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Aiton 
v Transfield [1999] NSWSC 996 (1 October 1999)
Last Updated: 4 October 1999
NEW SOUTH WALES SUPREME COURT
CITATION:
Aiton v Transfield [1999] NSWSC 996CURRENT JURISDICTION: Equity Division, Construction List
FILE NUMBER(S): 55020/99
HEARING DATE{S): 26.7.99
JUDGMENT DATE: 01/10/1999
PARTIES:
Aiton Australia Pty Limited (Plaintiff) Transfield Pty Limited (Defendant)JUDGMENT OF: Einstein J
LOWER COURT JURISDICTION: Not Applicable
LOWER COURT FILE NUMBER(S): Not Applicable
LOWER COURT JUDICIAL OFFICER: Not Applicable
COUNSEL:
R.W. Hunt (Plaintiff)
M.G. Rudge (Defendant)
SOLICITORS:
Corrs Chambers Westgarth (Plaintiff)
Minter Ellison (Defendant)
CATCHWORDS:
Contract - Construction contracts - Settlement of disputes - Dispute resolution
procedures a condition precedent to commencing expert
resolution or judicial
proceedings - Requirement that the parties utilise dispute resolution
procedures in "good faith" - Meaning
of "good faith" - Whether provision
sufficiently certain to be enforced - Whether proceedings ought be adjourned or
stayed
Procedure - Stay - Dispute resolution procedure a term of the contract - Stay
order where abuse of process to sue - Exercise of
court's discretion.
ACTS CITED:
Commercial Arbitration Act 1984 (NSW)
Farm Debt Mediation Act 1994 (NSW)
Industrial Relations Act 1988 (Cth)
Native Title Act 1993 (Cth)
DECISION:
Application for stay of proceedings dismissed.
JUDGMENT:
THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION - COMMERCIAL LIST
EINSTEIN J
1 October 1999
55020 of 1999
AITON AUSTRALIA PTY LTD v TRANSFIELD PTY LTDJUDGMENT
The Motion
1 The motion before the court is for a stay of proceedings.
2 The defendant seeks the stay on the basis that the
contracts pleaded by the plaintiff, forming the basis of the plaintiff's
claim,
contain express procedures for dispute resolution to be followed prior to
either party commencing proceedings. [The precise
words used in the relevant
clause are set out below.] The defendant asserts that such procedures have not
been carried out, and
therefore, the court ought stay the proceedings until the
procedures have been followed. If successful, this application would amount
to
an indirect enforcement of those express procedures.
The Proceedings
3 The proceedings were commenced by the plaintiff,
Aiton Australia Pty Ltd, by summons dated 21 May 1999. They concern the Osborne
Co-Generation Project, a turn-key construction project for Osborne Co. Pty Ltd,
an independent power producer situated in Adelaide,
South Australia. In May
and June of 1997 the plaintiff and the defendant,
Transfield Pty Ltd, enteredinto three contracts in relation
to the construction of the project. It is
these contracts, and the tender negotiations leading up to the execution of the
contracts,
from which the dispute between the parties arises.
4 The plaintiff asserts inter alia that the defendant made
representations to the plaintiff during the tender negotiations which
were
misleading and deceptive. In consequence, the plaintiff claims to have been
unable to execute the works in the manner, sequence,
and within the duration
and for the tender price provided for by the contracts. Further, the plaintiff
asserts that the defendant
made representations to the plaintiff during the
performance of the works which were misleading and deceptive. In consequence,
the
plaintiff claims to have performed additional work and worked according to
a different completion period.
5 The plaintiff puts its case in terms of sections 52 and 53
of the Trade Practices Act (Cth) 1974 and/or sections 42 and 44
of the Fair Trading Act (NSW) 1987 or sections 56 and 58 of the Fair
Trading Act (SA) 1987. The plaintiff claims damages said to be incurred by
reliance on the representations.
6 The plaintiff further claims damages for delay and
disruption to the works arising from the acts or omissions of the defendant
and
an entitlement to be paid for additional works pursuant to the contracts,
collateral contract or on a quantum meruit.
The Contracts
7 The contracts referred to above, forming the basis of the
plaintiff's claim, are Contract C11/1 dated 23 May 1997; Contract
C7 dated 20
June 1997 and Contract C11/2 dated 24 June 1997. Each contract contained an
express term and condition for dispute resolution
procedure, in the terms of cl
28.
8 Clause 28 of the Contracts provides:
`28 Dispute resolution
28.1 General
The Purchaser [
Transfield ] and Supplier [ Aiton ] shall make diligent and goodfaith efforts to resolve all Disputes in accordance with
the provisions of this
Section 28.1 [General] before either party commences mediation, legal action or
the expert Resolution Process,
as the case may be.
If the representatives of the parties are unable to resolve a Dispute within
15 days after Notice from one Party to the other of the
existence of the
dispute (the "Dispute Notice") and after exchange of the pertinent information,
either party may, by a second Notice
to the other Party, submit the Dispute to
the Designated Officers of Supplier and Purchaser. A meeting date and place
shall be established
by mutual Contract of the Designated Officers. However, if
they are unable to agree, the meeting shall take place at the Site on
the 10th
business day after the date of the second Notice. The Designated Officers shall
meet in person and each shall afford sufficient
time for such meeting (or daily
consecutive meetings) as will provide a good faith, thorough exploration and
attempt to resolve the
issues. If the Dispute remains unresolved 5 Business
Days following such last meeting, the Designated Officers shall meet at least
once again within 5 Business Days thereafter in a further good faith attempt to
resolve the Dispute.
For any Dispute which is unresolved at the conclusion of such meeting, each
Party shall submit within 10 days thereafter a written
statement of its
position to the other party and the Dispute shall be immediately submitted to
mediation pursuant to Section 28.2
[Mediation].
28.2 Mediation
If the Dispute is not resolved pursuant to the process established in
Section 28.1 [General], either Purchaser or Supplier shall submit
the same for
mediation and the parties expressly agree upon the following process and
subject to Section 28.5 [Limitation Periods]
agree that Mediation shall be
compulsory before either Party may commence legal action or initiate the Expert
Resolution process,
as the case may be:
(a) The Party initiating mediation shall provide Notice of that request to
the other Party, including a summary of the Dispute, a
written statement of its
position and a list of 4 mediators acceptable to it.
(b) Within 5 business days following receipt of the above Notice, the
recipient Party shall provide the other Party with a written
statement of its
position on the Dispute, any objections and amendments that it may have to the
other Party's above mentioned summary
of the Dispute and a list of 4 mediators
acceptable to it if it does not accept an individual from the other Party's
list.
(c) If the Parties are unable to agree on a mediator within 5 business days
following delivery of the material mentioned in Subsection
(b) above, then
either Party may apply on an expedited basis to have the mediator appointed by
the President for the time being of
the New South Wales Bar Association (or
paramount officer of any successor organisation). The mediator shall have
suitable qualifications
and standing to mediate the Dispute.
(d) The place of any mediation proceeding shall be Sydney, New South
Wales.
(e) The mediator may conduct the proceedings in any manner he considers
appropriate, taking into account the circumstances of the
Dispute, any desires
expressed by the Parties, and the desire for speedy resolution of the Dispute.
The mediator may communicate
with the Parties orally or in writing and may meet
with the Parties together or individually. The Party initially referring the
Dispute to mediation is entitled to make the first opening statement to the
mediator.
(f) The mediator shall not act as a representative or witness of either
Party or otherwise participate in any Expert Resolution or
judicial proceedings
related to a Dispute that was the subject of mediation.
(g) Statements made by either Party or the mediator in the course of the
mediation process shall not be disclosed to any third party
and shall not be
introduced by either Party in the Expert Resolution process or judicial
proceedings, whether or not those proceedings
relate to the Dispute that was
the subject of the mediation.
(h) The Parties agree to use all reasonable endeavours in good faith to
expeditiously resolve the Dispute by mediation.
(i) If the Dispute has not been resolved by the mediation process within 28
days of the appointment of the mediator or such other
period as is subsequently
agreed to by the Parties, then either Party shall have the right to initiate
the Expert Resolution process
or judicial proceedings, as the case may
be.
28.3 Expert
Where the Parties agree to submit a dispute or difference to the Expert
Resolution Process, such dispute or difference shall be resolved
in the
following manner:
(a) An Expert will be appointed by the Parties, or in default of Contract
upon such appointment, either Party may refer the appointment
to, in the case
of financial matters, the President for the time being of the Institute of
Chartered Accountants in Australia, in
the case of technical matters, the
President for the time being of the Institution of Engineers in Australia and,
in the case of
any other matters (including a dispute as to the interpretation
of this Contract) the President for the time being of the Institute
of
Arbitrators in Australia. In all events, the Expert must have reasonable
qualifications and commercial and practical experience
in the area of Dispute
and have no interest or duty which conflicts or may conflict with his function
as an Expert.
(b) The Expert will be instructed to :
(i) promptly fix a reasonable time and place for receiving submissions or
information from the Parties or from any other Persons as
the Expert may think
fit;
(ii) accept oral or written submissions from the Parties as to the subject
matter of the Dispute within 10 Business Days of being
appointed;
(iii) not be bound by the rules of evidence, and
(iv) make a determination in writing with appropriate reasons for that
determination within 20 Business Days of the date referred
to in Subsection
28.3(b)(ii).
(c) The Expert will be required to undertake to keep confidential matters
coming to the Expert's knowledge by reason of being appointed
and the
performance of his duties.
(d) The Expert will have the following powers:
(i) to inform himself independently as to facts and if necessary technical
and/or financial matters to which the dispute relates;
(ii) to receive written submissions sworn and unsworn written statements and
photocopy documents and to act upon the same;
(iii) to consult with such other professionally qualified persons as the
Expert in his absolute discretion thinks fit and
(iv) to take such measures as he thinks fit to expedite the completion of
the resolution of the dispute.
(e) Any person appointed as an Expert will be deemed not to be an arbitrator
but an expert and the law relating to arbitration including
the Commercial
Arbitration Act 1986 (SA) and the NSW equivalent, as amended, will not apply to
the Expert or the Expert's determination
or the procedures by which he may
reach his determination.
(f) The Dispute resolution will be held in Sydney, New South Wales unless
the Parties otherwise agree.
(g) In the absence of manifest error, the decision of the Expert will be
valid, final and binding upon the Parties.
(h) The costs of the Expert and any advisers appointed pursuant to
Subsection 28.3(c)(iii) will be borne by Purchaser or Supplier
or both as
determined in the discretion of the Expert taking into account the Expert's
decision in the dispute.
