off preliminary negotiations without being held to an accounting.


Tradition has it that absent fraud, misrepresentation, concealment, and duress, parties negotiating for a contract are dealing at arm's length and are under no duty to act in good faith toward each other.


Bargaining in good faith is dealt with neither by the Uniform Commercial Code (§1-203), nor by the Restatement Second (§205). Both "codifications" deal only with good faith in performance.


By contrast, the National Labor Relations Act §8(d)[46] imposes on both parties a duty to bargain in good faith. But this means only that the parties have to meet at regular times and confer in good faith. This obligation does not compel either party to agree to a proposal or require the making of a concession. (H. Wellington, Labor and the Legal Process, 52-53 (1968)).[47] The National Labor Relations Board is empowered to promulgate orders enforceable in the courts to implement S8, but although it may order a party to cease and desist from refusing to bargain, it may not order the party to include a particular term in the agreement. H. K Porter Co. v. N.L.R.B., 397 U.S. 99 (1970).


Until fairly recently, it has been argued that a good faith principle like that embodied in the National Labor Relations Act ought not to be carried over into the formative stage of contracts,[48] except in fiduciary and confidential relationships. A majority of courts have taken and still take the view that a contract to make a contract, or an agreement to agree, is not binding,[49] thus allowing each party to abandon negotiation with impunity. But it should not be overlooked that this privilege presupposes that the parties have not yet come to an agreement. Consequently, the further negotiations have progressed, the more unsafe it is to withdraw. The Uniform Commercial Code and the progressive case law endorsed by the Restatement Second, as we saw in the previous section, long ago abandoned the idea that a contract presupposes a consensus ad idem.[50]


The materials that follow, too important to be ignored and often in conflict, show a tendency to tamper with tradition and to recognize good faith duties, even if the contract in the traditional sense never came into existence. The courts are willing to grant damages when the party claiming lack of agreement has invited or encouraged the other's reliance so that non-enforcement would leave the relying party in a disadvantageous position. Some courts have gone even further, developing in appropriate cases what has been called a "contract to bargain."[51] This happens when the parties have committed themselves in good faith to complete the contract. In this situation neither party may "arbitrarily" back out of the deal. One may do so only if a fair and honest understanding cannot be reached, but not merely because an outsider has offered better terms. There is thus a gray area between a completed bargain and no contract at all. Of course, it may be exceedingly difficult to shape the appropriate remedy in such a case. Unlike most of the cases in this chapter, where the injured party must be satisfied with either restitution or reliance damages, a few cases, like Borg-Warner, infra p. 226, confront the difficult question of specifically enforcing terms calling for future negotiations, or alternatively, of awarding damages with an allowance for the failure of such negotiations.


[46] 61 Stat. 142 (1947), 29 U.S.C. §158(d)(1958).


[47] For the meaning of the term “good faith” see N.L.R.B. v. Insurance Agents’ Int’l Union, 361 U.S. 477 (1960); Cox, The Duty to Bargain in Good Faith, 71 Harv. L. Rev. 1401 (1958).


[48] United States v. Braunstein, 75 F. Supp. 137 (S.D.N.Y. 1947), appeal dismissed, 168 F.2d 749 (2d Cir. 1948); Ruebsamen v. Maddocks, 340 A.2d 31 (Maine 1975); AB.C. Packard, Inc. v. General Motors Corp., 275 F.2d 63, 69 & n.6 (9th Cir. 1960); Woodmont, Inc. v. Daniels, 274 F.2d 132, 137-138 (10th Cir. 1959).


[49] Ansorge v. Kane, 244 N.Y. 395, 155 N.E. 683 (1927); 1 Corbin §29 (1963) discusses the problem in a good deal more guarded way: a contemplated writing, for instance, might not be the final step in the consummation of an agreement, but a "mere" memorial of the agreement already reached. See further Shepard v. Carpenter, 54 Minn. 153, 55 N. W. 906 (1893); Lord Wright in Hillas v. Argos, 147 L.T. 503 (1902).


[50] U.C.C. §§2-204(3), 2-305(1). The distinction, for instance, between an understanding that the price should be reasonable and an agreement to negotiate in a reasonable way to reach such a price can become quite fluid. A good deal may depend on the remedy sought.


[51]  Knapp, Enforcing the Contract to Bargain, 44 N.Y.U. L. Rev. 673 (1969); Summers, “Good Faith” in General Contract Law and the Sales Provisions of the Uniform Commercial Code, 54 Va. L. Rev. 195 (1968); Kessler & Fine, Culpa in Contrahendo, Bargaining in Good Faith, and Freedom of Contract: A Comparative Study, 77 Harv. L. Rev. 401 (1964).


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