(i) The Parties will give the Expert all information and assistance that the
Expert may reasonably require. The Parties will be entitled
to be legally
represented in respect of any representations that they may wish to make to the
Expert, whether orally or in writing.
28.4 Work to Continue
Notwithstanding the status of the progress of any Dispute whether it be
under discussion between the Parties or the Designated Officers
or in
mediation, litigation or the Expert Resolution Process and regardless of the
basis thereof or the grounds therefor, Supplier
shall, unless the Contract has
been lawfully terminated, diligently continue to prosecute the Work and comply
with its Warranty Obligations,
all in accordance with the terms of this
Contract.
28.5 Limitation Periods
Notwithstanding anything contained in Section 28.1 [General] and Section
28.2 [Mediation] each Party retains the right to commence
legal action or
initiate the Expert Resolution Process as the case may be, to preserve that
Party's rights to prevent the elimination
of such rights by a limitation period
prescribed by Law.
28.6 Designated Officers
The Designated Officers are:
Purchaser: Chief Executive Officer of
Transfield Pty LtdSupplier: The most senior officer of the Supplier at the Supplier's address
stated on the Purchase Order.'
9 The definition of `Dispute' is provided in clause 1.1 of
the Contracts, being `any claim, dispute, disagreement or other matter
in
question between Purchaser and Supplier that arises with respect to the terms
and conditions of this Contract or with respect
to the performance,
non-performance or breach by the Purchaser or Supplier of their respective
obligations under this Contract.'
The Facts
10 The history of the various claims made by
Aiton to Transfield prior to service of the summons, is set out in the affidavitsof Mr
Neil Price, sworn 2 July 1999 and Mr Keith Walker-Smith, sworn 6 July 1999. Mr
Price has been involved with the Osborne Co-Generation
Project since 21 July
1997 and has been Project Manager for
Aiton since November 1997. Mr WalkerSmith was the General Manager of
Aiton from October 1991 to February 1999 andManaging Director from February 1999 to 1 May 1999.
11 On the evidence of Mr Price, the following can be seen as
heads of claim pursued by
Aiton against Transfield during the periodfrom 1997
to 1999: (1) extension of time and costs due to inadequate isometric drawings
being provided by
Transfield ; (2) wage ratesvariations associated with an
additional over-award weekly payment to the labour force; (3) work involved
with the installation of
cooling water piping, being work outside the contract
price; (4) hourly rates site variations for work performed outside the
contracts;
and (5) work involved with the installation of trimmer steel, being
work outside the contract price.
12 On 30 March 1999
Aiton made a consolidated claim which islater reflected in the summons. Presumably, the pleaded consolidated
claim,
totalling $11,897,529 once broken down, may be directly correlated with the
separate heads of claim detailed in Mr Price's
affidavit. It is convenient,
therefore, that the heads of claim, having separate claim histories be dealt
with separately.
13 As to the isometric drawings claims,
Aiton gave Transfield a notice of dispute pursuant to cl 28.1 on 20 March 1998 (NEP4).
Following
requests for further information from
Transfield, Aiton submitted itsquantified claim, incorporating previous interim
claims, and supporting
documentation to
Transfield on 1 December 1998. On the evidence of Aiton,Aiton
's subsequent attempts todiscuss the claim were frustrated by the conduct
of
Transfield : communication by Transfield to the effect that Transfield didnot
intend to make further payments to
Aiton ; cancellation of the 20 January1999 variation claims meeting at which the claims were proposed
to be
discussed; failure to prepare for the 28 January 1999 meeting; failure to
respond. It appears that
Aiton did not submit asecond notice of dispute in
relation to these claims as per the procedure stipulated in cl 28.1.
14 As to the wage rates variations,
Aiton notified Transfield on 12 November 1997 at a variation claims meeting that such variations
were in
dispute, this notification being confirmed by facsimile dated 29 November 1997
(NEP9). On the evidence of
Aiton , no furthersteps were taken pursuant to cl
28 in view of
Transfield 's apparent acceptance of the claim, subject todocumentary substantiation,
by facsimile dated 11 February 1998 (NEP12). On 19
August 1998
Aiton submitted its particularised claim with supportingdocumentation
to
Transfield . Thereafter, Transfield advised Aiton that theclaim was under review, until on 28 January 1999
Transfield advised Aiton thatit had difficulties with the claim and was reviewing the earlier
correspondence.
15 As to the claims arising from the cooling water piping,
Aiton notified Transfield on 12 November 1997 at a variation claimsmeeting
that such variations were in dispute, this notification being confirmed by
facsimile dated 29 November 1997 (NEP18). On
the 16 October 1998
Aiton gave Transfield a second notice pursuant to cl 28.1. Thereafter, Aiton madenumerous requests that the
parties' Chief Executive Officers meet to discuss
the claim, being the designated officers as required by the dispute resolution
procedures in clause 28.1. On the evidence of
Aiton , given the consistentfailure of
Transfield to meet these requests, it was agreedthat such meeting
be convened between the respective general managers of each party. On 9
November 1998
Transfield agreed to pay$68,800.00 of the $80,380.00 originally
claimed.
16 As to the hourly rates site variations,
Aiton gave Transfield notice of dispute pursuant to cl 28.1 on 23 September 1998 (NEP46).By facsimile dated 8 October 1998,
Transfield requested further information,stating further that given that `there are some 348
claims which make up
Aiton 's labour claims for site variations', the procedures for exchange ofinformation effectively outlined
in cl 28.1, are unacceptable and are not
`realistic or practical'. On the evidence of
Aiton , thereafter followed aseries of meetings
between officers of the plaintiff and the defendant at which
a number of
Aiton 's claims were settled, payment having not yet beenreceived.
17 As to the claims arising from the installation of trimmer
steel, being work said by the plaintiff to be outside the contracts,
Aiton 'ssolicitors sent a letter of demand to the defendant on 26 June 1998. On the
evidence of
Aiton , while Transfield has advised Aiton on numerous occasionsthat a site report prepared by
Transfield in respect of these claims would bemade available to
Aiton ,no such report has been made available.
18 On 30 March 1999,
Aiton forwarded to Transfield a lettercontaining a consolidated claim, inviting
Transfield to contact Aiton within 15
days to negotiate a programme for resolution of the claim.
Aiton further statedthat if
Transfield did not respond withinthat time or if the parties were
unable to agree,
Aiton would assume the parties were in dispute as to theconsolidated claim. Argument
as to production of information ensued,
Aiton forming the view in May 1999 that
Transfield had failed to act in a bona fidemanner
with respect to the resolution of disputes.
19 Subsequent to the filing of the summons by
Aiton on 21 May1999, the plaintiff's solicitors, acting on the instructions of
the plaintiff,
sent to the defendant's solicitors a facsimile dated 7 June 1999 containing a
proposal for mediation. By facsimile
of the same day, the solicitors for the
defendant responded to that proposal, asserting that it was at best, 'a
truncated and inadequate
version of the dispute resolution process recommended
in the contract'.
20 On the evidence of the defendant, the procedures following
notice of dispute outlined in clause 28.1 of the Contracts have
not been
complied with in respect of the issues raised in the proceedings, nor have the
mediation procedures referred to in clause
28.2 been initiated or complied with
in relation to the issues raised in the proceedings [affidavit of Mr Paul
Finnerty 17 June 1999,
pars 6 and 7]. This is notwithstanding the defendant's
assertion that it is ready and willing to do everything necessary for the
proper conduct of the dispute resolution procedures, including mediation
[Outline of defendant's Submissions, par 7].
21 In the result, the defendant seeks a court order staying
the proceedings, thereby indirectly enforcing clause 28, compliance
with which
is expressed to be a condition precedent to commencing litigation or
arbitration.
22 In my view, on the evidence, the defendant has sought to
frustrate the plaintiff's attempts to regularly invoke the provisions
of cl 28.
Whilst the correspondence and communications between the parties are open to
more than one construction, I see as made
out the plaintiff's submission that
the defendant has not complied with the spirit and intent, let alone the words,
of cl 28 on the
occasions where the plaintiff sought to invoke the provisions
of the clause.
23 It has to be said that there has been a progression and
expansion of claims with the expansion of time and that in my view,
on the
evidence, the defendant's earlier responses to the separate heads of claim
bespeak a most negative attitude indeed to submitting
to the agreed cl 28
procedures.
24 Notwithstanding this, it must also be said that, on the
evidence,
Aiton itself failed to adhere to the agreed cl 28 proceduresin
seeking to invoke those procedures in relation to all the separate heads
of claim or to it's consolidated claim. It may be that in view of
Transfield 'sprevious responses,
Aiton ultimatelygave up on making further attempts to
invoke the agreed dispute resolution procedure.
25 It is trite to observe that parties ought be bound by
their freely negotiated contracts. As Kirby P (as he was then) stated
in
Trawl Industries of Australia Pty Ltd v Effem Foods Pty Ltd (1992) 27
NSWLR 326 at 332, the `courts should be the upholders, and not the destroyers,
of commercial bargains'. Similarly, in Meehan v Jones [1982] HCA 52; (1982) 149 CLR
571 at 589, Mason J referred to the 'traditional doctrine that courts should be
astute to adopt a construction which will preserve the
validity of the
contract'.
Stay of proceedings
26 Equity will not order specific performance of a dispute
resolution clause, notwithstanding that it may satisfy the legal requirements
necessary for the court to determine that the clause is enforceable. This is
because supervision of performance pursuant to the
clause would be untenable:
see Hooper Bailie Associated Ltd v Natcon Group Pty Ltd (1992) 28 NSWLR
194 at 210. The court may, however, effectively achieve enforcement of the
clause by default, by ordering that proceedings commenced
in respect of a
dispute subject to the clause, be stayed or adjourned until such time as the
process referred to in the clause, is
completed.
27 The court's power to order a stay of proceedings is
derived from its inherent jurisdiction to prevent abuse of its process
[cf
Supreme Court Rules (Pt 13 r5)].
28 As Giles J observed in Hooper Bailie, for a party
to proceed with litigation in the face of an enforceable agreement to follow a
dispute resolution procedure, may be an
instance of abuse of process in
accordance with the principle stated by MacKinnon LJ in Racecourse Betting
Control Board v Secretary for Air [1944] Ch 114 at 126, having reference to
an exclusive jurisdiction clause:
'. . . the court makes people abide by their contracts, and, therefore,
will restrain a plaintiff from bringing an action which he
is doing in breach
of his agreement with the defendant that any dispute between them will be
otherwise determined.'
29 This same approach was adopted by Rogers CJ in AWA Ltd
v Daniels (unreported, Supreme Court of NSW, 24 February 1992) and, at
least in principle, by Master Horton in Allco (Steel) Queensland Pty Ltd v
Torres Strait Pty Ltd (unreported, Supreme Court of Qld, 12 March 1990).
30 It is noteworthy that a different approach was taken in
Townsend v Coyne (unreported, Supreme Court of NSW, 26 April 1995, Young
J). In that case, Young J concluded that in the absence of the applicability
of
the Commercial Arbitration Act 1984 (NSW), the court is unlikely to
grant a stay unless there is an instance of abuse of process. With reasoning
similar to that of Master
Horton in Allco Steel, who emphasised the
overriding concern of the paramount jurisdiction of the court to determine
proceedings, Young J refused the application
for a stay, on the basis that he
doubted whether it would constitute an abuse of process to commence proceedings
without a prior
attempt to mediate.
31 The particular facts of Townsend concerned an
application for the removal of a caveat. Clearly, where urgent interlocutory
relief is sought by one party, it is unlikely
that the court will allow another
party to shelter behind a dispute resolution process so as to frustrate the
party obtaining that
urgent relief. Such considerations will inform the
court's exercise of it's discretion to grant a stay or adjournment as
appropriate.
Construction of the clause
32 The plaintiff's first submission is that on the proper
construction of the contracts, the provisions of clause 28.1 of the
Commercial
Terms (Rev 4 dated 21/1/97) are not expressed to be mandatory before
commencement of any legal action. They point to
the absence of the words
"shall be compulsory", which are found in clause 28.2, submitting that for
clause 28.1 to be treated as
mandatory, those words in clause 28.2 would need
to be treated as otiose, which is contrary to the presumption against 'mere
surplusage'
(per Somervell LJ in SA Maritime et Commerciale of Geneva v
Anglo-Iranian Oil Co Ltd [1954] 1 WLR 492 at 494-5).
33 Secondly, the plaintiff submits that having regard to the
definition of `Dispute' in clause 1.1(s) of the Commercial Terms,
clause 28 of
the contracts has no application to certain of
Aiton 's claims, namely, theclaim for quantum meruit and the claims for
damages for negligence or breaches
of the Trade Practices Act and the Fair Trading Act.
34 The plaintiff's third submission is that in any event, the
requirement of `good faith' imposed by clause 28 of the contracts,
is not such
as to `require of the parties participation in the process by conduct of
sufficient certainty for legal recognition of
the agreement': Hooper Bailie
Associated Ltd at 209. This is because (the plaintiff asserts) the concept
of 'good faith' is too imprecise to give rise to an enforceable obligation.
35 To my mind, the plaintiff's first submission is without
substance. It is not open to the parties to elect to comply or to
fail to
comply with the dispute resolution procedure. Upon the proper construction of
cl 28, the staged set of procedures stipulated
for in the clause require to be
strictly observed as necessary preconditions to the right to commence
proceedings. Clause 28.1 requires
that the parties "shall" make good faith
efforts to comply with the first stage procedure for dispute resolution
"before" either
party commences mediation, legal action or expert resolution.
Failing that process, clause 28.2 provides for mediation as the second
stage of
the dispute resolution procedure. Likewise, clause 28.2 uses the mandatory
language of "shall". In addition, the second
stage is expressly stated to be a
"compulsory" pre-condition to the right to proceed with legal action or the
expert resolution process.
36 As to the plaintiff's second submission, I am mindful that
the tender representations relied upon by the plaintiff are said
to have
induced the plaintiff to enter into the contracts. They are, therefore, so
closely connected with the terms of the contracts
that they "arise with respect
to the terms and conditions of this contract" [see the definition of Dispute in
cl 1.1]. [See generally
the manner in which Clarke JA dealt in IBM
Australia Ltd v National Distribution Services Ltd (1991) 22 NSWLR 466 at
483 with the ambit of the words `arising out of' and `related to this
agreement' - "It is not only claims arising out of the agreement
or any
breaches of it which are covered but also those related to the agreement and
any breaches of it. The phrases `in relation
to' or `related to' are of the
widest import and should not, in the absence of compelling reasons to the
contrary, be read down."]
The words `arise with respect to the terms and
conditions of this contract' by parity of reasoning, are of wide import not to
be
read down without compelling reasons. The negligence count is based
entirely upon the same representations. The plaintiff's quantum
meruit case is
based on additional works performed at the request or direction of the
defendant, its representatives or agents.
The quantum meruit claim is
inextricably linked with the plaintiff's contractual claims [Summons, Issues
Likely to Arise, par 15]
and so ought be treated together. The plaintiff's
second submission is rejected.
37 It is the plaintiff's third submission, as to the
certainty of the concept of `good faith', which commands greater substance.
38 Clause 28.1 expresses a requirement of 'good faith' in:
`The Purchaser and Supplier shall make diligent and good faith
efforts to resolve all Disputes in accordance with the provisions of
this Section 28.1 [General] before either party commences mediation,
legal
action or the expert Resolution Process, as the case may be. (1st
paragraph)
The Designated Officers shall meet in person and each shall afford
sufficient time for such meeting (or daily consecutive meetings)
as will
provide a good faith, thorough exploration and attempt to resolve the
issues. If the Dispute remains unresolved 5 Business Days following
such last meeting, the Designated Officers shall meet at least once
again
within 5 Business Days thereafter in a further good faith
attempt to resolve the Dispute. (2nd paragraph, 4th line).'
39 Clause 28.2:
`(h) The Parties agree to use all reasonable endeavours in good
faith to expeditiously resolve the Dispute by mediation.'
[emphasis added]
40 It appears that cl 28.1 amounts to an agreement to
negotiate disputes in good faith, as distinct from an agreement to conciliate
disputes in good faith.
41 The issue of whether the requirement of 'good faith' in
dispute resolution clauses creates obligations which are enforceable
in law is
examined below. It is convenient to turn first to dispute resolution clauses
generally.
ADR clauses as a precondition to litigation generally
42 There is no legislative basis for enforcing dispute
resolution clauses otherwise than those which provide for arbitration:
Commercial Arbitration Act 1984 (NSW). However, it is clear that if
parties have entered into an agreement to conciliate or mediate their dispute,
the Court may,
in principle, make orders achieving the enforcement of that
agreement as a precondition to commencement of proceedings in relation
to the
dispute: Hooper Bailie.
43 To achieve enforcement of such an agreement it is
essential that the agreement is in the Scott v Avery form - that is,
expressed as a condition precedent. Such a clause was seen not to offend the
general tenet of law that it is not
possible to oust the jurisdiction of the
court as it acted, in effect, as a postponement of a party's right to commence
legal proceedings
until the arbitration was concluded, not as a prohibition
against a party having such recourse: Scott v Avery [1856] EngR 810; (1856) 10 ER 1121.
Further, as mentioned previously, the agreement is enforced, not by ordering
the parties to comply with the dispute resolution procedures,
but by forbidding
them from using other procedures from which they have agreed to abstain until
the end of the dispute resolution
process.
44 The Court will not adjourn or stay proceedings pending
alternative dispute resolution procedures being followed, if the procedures
are
not sufficiently detailed to be meaningfully enforced: Elizabeth Bay
Developments Pty Ltd v Boral Building Services Pty Ltd (1995) 36 NSWLR
709.
45 In Hooper Bailie, Giles J framed the test for
enforcement in the following terms at 209:
`An agreement to conciliate or mediate is not to be
likened ... to an agreement to agree. Nor is it an agreement to negotiate, or
negotiate in good faith, perhaps necessarily
lacking certainty and obliging a
party to act contrary to its interests. Depending upon its express terms and
any terms to be implied,
it may require of the parties participation
in the process by conduct of sufficient certainty for legal
recognition of the agreement'
[Emphasis added]
46 In that case, the court dealt with a summons seeking to
prevent the defendant from continuing with an arbitration between
the parties.
The suit was brought on the basis that the defendant had agreed by exchange of
letters that the arbitration would not
continue until a process of conciliation
had concluded and the process had not concluded.
47 Giles J held that the parties had agreed to conciliation
in respect of the issues identified in the exchange of letters and
had agreed
that the arbitration would not resume until such conciliation was concluded.
After reviewing Australian authorities and
having reference to United States'
and English authorities, Giles J concluded that the procedure was sufficiently
certain to render
the agreement enforceable as a solicitor's letter set out the
procedure to be followed. Accordingly, his Honour ordered that the
arbitration
be stayed pending conclusion of the conciliation process.
48 In contradistinction, in Elizabeth Bay, a case
where Giles J again considered the enforceability of a dispute resolution
agreement, being an agreement to mediate, his Honour
held that there were two
compelling reasons why the agreement was not sufficiently certain to be
enforced in the circumstances.
The first, related to the inconsistency between
the mediation agreement and the guidelines setting out procedure. The second,
relevantly
to the issue now before me, related to the requirement (clause 11)
that parties attempt to negotiate their disputes in good faith.
49 His Honour stated at 716:
'..by cl 11 the parties also confirmed that they "enter[ed] into this
mediation with a commitment to attempt in good faith to negotiate
towards
achieving a settlement of the dispute". What did this mean?
On one view it was merely declaratory, a statement of the parties' states of
mind. It is difficult to regard the parties as having
undertaken in 1993 to
declare at a future time that they had (at the future time) a commitment to
good faith negotiations: first,
other than being a laudable emotion the
declaration itself would not advance the process of mediation, and secondly by
the future
time one or other of the parties may well not have had that
commitment. It is more likely that, as one of a number of paragraphs
expressing
rights and obligations in a formal legal agreement, cl 11 was intended to
impose an obligation to attempt to negotiate
in good faith. The obscurity in cl
11 is to be regretted, since it brought to the mediation agreement either a
legally peripheral
declaration likely to be disproved at the very time cl 11
was invoked or a purported obligation the recognition of which involved
formidable legal difficulty: the cumulative uncertainty of "commitment",
"attempt", "negotiate" and "in good faith" is forbidding.
I do not think it matters which view is taken of cl 11. It is not
easy to take a course requiring a party to assert a state of mind which it may
well not have, and even less easy to take
a course which compels a party to
commit itself to the vagueness of attempting in good faith to negotiate with
the other party to
the dispute. The latter difficulty lies not so
much in the ascertainment of the presence or absence of good faith, or even in
the uncertainty
of attempting, but rather in the necessary tension
between negotiation, in which a party is free to, and may be expected to, have
regard to self-interest rather
than the interests of the other party, and the
maintenance of good faith: see Hooper Bailie Associated Ltd v Natcon
Group Pty Ltd (at 209); Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991)
24 NSWLR 1 at 26-27; Walford v Miles [1992] 2 AC 128 at 138.'
[Emphasis added]
50 The plaintiff submits that the decisions of Giles J in
Hooper Bailie and Elizabeth Bay, mandate a holding that cl 28.1
is unenforceable not only because it is merely an agreement to negotiate, as
opposed to an agreement
to conciliate and/or to mediate, but also because it
contains a good faith requirement. Likewise, that cl 28.2 also containing the
good faith requirement, is unenforceable.
51 Giles J did not have before him, in either case, an
agreement to negotiate. In Hooper Bailie, his Honour drew a distinction
between an agreement to conciliate or mediate and an agreement to negotiate in
good faith, upholding
the former in principle and expressing doubt as to the
necessary certainty of the latter. However, his Honour's reasoning centred
upon an agreement to conciliate - the question of enforceability of an
agreement to negotiate as part of the dispute resolution mechanism,
not being
an immediate concern.
52 The status of agreements to negotiate in good faith was
considered by Hayne J who wrote the leading judgement in Con Kallergis Pty
Ltd T/A Sunlighting Australasia Pty Ltd) v Calshonie Pty Ltd (Formerly C W
Norris Pty Ltd) (1998) 14 BCL 201. In that case, a question arose as to
whether an agreement for valuation of variations was uncertain or incomplete
on
the grounds that the agreement provided that the price of the work was to be
negotiated by one party to the contract with a third
party. The argument
proceeded on the assumption that the contracting party's obligation to
negotiate, may properly be seen as an
obligation to negotiate in good faith or
to do so honestly and reasonably (at 211).
53 Although Hayne J was not prepared to countenance the
argument of uncertainty for the first time on appeal, his Honour made
the
following remarks in obiter at 211-212:
`It was submitted ... that even if the obligation undertaken .. was to
negotiate in good faith..., the obligation was still too uncertain
to admit
enforcement..... Although there may be difficult questions of fact
and degree about whether evidence of particular conduct reveals a lack of good
faith
or lack of honesty or reasonableness, the obligation to act in good faith
or honestly or reasonably is an obligation that is certain.... [See
eg Meehan v Jones [1982] HCA 52; (1982) 149 CLR 571 at 589 per Mason J. As his Honour there
said:
"The limitation that the purchaser must act honestly, or honestly and
reasonably, takes the case out of the principle that:
`. . . where words which by themselves constitute a promise are accompanied
by words which show that the promisor is to have a discretion or
option as to whether he will carry out that which purports to be the
promise, the result is that there is no contract on which an action
can be brought' . . .
Some of the writing in this area seeks to suggest that there can be only one
answer to the general question whether an agreement to
negotiate is
enforceable. The discussion by the members of the courts who decided Coal
Cliff and Trawl Industries, as well as the
discussion by Giles, J of the
problems he had to consider in Hooper Bailie and in Elizabeth Bay show that the
question may be more
complex than the simple statement of it may suggest and
that the answer to the problem may vary according to the precise terms of
the
agreement. They suggest that it is only when all of the circumstances are
known that it can be seen whether the obligations
of the parties (described as
"to negotiate") can be identified with certainty. And that is why it is now
too late to raise the point.
Norris has been deprived of the opportunity to
lead evidence about those matters.
Where, as I assume may be the case here, B and C must negotiate (B because
it is bound to A to do so and C because it is bound to
B to do so) and there is
a process for resolving any disagreement between B & C, I consider that the
obligation "to negotiate"
the price is certain.']
The contract considered in Walford v Miles was held to be uncertain because
either party could break off negotiations at any time
and for any reason. It
was held that the implication of an obligation to negotiate in good faith did
not cure the difficulty because
a negotiator, acting in good faith, might
nevertheless always break off negotiations. But unlike the kind of
contract considered in Walford v Miles, a contract of the kind now under
consideration (in which I assume there
is provision for resolution of disputes
between the negotiators) does provide for an end to the negotiation other than
the parties
to it retreating to their offices to nurse their pride and their
rejected bargaining position. If one party withdraws from the negotiations,
whether in the hope that the opposite party will re-open them with an improved
offer or for any other reason, the impasse between
the parties can be resolved
by one or other setting in train arbitration of the dispute or whatever other
process of dispute resolution
has been agreed. The matter will not stop with
the breaking off of negotiations.'
[Emphasis added]
54 Hayne J did not address the nature or content of an
obligation to negotiate in `good faith'.
55 Notwithstanding that Hayne J does leave this question
unanswered, his Honour's comments are instructive as they highlight
the
difference between, on the one hand, an `agreement to agree', which was
described by Lord Wensleydale in Ridgway v Wharton [1857] EngR 713; (1857) 10 ER 1287 at
1313 as `a contradiction in terms': `It is absurd to say that a man enters into
an agreement till the terms of that agreement
are settled', and on the other
hand, an `agreement to negotiate', where it constitutes part of a broader
dispute resolution process.
56 This point is clearly made by D Cremean in the following
passage:
`No justification exists for starting from the premise that an agreement to
negotiate in good faith is like an agreement to agree.
The two are
quite different. To adopt the analogy of an agreement to conciliate
or mediate, an agreement to negotiate should be viewed as obliging the parties
to participate in a negotiating process. A negotiating process, where offers
and counteroffers are made, may or may not lead to
agreement. But agreement is
not necessarily the outcome of the process. Agreement in consequence
of agreement is not guaranteed. An agreement to agree, on the other
hand, obliges no participation in a negotiating process because, in theory,
agreement has already
been reached. Agreement in consequence of agreement is
guaranteed.'
[Cremean D, `Agreements to negotiate in good faith' (1996) 3 Commercial
Dispute Resolution Journal 61 at 63 - emphasis added].
57 It is important not to collapse the distinction by
confusing what are referred to here, as an `agreement to negotiate'
(agreement to negotiate as part of a process), with what are really,
`agreements to agree' (agreement to negotiate to achieve agreement). An
example where phraseology alone may confuse the issue, is found in Courtney
& Fairbairn Ltd v Tolaini Bros (Hotels) Ltd [1975] 1 WLR 297, where
Lord Denning (with whom Lord Diplock agreed), in considering an agreement "to
negotiate fair and reasonable contract sums",
stated:
`If the law does not recognise a contract to enter into a contract (when
there is a fundamental term yet to be agreed) it seems to
me it cannot
recognise a contract to negotiate. The reason is because it is too uncertain to
have any binding force. No court could
estimate the damages because no one
could tell whether the negotiations would be successful or would fall through:
or if successful
what the result would be. It seems to me that a contract to
negotiate, like a contract to enter into a contract, is not a contract
known to
the law.'
[at 301]
58 One commentator has suggested that the decision in Con
Kallergis turns on its particular facts. P Mead, `ADR Agreements: Good
Faith and Enforceability' (1999) 10(1) Australian Dispute Resolution
Journal 40 at 43 suggests that there is a distance between an agreement on
the one hand, which purports to compel one party to that agreement
to attempt
to negotiate with a third party, failing which an alternative procedure
somewhat removed is expressly prescribed, and
on the other hand, an agreement
to negotiate which itself forms part of the dispute resolution mechanism.
59 To my mind, this is a false distinction. As discussed
below, the focus ought properly be on the process provided by the
dispute resolution procedure. Provided that no stage of the dispute resolution
mechanism is itself an `agreement
to agree' and therefore void for uncertainty,
there is no reason why, in principle, an agreement to attempt to negotiate a
dispute
may not itself constitute a stage in the process.
Procedure to be certain
60 In Hooper Bailie, Giles J stated at 206:
`What is enforced is not cooperation and consent but participation
in a process from which consent might
come.'
[Emphasis added]
61 It is for this reason that that the process from which
consent might come must be sufficiently certain.
62 This is not to suggest that the process need be overly
structured. Certainly, if specificity beyond essential certainty were
required, the dispute resolution procedure may be counter-productive as it may
begin to look much like litigation itself.
63 In Elizabeth Bay, Giles J noted at 714 that apart
from the express agreement in clause 11 to enter into negotiation in good
faith, the agreement to
mediate did not lay down a procedure for the mediation
process other than the parties' presence or representation, the mediators
discretion to hold private sessions with any party to the mediation and the
stipulation that, unless otherwise agreed, the parties
would within 14 days of
the agreement provide to each other and to the mediator, a short statement of
issues outlining the nature
of the dispute and the various matters in issue.
His Honour concluded that the agreement to mediate being so open-ended, was
unworkable,
as the 'process to which the parties had committed themselves would
come to an early stop when, prior to the mediation, it was asked
what the
parties had to sign and the question could not be answered' [at 715].
64 In a similar vein, the plaintiff submits that beyond the
alleged uncertainty of the 'good faith' requirement, the process
of mediation
set out in cl 28.2 lacks sufficient certainty to be given legal effect in
that:
(1) there are no provisions dealing with the remuneration to be paid to a
mediator, if agreed or appointed pursuant to paragraph (c)
of clause
28.2;
(2) there are no provisions dealing with what is to happen if one or both of
the parties do not agree with the fees proposed by any
such mediator, or what
is to happen if the nominated (or agreed) mediator declines appointment for
this or any other reason.
65 The mediation agreement is indeed silent about the
remuneration to be paid to the mediator and the effect of a declined
appointment.
66 To my mind, of particular difficulty is the lack of a
provision in the clause setting out a mechanism for apportionment of
the
mediator's costs. Whilst it may be arguable that a term should be implied to
the effect that the parties would jointly share
the reasonable remuneration of
the mediator, in my view that term may not be implied. The well known
conditions necessary to ground
the implication of a term are as follows:
(1) it must be reasonable and equitable.
(2) it must be necessary to give business efficacy to the contract, so that
no term will be implied if the contract is effective
without it.
(3) it must be so obvious that `it goes without saying'.
(4) it must be capable of clear expression.
(5) it must not contradict any express term of the contract.'
[Codelfa Construction Pty Ltd v State Rail Authority of NSW (1981) 149
CLR 337 at 347 per Mason J applying BP Refinery (Westernport) Pty Ltd v
Hastings Shire Council (1977) 52 ALJR 20 at 26].
67 To my mind, the suggested implied term does not satisfy
the third of these conditions. There is a strong argument that the
parties may
have intended that the same regime as that stipulated in cl 28.3(h) apropos the
costs, upon the invocation of cl 28.3
of an expert, was to apply in respect of
the costs of a mediator. One can easily imagine that the parties may have
intended that
the mediator be given power to determine costs. Equally, the
parties may have intended that they be obliged to share the mediators
costs.
Hence the suggested implied term is not so obvious that `it goes without
saying'.
68 A further question going to certainty relates to the
method of determining the mediator's remuneration. In this regard, whilst
it
would have been preferable to stipulate the procedure to be followed to achieve
such determination, I do not see the matter as
affecting the enforceability of
the agreement.
69 I note that in view of decided Australian case law,
commentators such as L Boulle and R Angyal have noted that, for a mediation
clause to be enforceable, it must satisfy the following minimum requirements [I
interpolate to note that in my opinion, these minimum
requirements ought be
seen as applying to any stage in a dispute resolution clause as the case may
be, not just to mediation] :
*It must be in the form described in Scott v Avery. That is, it should
operate to make completion of the mediation a condition precedent
to
commencement of court proceedings.
*The process established by the clause must be certain. There cannot be
stages in the process where agreement is needed on some course
of action before
the process can proceed because if the parties cannot agree, the clause will
amount to an agreement to agree and
will not be enforceable due to this
inherent uncertainty.
*The administrative processes for selecting
a mediator and in determining the mediator's
remuneration should be included in the clause and, in the event that
the parties do not reach agreement, a mechanism for a third party to make the
selection will be necessary
*The clause should also set out in detail the process of mediation to be
followed - or incorporate these rules by reference. These
rules will also need
to state with particularity the mediation model that will be used.
[see Australian Law Reform Commission, Review of the Adversarial System of
Litigation, Issues Paper 25, June 1998, Chapter 6, par 6.20 - emphasis
added].
70 It follows that the subject mediation clause is
unenforceable.
71 To my mind, the mediation clause is not severable from the
negotiation clause. The two are intended to walk together as a
staged
procedure, constituting the dispute resolution process as agreed between the
parties. As such, the agreement to negotiate
must also be unenforceable.
72 In deference, however, to the detailed submissions
advanced on other aspects of the matter, and against the possibility that
my
view of the inability to imply the above term be incorrect, I propose to deal
with the other issues raised.
73 As to the plaintiff's submission relating to the absence
of provisions dealing with what is to happen if the nominated (or
agreed)
mediator declines appointment for any reason, it is to be noted that cl 28.2
provides a clear mechanism for the appointment
of a mediator and in the event
of disagreement as to his or her identity, then the mediator is to be appointed
by the President for
the time being of the New South Wales Bar Association. If
a nominated mediator declined appointment on some basis then presumably,
the
nomination process would merely be reactivated. The plaintiff's submission on
this issue is without substance.
74 To my mind, where parties agree to follow a dispute
resolution procedure as a condition precedent to either party commencing
proceedings, it is important that the parties be able to determine when that
procedure has come to an end. Clearly, conclusion of
the procedure is not to be
equated with resolution of the issues in dispute: see Hooper Bailie at
203
75 While this question might be thought to be academic,
ability to determine the conclusion of the process and thus, the point
at which
the parties may be free to pursue litigation or expert resolution, must be a
telling indicium of the certainty and thus enforceability of the
agreement. This is because conclusion of the procedure must surely be
determined by the terms of the
agreement itself: see R Angyal, `The
enforceability of agreements to mediate' (1994-5) 12 Australian Bar
Review 1 at 10.
76 I read the words "exchange of the pertinent information"
in cl 28.1 as requiring to be exchanged within the fifteen day period
between
submission of the first and second dispute notices.
77 Clause 28 clearly stipulates time frames within which the
staged procedures for attempting dispute resolution are to be followed
in the
absence of agreement to the contrary. As such, it cannot be said that in the
absence of agreement, the parties would not
know when the condition precedent
is satisfied and when they thus have the option of instituting proceedings.
78 But for the matter identified above in relation to the
allocation of the mediator's costs, I am satisfied that the remainder
of the
procedure provided for in the subject contracts (disregarding the good faith
requirement for the moment) would be sufficiently
certain to be enforced. My
finding that the remainder of the procedure is in fact sufficiently certain, is
in part informed by what
I see to be the parties' ability to determine when the
procedure provided for in clause 28 has concluded.
`Good faith' as a requirement of an ADR clause
79 Clearly, the purpose of the good faith requirement in cl
28 is to require the parties to have a commitment to the dispute
resolution
process in advance of any dispute arising.
80 It has been said that an `agreement to negotiate a dispute
in good faith' is unenforceable for the same reasons why an `agreement
to
agree' is unenforceable. This position is made clear by Lord Ackner in
Walford v Miles [1992] 2 AC 128 at 138, with whom Lord Keith, Lord Goff,
Lord Jauncey and Lord Browne-Wilkinson agreed:
`The reason why an agreement to negotiate, like an agreement to agree, is
unenforceable, is simply because it lacks the necessary
certainty. The same
does not apply to an agreement to use best endeavours. This uncertainty is
demonstrated in the instant case
by the provision which it is said has to be
implied in the agreement for the determination of the negotiations. How can a
court
be expected to decide whether, subjectively, a proper
reason existed for the termination of negotiations? The answer suggested
depends upon whether the negotiations have been
determined "in good faith."
However the concept of a duty to carry on negotiations in good faith
is inherently repugnant to the adversarial position of the parties when
involved in negotiations. Each party to the negotiations is entitled
to pursue his (or her) own interest, so long as he avoids making
misrepresentations.
To advance that interest he must be entitled, if he thinks
it is appropriate, to threaten to withdraw from further negotiations
or to
withdraw in fact, in the hope that the opposite party may seek to reopen
negotiations by offering him improved terms. Mr Naughton,
of course accepts
that the agreement upon which he relies does not contain a duty to complete the
negotiations. But that still leaves
the vital question - how is a vendor ever
to know that he is entitled to withdraw from further negotiations?' How is the
court to
police such an "agreement?" A duty to negotiate in good faith is as
unworkable in practice as it is inherently inconsistent with
the position of a
negotiating party. It is here that the uncertainty lies. In my judgment,
while negotiations are in existence
either party is entitled to withdraw from
those negotiations, at any time and for any reason. There can be thus no
obligation to
continue to negotiate until there is a "proper reason" to
withdraw. Accordingly a bare agreement to negotiate has no legal
content.'
[emphasis added]
81 A similar position was adopted by Giles J in Elizabeth
Bay at 716 who emphasised the 'necessary tension between negotiation, in
which a party is free to, and may be expected to, have regard
to self-interest
rather than the interests of the other party, and the maintenance of good
faith'. For Giles J, it was this tension,
rather than the difficulty inherent
in attempting to ascertain the presence or absence of good faith, which was
determinative of
the `forbidding' `vagueness' of cl 11.
82 With great respect, I disagree - such tension ought not be
the linchpin in an argument that a good faith requirement in negotiation
is too
vague and uncertain to be meaningfully enforced.
83 It is clear that a tension may exist between negotiation
from a position of self-interest and the maintenance of good faith
in
attempting to settle disputes. However, maintenance of good faith in a
negotiating process is not inconsistent with having regard
to self-interest:
see D Cremean, `Agreements to negotiate in good faith' (1996) 3 Commercial
Dispute Resolution Journal 61 at 64. As Cremean points out at 65, "good
faith is not co-extensive with selflessness." It does not require a party to
make concession
upon concession. Clearly, good faith negotiation is not the
equivalent of agreement, is not a synonym for settlement, and does not
require
any particular outcome: see C McPheeters, `Leading horses to water: May courts
which have the power to order attendance at
mediation also require good-faith
negotiation?' (1992) 2 Journal of Dispute Resolution 377 at 391
84 To further take up the point raised by Lord Ackner in
Walford, nor should good faith prevent a party from withdrawing from
negotiations if appropriate.
85 I turn now to the related argument, that the concept of
'good faith' is too vague and uncertain to be enforceable. This argument
was
forcefully put by Handley JA in Coal Cliff Collieries Pty Ltd v Sijehama Pty
Ltd (1991) 24 NSWLR 1 at 41-2, where his Honour stated that there were no
identifiable criteria by which the content of the obligation to negotiate in
good faith could be determined. Handley JA pointed out that:
`Negotiations are conducted at the discretion of the parties. They may
withdraw or continue; accept, counter offer or reject; compromise
or refuse,
trade-off concessions on one matter for gains on another and be as unwilling,
willing or anxious and as fast or slow as
they think fit.'
86 Accordingly, his Honour concluded that 'these
considerations demonstrate that a promise to negotiate in good faith is
illusory
and therefore cannot be binding'.
87 In Asia Pacific Resources Pty Ltd v Forestry
Tasmania (unreported, Supreme Court of Tasmania FC, 4 September 1997), the
Full Court considered `good faith' in the context of an implied
term to
negotiate in good faith. Wright J, in rejecting the implication of such a term
at law, stated:
`The novel `good faith' concept, ... whilst capable of statement with
beguiling simplicity can never be a pure question of law ...
because even its
most ardent proponents appear to recognise that `good faith' is incapable of
abstract definition and can only be
assessed as being present or absent if the
relevant facts are known or are capable of being known - a little like
proximity in the
law of negligence'. [at 12]
88 While there may be a vagueness about a `good faith'
obligation, it is to be noted that there is a vagueness about many commercial
contracts: see D Cremean, `Agreements to negotiate in good faith' (1996) 3
Commercial Dispute Resolution Journal 61 at 64. The author draws
attention to the statement of Ormiston J in Vroon BV v Foster's Brewing
Group Ltd [1994] 2 VR 32 at 67:
`. . . the courts should strive to give effect to the expressed agreements
and expectations of those engaged in business, notwithstanding
that there are
areas of uncertainty and notwithstanding that particular terms have been
omitted or not fully worked out.'
89 Further, it is worthwhile remembering the observation of
Barwick CJ (with whom McTiernan, Kitto and Windeyer JJ agreed) in
Council of
the Upper Hunter County District v Australian Chilling and Freezing Co Ltd
[1968] HCA 8; (1968) 118 CLR 429 at 436-437:
'But a contract of which there can be more than one possible meaning or
which when construed can produce in its application more than
one result is not
therefore void for uncertainty. As long as it is capable of a meaning, it will
ultimately bear that meaning which
the courts, or in an appropriate case, an
arbitrator, decides on its proper construction: and the court or arbitrator
will decide
its application. The question becomes one of construction, of
ascertaining the intention of the parties, and of applying it... so
long as the language used by the parties, to use Lord Wright's words
in Scammell (G) and Nephew Ltd v Ouston [1941] AC 251 is not 'so
obscure and so incapable of any definite or precise meaning that the Court is
unable to attribute to the parties any particular
contractual intention', the
contract cannot be held to be void or uncertain or meaningless. In
the search for that intention, no narrow or pedantic approach is warranted,
particularly in the case of commercial arrangements.
Thus will uncertainty of
meaning, as distinct from absence of meaning or of intention, be
resolved.'
[emphasis added]
90 I note that one submission made by Mr Rudge SC for the
defendant is that the good faith requirements in clause 28 are satisfied
by a
party merely attending the stages of the dispute resolution procedure.
91 I do not think this can be correct.
92 The very nature of the words `good faith' must go toward
the conduct of the parties involved in the agreed dispute resolution, as
inclusion of those words connotes something more than mere attendance
in the
process.
93 I turn now to examine whether the words `good faith' in
cl 28 have meaning of sufficient certainty to be enforceable.
94 In Renard Constructions (ME) Pty Ltd v Minister for
Public Works (1992) 26 NSWLR 234, Priestley JA at 263-268 closely examined
the notions of good faith drawing extensively from developments in the United
States, Canada,
Australia and New Zealand. The analysis in its detail, context
and conclusions draws together the several strands which argue strongly
for the
recognition in Australia of the implied obligation of good faith in the
performance and enforcement of contracts as is clearly
recognised in the United
States. At 263-264, Priestley JA remarked as follows in considering an implied
obligation of good faith
in contract:
`The kind of reasonableness I have been discussing seems to me to have much
in common with the notions of good faith which are regarded
in many of the
civil law systems of Europe and in all States in the United States as
necessarily implied in many kinds of contract.
Although this implication has
not yet been accepted to the same extent in Australia as part of judge-made
Australian contract law,
there are many indications that the time may be fast
approaching when the idea, long recognised as implicit in many of the orthodox
techniques of solving contractual disputes, will gain explicit recognition in
the same way as it has in Europe and in the United
States.
95 His Honour continued at 265 that:
There is a close association of ideas between the terms unreasonableness,
lack of good faith and unconscionability. Although they
may not always be
co-extensive in their connotations, partly as a result of varying senses in
which each expression is used in different
contexts, there can be no doubt that
in many of their uses there is a great deal of overlap in their
content.'
96 An extract from the conclusions in the judgment of
Priestley JA in Renard was referred to by Finn J in Hughes Aircraft
Systems International v Air Services (1997) 146 ALR 1 at 36-37, who
indicated that his own view inclined to that of Priestley JA. Finn J, when
dealing with a suggested general implied
duty of good faith and fair dealing,
said:
`(a) Good faith and fair dealing
The applicant's submission is that the proposed term is a manifestation of a
general implied duty of good faith and fair dealing.
I have, in consequence,
been invited to embrace the conclusion of Priestley JA in Renard Constructions
(ME) Pty Ltd v Minister for
Public Works, above, at 268 that:
people generally, including judges and other lawyers, from all strands of
the community, have grown used to the courts applying standards
of fairness to
contract which are wholly consistent with the existence in all contracts of a
duty upon the parties of good faith
and fair dealing in its performance. In my
view this is in these days the expected standard, and anything less is contrary
to prevailing
community expectations.
The primary basis upon which I was asked to make this implication was
unrelated specifically to pre-award contracts in procurement
cases. Rather as
suggested in the Restatement of Contracts, Second, Art 205, the implied duty
existed in "every contract". I make
this particular observation because, as
later discussed, a duty to act fairly in some form appears to have been
accepted in other
Commonwealth jurisdictions in pre-award contract contexts:
see Pratt Contractors Ltd v Palmerston North City Council, above, at 478,
483;
Martselos Services Ltd v Arctic College (1994) 111 DLR (4th) 65; and see
generally N Seddon, Government Contracts, pp 235ff.
The respondent in contrast has pressed upon me the judgment of Gummow J,
then of this court, in Service Station Association Ltd v
Berg Bennett &
Associates Pty Ltd [1993] FCA 445; (1993) 45 FCR 84; 117 ALR 393. After considering North
American jurisprudence's acceptance of an implied duty of good faith and fair
dealing, his Honour observed,
at FCR 96; ALR 406:
Anglo-Australian contract law as to the implication of terms has heretofore
developed differently, with greater emphasis upon specifics,
rather than the
identification of a genus expressed in wide terms. Equity has intervened in
matters of contractual formation by
the remedy of rescission, upon the grounds
mentioned earlier. It has restrained freedom of contract by inventing and
protecting
the equity of redemption, and by relieving against forfeitures and
penalties. To some extent equity has regulated the quality of
contractual
performance by the various defences available to suits for specific performance
and for injunctive relief. In some,
but not all, of this, notions of good
conscience play a part. But it requires a leap of faith to translate
these well established doctrines and remedies into a new term as to the quality
of contractual
performance, implied by law [emphasis added].
Needless to say I have been asked to remain in Gummow J's company and not
take that leap.
Other Australian authority on this duty is indecisive. Notably, in the Full
Court of this court in News Ltd v Australian Rugby Football
League Ltd [1996] FCA 1256; (1996)
139 ALR 193 at 285, it was found unnecessary to consider whether such a duty
should be implied in that case. The court did not enter upon the
question of
whether our law recognised such an implication as a matter of law.
If the matter stood merely as one of choice between two conflicting views, I
would, as a matter of comity, adhere to that of Gummow
J: see Bank of Western
Australia Ltd v FCT (1994) 55 FCR 233 at 255; 125 ALR 605 on "comity" and the
cases referred to therein. This is an arena in which opinions, judicial and
scholarly, differ often sharply:
see, eg I Renard, "Fair Dealing and Good
Faith", in Saunders (ed), Courts of Final Jurisdiction, Federation Press,
Sydney, 1996.
And it is difficult to disagree with Gummow J's
characterisation both of the methodology of Australian contract law while it
remained
subject to direct English control and of the role assumed by equity in
regulating contract formation and performance.
Having said this, it is also appropriate to indicate that my own view
inclines to that of Priestley JA. Of that inclination I would
say only this.
Fair dealing is a major (if not openly articulated) organising idea in
Australian law. It is unnecessary to enlarge
upon that here. More germane to
the present question, the implied duty is, as is well known, an accepted idea
in the contract law
of the United States and, probably, of Canada: see EA
Farnsworth, "Good Faith in Contract Performance" in J Beatson and D Friedmann
(eds), Good Faith and Fault in Contract Law, Clarendon Press, Oxford, 1995;
for a convenient collection of some of the voluminous
literature in the United
States debating the meaning of the implied duty, see Farnsworth on Contracts,
vol 2, Little, Brown &
Co, Boston 1990, para 7.17a; for an English view
see eg Rt Hon Lord Justice Staughton, "Good Faith and Fairness in Commercial
Contract
Law" (1994) 7 Jo Contract Law 193; and see Livingstone v Roskilly
[1992] 3 NZLR 230 at 237-8. Its status in civil law is well recognised: see
eg HK Lücke, "Good Faith and Contractual Performance" in PD Finn
(ed),
Essays on Contract, Law Book Co, Sydney, 1987; JF O'Connor, Good Faith in
English Law, Dartmouth, 1990, Ch 8. It has been propounded as a fundamental
principle to be honoured in international commercial contracts: see eg
Unidroit, Principles
of International Commercial Contracts, International
Institute for the Unification of Private Law, Rome, 1994, Art 1.7. Its more
open recognition in our own contract law is now warranted: cf Sir Anthony
Mason, "Contract and its Relationship with Equitable Standards
and the Doctrine
of Good Faith", The Cambridge Lectures, 1993 (8 July 1993); notwithstanding
the significant adjustments this would
occasion to some of contract law's
apparent orthodoxies: see eg Lücke, above, pp 177ff.
I should add that, unlike Gummow J, I consider a virtue of the implied duty
to be that it expresses in a generalisation of universal
application, the
standard of conduct to which all contracting parties are to be expected to
adhere throughout the lives of their
contracts. It may well be that, on
analysis, that standard would be found to advance little the standard that
presently may be exacted
from contracting parties by other means: cf the
standard applied in Conoco v Inman Oil Co 774 F2d 895 (1985) at 908. But
setting
the appropriate standard of fair dealing is, in my view, another matter
altogether from acceptance of the duty itself.'
97 In Alcatel Australia Ltd v Scarcella (1998) 44
NSWLR 349 Sheller JA (with whom Powell and Beazley JJA agreed), stated at 369
as follows:
'The decisions in Renard Constructions and Hughes Bros mean that in New
South Wales a duty of good faith, both in performing obligations and
exercising rights, may by implication be imposed upon parties as part
of a contract.'
[Emphasis added]
98 It appears to be common sense that as an obligation to act
in 'good faith' may, in principle, be legally recognised as an
implied or
imputed obligation, there is no reason why it should be struck down as
uncertain in cases where there is an express contractual
term, as in the
present case.
99 In Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd
(1991) 24 NSWLR 1 the majority of the Court of Appeal considered that a
preliminary contract to negotiate in good faith was possible, although it was
not made out on the facts (Mason P with whom Waddell A-JA agreed, Handley JA
disagreeing on this point). Special leave to appeal
was refused by the High
Court: (1992) 4 Leg Rep SL 2.
100 The law in this area can not, however, be regarded as
settled, as while the reasoning of Handley JA found support in the
House of
Lords' decision in Walford v Miles, the New South Wales Court of Appeal
found it unnecessary to deal with the matter in Australis Media Holdings Pty
Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104: see Healey v
Commonwealth Bank of Australia (unreported, Supreme Court of NSW - CA, 8
December 1998) per Giles JA at 8.
101 In Tobias v QDL Ltd (unreported, Supreme Court of
NSW, 12 September 1997, Simos J), the court considered whether an alleged
obligation to `review and
negotiate in good faith' the terms of repayment of an
amount outstanding under a mortgage to the satisfaction of both parties,
gave rise to a binding legal obligation.
102 Simos J, who relied upon the reasoning of Handley JA in
Coal Cliff, held that it did not, being of the opinion that `at least in
the circumstances of the present case, the alleged obligation is illusory
[being no more than an agreement to agree] and, accordingly did not relevantly
exist'.
103 To my mind, notwithstanding the unsettled status of law
in this area, Tobias, like Coal Cliff, can be distinguished from
the question presently before me. Both cases concern a clause requiring the
negotiation in good faith
of a substitute agreement. In the
circumstances of each case, such a clause was said to be illusory (though the
majority in Coal Cliff was prepared to countenance such an agreement in
appropriate circumstances). In cl 28, however, the parties have made their
agreement
to follow a process of dispute resolution as a precondition to
litigation - the obligation of good faith relates to performance of the
agreement, and is, therefore, quite different.
104 To my mind, the following comments of Simos J are
instructive on this distinction:
`..in my opinion, there is significant difference between an obligation to
"act" in good faith, compliance with which obligation may,
in certain
circumstances, be capable of being assessed by reference to some appropriate
legal and/or factual standard, on the one
hand, and on the other hand, an
alleged obligation to "negotiate" in good faith to achieve an outcome
"satisfactory" to both parties,
which, in my opinion, as I have said, is no
more than an agreement to agree giving rise to no legally binding
obligation.'
105 There is clearly a difference between the obligations of
good faith contained in cl 28 and the alleged obligation considered
in
Tobias. The former, being an obligation to `negotiate' in good faith
in an endeavour to reach agreement, is not to be equated
with the latter, being "an obligation to `negotiate' in good faith to achieve
an outcome satisfactory to both parties". The former
is only an obligation to participate in a negotiating process which may, but
not must, achieve an outcome, which if achieved, may, but not must,
be viewed as satisfactory to both parties. The outcome may indeed be viewed as
unsatisfactory by either or both parties, but as
an outcome which, for whatever
reason, both sides accept as resolving the dispute.
106 It is interesting to note how the words 'good faith' have
been treated in academic writings.
107 In Brownsword, Hird & Howells (eds) Good Faith in
Contract - Concept and Context, Ashgate, Dartmouth, 1999, 'good faith' is
described (at 3) as an elusive idea, taking on different meanings and emphases
in different
contexts.
108 A question arises as to whether the law surrounding the
notion of 'good faith' as it relates to a general duty of good faith
in the
performance of a contract, can be imported to give content to the good faith
requirement in cl 28.
109 The meaning of `good faith', as it relates to performance
of contractual obligations, was comprehensively explored in a paper
by Justice
Cole: TRH Cole, `Law - All in good faith' (1994) BCL 18. His Honour
noted at 19 that there is "no shortage of possible definitions for the term
`good faith' but there does not appear
to be one universally accepted
definition." In his overview of academic analysis on the subject, Cole J drew
attention to the myriad
of possible definitions for the phrase. Similarly, PD
Finn in comments that the `good faith issue' is both controversial and complex.
It does not admit a simple (single) answer: `Commerce, the Common Law and
Morality' [1989] MelbULawRw 5; (1989) 17 MULR 87
110 Notwithstanding the difficulties inherent in defining the
concept, Cole J concludes that the experience overseas suggests
that good faith
is a concept that has independent meaning and substance [at 20].
111 Interestingly, many commentators, rather than attempting
to affirmatively define good faith, approach the issue by highlighting
what
does not constitute good faith. For instance, in G Shalev, `Negotiating in
Good Faith' in S Goldstein (ed) Equity and Contemporary Legal
Developments, The Hebrew University of Jerusalem, Jerusalem, 1992, the
author states:
`The concept of good faith cannot be independently defined or reduced to
rigid rules; it acquires substance from the particular events
that take place
and to which it is applied. The difficulty of defining the good faith
principles results also from the fact that
it is not intended to dictate
certain modes of behaviour. It is hard to say when good faith exists in a
factual setting; it is much
easier, and more common , to point to its
absence.'
112 In K Kovach, `Good faith in mediation - requested,
recommended, or required? A new ethic' (1997) South Texas Law Review 575
at 612, the author includes the following as signs that a party is negotiating
in bad faith: `unexpected delays in answering correspondence;
postponement of
meetings; sending negotiators without authority to settle; repudiating
commitments made during bargaining; shifting
positions; interjecting new
demands; insisting on a verbatim transcript of the negotiation; refusal to sign
a written agreement;
unilateral action; and withholding valuable
information.'
113 In Canada, it has been judicially observed that 'good
faith' cannot be defined except by providing modern examples of bad
faith
behaviour': Gateway Realty Ltd v Arton Holdings Ltd (No 3) (1991) 106
NSR (2d) 180 at 197; affirmed (1992) 112 NSR (2d) 180.
114 This approach is evident in Australian courts. For
instance, it has been held that failure to co-operate at a mediation
conference
or adopting an obstructive attitude in regard to an attempt to narrow issues,
may constitute a lack of good faith. Accordingly,
this may lead to adverse
costs orders being made against the unco-operative or obstructive party in
later court proceedings: Capolingua v Phylum Pty Ltd (1991) 5 WAR 137.
In Capolingua v Phylum, Ipp J held that where it was later shown that
issues would otherwise have been narrowed, this was a relevant factor in
awarding
costs in respect of a later trial that had been unnecessarily
extended.
115 To my mind, however, reference to what good faith is not,
does not adequately give content to the obligation at any particular
stage. In
saying this, I recall the comments of Handley JA in Coal Cliff at 43.
With respect I do not, however, agree with Handley JA to the extent that his
Honour remarks that determination of bad faith
does not 'even provide guidance'
as to the 'content of the obligation at any particular stage'.
116 The following observations of Brownsword, Hird &
Howells (supra) go towards on an affirmative understanding of the good
faith
concept:
`It is commonplace that good faith can be read as having both a subjective
sense (requiring honesty in fact) and an objective sense
(requiring compliance
with standards of fair dealing). [I interpolate to note the footnote
reference to the UNIDROIT principles of International Commercial Contracts,
Article 1.106(1)
which provides that each party, in `exercising his rights and
performing his duties ...must act in accordance with good faith and
fair
dealing'. The authors point out that the Commission takes `good faith' to mean
`honesty and fairness in mind, which are subjective
concepts', and `fair
dealing' to mean `observance of fairness in fact which is an objective
test'.] It is also commonplace that the most troublesome aspects of good
faith relate to its objective dimension. In particular, if good
faith is
understood as prescribing standards of fair dealing, who are the good-faith
standard setters, by what authority do they
set such standards, and what are
the standards that they so set?' [at 4]
117 In this context, it is instructive to examine the impact
lexicon plays in our understanding of the notion of good faith.
118 In light of the interest generated by international
instruments such as the UNIDROIT Principles of International Commercial
Contracts prepared by the International Institute for the Unification of
Private Law (Rome: UNIDROIT, 1994), which specifically refer to a
requirement
of "good faith" in contracts, the Quebec Research Centre of Private and
Comparative Law at McGill University set about
preparing partner dictionaries,
in French and English, which set out the fundamental vocabulary of Quebec
private law.
119 `Good faith' as it relates to contracts, was chosen by
the Editorial Committee as the first term to be presented as a sample
in a
paper published in advance of the release of the dictionary. The Editorial
committee stated as follows:
`...the concept of good faith may now be thought of as one of the cannons of
international contract law. Since the notion of good
faith is seen as
fundamental to understanding all aspects of the law of contract, civilians
generally express surprise at how little
place "good faith' occupies as a
formal construct in the Common Law tradition. This is not to say "good faith"
is absent in the Common
Law - on the contrary - but its mode of
expression is such that it may be buried in the cases of that tradition rather
than expressed formally as an abstract principle. This is especially
problematic when it comes to articulating "good faith" in English, the language
most commonly associated with
Common law parlance, in a document such as the
UNIDROIT Principles. In this respect, the usage of good faith in English
civilian
parlance in Quebec is of particular interest.
It is often said that in Civil law, "good faith" is not only understood in a
subjective manner but also objectively, whereas Common
lawyers tend to measure
"good faith" on a subjective basis corresponding essentially to a given actor's
state of mind. In order
to ensure the notions of "good faith" and "bonne foi"
be taken as equivalents, the expression "good faith and fair dealings" was
chosen to underline the objective aspect of "good faith" in the EUROPEAN
Principles and the UNIDROIT Principles. In this choice
of terms, there is a
lingering sense that law's expression in French corresponds naturally to the
Civil law and that English and
Common law are also more natural partners. Yet,
the English language may certainly be thought of as sufficiently elastic to
express
the civilian notion of good faith. English-speaking civilians in Quebec
do not feel any need to add the expression "fair dealings"
in order to make the
scope of the notion of good faith clearer.
GOOD FAITH Loyalty, honesty, in the exercise of civil
rights
[Emphasis added]
120 Turning specifically to the proposition that the mode of
expression of good faith is buried in the Common law tradition:
it may be that
Australian courts have already developed a concept akin to the notion of good
faith.
121 In United States Surgical Corp v Hospital Products
International Pty Ltd [1982] 2 NSWLR 766 at 800 McLelland J observed that
the duty of good faith performance in contract law of New York/Connecticut was
not materially different
from the implied business efficacy principle. That
is, where in a written contract it appears that both parties have agreed that
something will be done, a court will imply a term that 'each agrees to do all
that is necessary to be done on his part for the carrying
out of that thing,
though there may be no express words to that effect': Mackay v Dick
(1881) 6 AppCas 251 per Blackburn L at 263, approved by the High Court in
Secured Income Real Estate (Aust) Ltd v St Martins Investments Pty Ltd
[1979] HCA 51; (1979) 144 CLR 596.
122 In Secured Income Mason J made clear at 607-8 that
this rule of construction does more than oblige contracting parties to
cooperate so that each may
perform their obligations under the contract,
rather, it ensures that contracting parties do all that it necessary to carry
out the
contract.
123 Further, parties are subject to a universal duty to act
honestly: Meehan v Jones [1982] HCA 52; (1982) 149 CLR 571 per Gibbs CJ at 580-581; per
Mason J at 589-590; per Wilson J at 597-598.
124 To my mind, a notion of good faith is implicit in any
alternative dispute resolution procedure, as without it there is no
chance of
reaching a mutually satisfactory conclusion. Indeed, literature on alternative
dispute resolution frequently includes
an explicit comment that good faith is
part of the process: K Kovach, `Good faith in mediation - requested,
recommended, or required?
A new ethic' (1997) South Texas Law Review
575.
125 Certainly, in Allco Steel, Master Horton appears
to have taken as a given that the dispute resolution clause, cl 4.5.6 of the
contract, contained an implied
term that any attempt to conciliate disputes
pursuant to that clause, be made `bona fide'.
126 Certain comments made by Rogers CJ Comm D. in AWA
Ltd v Daniels suggest that his Honour reached this same conclusion. For
instance, Rogers J observed, in answer to submissions that a court order
for
mediation would be futile in view of the reluctance of party participation,
that successful mediation may be achieved if "the
parties enter into in good
faith, as they said they would, the skill of the mediator will be given
full play to bring about consensus" (at 1 - emphasis added). Further,
Rogers J
cited the following passage from Haertl Wolff Parker Inc v Howard S Wright
Construction Co (unreported, US Dist Lexis 14756) a decision made, albeit
at first instance, in the United States District Court in Oregon:
'A contract providing for alternative dispute resolution should be enforced,
and one party should not be allowed to evade the contract
and resort
prematurely to the courts. Southland Corp v Keating [1984] USSC 22; 465 U.S 1, 7 (1984).
The success of an alternative dispute resolution procedure will
always depend on the good faith efforts of the parties, particularly
where, as here, the outcome of the procedure is not binding.
In this case, the disputes were referred to Oseran as required by the
Partnership Agreement, but HWP abandoned the effort when practical
difficulties
arose. Oseran remains ready to consider the disputes. Therefore, the courts
cannot say that it would be futile to refer
the deadlocked issues to him.'
[Emphasis added]
127 To my mind, it is telling that Rogers J did not recoil
from the parties' concession that they would enter into mediation
in 'good
faith' if required by the court to do so. Indeed, 'good faith' was seen as a
necessary concomitant of any attempt to mediate
a dispute.
128 To my mind, the matter should be approached as a question
of principle, it being undesirable to attempt to formulate a list
of factual
indicia suggesting compliance or non-compliance with the obligation to mediate
in good faith [per contra - K Kovach, `Good
faith in mediation - requested,
recommended, or required? A new ethic' (1997) South Texas Law Review 575
at 615].
129 The good faith concept acquires substance from the
particular events that take place and to which it is applied. As such,
the
standard must be fact-intensive and is best determined on a case-by-case basis
using the broad discretion of the trial court.
130 In the realm of insurance law it is common to find an
exclusion clause providing that a policy of insurance does not indemnify
the
Assured `in respect of any liability brought about by the dishonest or
fraudulent act or omission of the Assured'. There are
numerous authorities
seeking to define the word `dishonest', which do not make entirely clear what
is the ambit of conduct which
will be dishonest. In McMillan v Joseph
(1987) 4 ANZInsCas 61-162, Casey J stated:
`I accept the appellant's submissions that `dishonest' is used in the sense
of deliberate conduct carrying out it's ordinary meanings
(amongst others) of
`not straightforward' and `underhand'. Like fraud, the term is of wide
application in the almost infinite variety
of human activity and whilst the
general concepts it embodies are well understood, attempts to analyse or define
them narrowly are
fruitless. In any given case a decision on whether conduct is
dishonest is best left to the common sense and experience of the judge
or jury
after consideration of all the relevant circumstances.'
131 To my mind, the comments in relation to fraud and
dishonesty in the second and third sentences of the above extract, apply
equally to the notion of good faith.
132 This is not to suggest, however, that there may not be
general, overarching `core' principles of `good faith' which may provide
a
framework for the `common sense and experience of the judge or jury after
consideration of all the relevant circumstances'.
133 This topic is dealt with by J Stapleton as follows in
relation to `good faith' in performance of contract:
`Within the fashionable debate about good faith there is surprisingly little
agreement about or even interest in what the `core' principle
of good faith
might be. Even among radical advocates of good faith keen to establish its
viability as an independent doctrine, the
question of what is its core
principle often seems swamped by an eagerness to advance a normative agenda.
This agenda focuses on,
what are allegedly and generally accepted to be,
applications of the principle, typically in the fashionable context of
contract:
a new duty to disclose here; a new duty to cooperate there.
But this eclipse of the good faith principle by a variety of alleged
applications of it is doubly regrettable. By focusing on the
range of standards
which might be generated by a good faith principle it can give the impression
that the underlying principle is
itself indefinite or contradictory; while at
the same time deflecting attention from the search for a formulation of that
core principle.
But as I hope to show, it is possible to state a coherent
structured principle for good faith.....
Two major caveats should be noted before we examine the core principle of
good faith.
First, we must free ourselves from the current focus on specific
applications of good faith. ....
It does not make sense to focus only on those scattered applications of good
faith which excite current interest, particularly since
these tend to excite
interest because they are located in the interstices of current rules. What if
many of those rules could themselves
plausibly be expressed in terms of a
concern with `good faith' as that term has traditionally been understood in
connection with
phrases such as the bona fide purchaser for value without
notice? For example, whatever the precise formulation we use, intuitively
it
would seem possible to express in good faith terms specific rules such as the
tort of deceit and large areas of well-settled equitable
obligation. Indeed
Professor (now Justice) Paul Finn describes all eight equitable obligations
imposed on fiduciaries as `duties
of good faith'. It would not be sensible for
us to ignore these areas in formulating the good faith principle, which should
operate
at such a level of generality that it is capable of capturing all the
instances where we might deploy that term.....
The second caveat in the search for a formulation of the core principle of
good faith is that we should be alert to the fact that
a principle might be
described as a `general principle' but only be recognised in law as giving rise
to entitlements in selected
situations. The negligence principle is a
well-known example....
Across all the contexts in which the good faith idea is deployed I believe
we can identify and enunciate a conceptual common denominator
and it is one
that fuses the notions of the advertent pursuit of self-interest and
unconscionability. The principle of good faith
restrains the deliberate pursuit
of self-interest where this is judged unconscionable for certain specific
reasons and these reasons
can themselves be enunciated within the formulation
of good faith. To be more precise:
The good faith doctrine comprises standards/ obligations/considerations that
seek to temper the deliberate pursuit of self-interest
in situations where the
conscience is bound.
Such unconscionable conduct may be constituted either by:
(a) the person being dishonest;
(b) the person conducting himself contrary to his word/undertaking in the
sense of contradict; or
(c) the person exploiting a position of dominance or power over a person who
is vulnerable relative to him
To act in good faith requires that you do not act dishonestly, do not
deliberately contradict yourself (these two limbs might loosely
be termed the
"sincerity" dimension of good faith), or deliberately exploit a position of
dominance over another.
The inter-relationship of and difference between good faith and
reasonableness is subtle but of great importance. A requirement to
satisfy a
standard of reasonable behaviour is more demanding than the requirement of good
faith....
This distinction becomes vital when we confront judicial statements that
`effect must be given to the reasonable expectations of honest
people'. Left
unqualified this statement is ambiguous. People have different types of
expectations, among which are expectations
of good faith (ie honesty, sincerity
and no deliberate exploitation) as well as expectations of objectively
reasonable and `fair'
conduct. These two types of expectations are different
from each other. It is for this reason that we cannot use phrases such as
`expectations of honest people' or `expectations of reasonable conduct' as a
surrogate by which covertly to introduce good faith
concerns into the law.
Because the ambiguity of such phrases allows them to reach beyond expectations
of good faith to expectations
of objectively reasonable conduct, they introduce
a different and potentially much more demanding standard than intended.
[J Stapleton, `Good Faith in Private Law' [1999] Current Legal Problems
1 at 5-7]
134 To my mind, this commentary is valuable in endeavouring
to reach for an overarching framework in which to apply the good
faith notion.
In relation to the present case which of course deals with good faith in terms
only of obligations to negotiate or
mediate, it is not necessary for the Court
to explicitly accept or reject the author's views. As the caselaw unfolds,
that may
become necessary.
135 Of particular note is Stapleton's acknowledgment that
`good faith' is not synonymous with `reasonable behaviour'. [This
sits well
with Priestley J's observations in Renard, as his Honour points out that
while there is overlap in their content, reasonableness and good faith are not
co-extensive in their
connotations.]
136 Returning to the reservations as to the certainty of
`good faith' expressed both by Giles J in Elizabeth Bay and Handley JA
in Coal Cliff, I note that their Honours place significance on the
ability of the parties to negotiate from a position of self-interest. Their
Honours suggest that negotiation from a position of self-interest, in the face
of the interests of the other party, is necessarily
at odds with an obligation
to maintain good faith in negotiation.
137 To my mind, the distance between the concepts of good
faith and reasonableness accommodates the tension referred to by their
Honours.
The precise order, content or timing of offers and counter-offers that would
ordinarily arise in the course of negotiation
or mediation are unlikely to give
rise to a situation where [to use Stapleton's language], a party's `conscience'
is bound. In other
words, such matters are unlikely to inform the court in any
decisive way as to the presence or absence of good faith.
138 Beyond the authorities referred to above, I have had
regard to those dealing with certain statutory requirements of good
faith where
such requirements relate to the conduct of parties participating in a process.
Statutory requirements of `good faith'
139 Section 31(1)(b) of the Native Title Act 1993
(Cth) requires that negotiating parties `must' negotiate in good faith with a
view to obtaining agreement of each of the native title
parties. That
obligation, to `negotiate in good faith', has been interpreted to be mandatory
prior to the possible doing of a future
act: Walley v State of Western
Australia & Western Mining Corporation Ltd [1996] FCA 490; (1996) 137 ALR 561 per Carr
J at 576, applied in Western Australia v Taylor (Njamal People)
(1996) 134 FLR 211 at 215.
140 There is no specific reference in the Act as to the
meaning of the phrase `negotiate in good faith' other than what is stated
in
section 31 and in the preamble. The content of the obligation has, therefore,
been approached on the basis that whatever might
be regarded as the normal
meaning of the expression, the meaning to be given to it must depend upon the
context provided by the statute:
Njamal People case per Member
Sumner applying R v Director-General of Health for the Commonwealth; Ex
parte Thomson (1976) 51 ALJR 180 at 181-2; Cooper Brookes (Wollongong)
Pty Ltd v Commissioner of Taxation (Cth) [1981] HCA 26; (1981) 147 CLR 297 at 319-320 per
Mason and Wilson JJ.
141 The key point in the preamble is that future acts of this
kind can only be done if "every reasonable effort has been made
to secure the
agreement of the native title owners through a special right to negotiate".
The phrase "every reasonable effort" has
thus been imported into the good faith
requirement in s31(1)(b): see Njamal People case at 219.
142 In the Njamal People case, Member Sumner
considered what was encompassed by the phrase "negotiate in good faith". His
Honour looked to the ordinary meaning
of the words `good faith'.
143 In the first place, Member Sumner extracted dictionary
definitions:
`Good Faith'
New Shorter Oxford English Dictionary, 1993 ed. at 908:
`honesty of intention; sincerity'.
Macquarie Dictionary, 2nd ed. at 754:
1. honesty of purpose or sincerity of declaration: to act in good
faith;
2. expectation of such qualities in others: to take a job in good
faith'.
144 His Honour concluded at 219 that:
`It is clear that if negotiations were being approached in a dishonest way
or with a fraudulent intention then there would not be
a negotiation in good
faith. The more difficult question is whether more than sincere intentions on
the part of those involved in
the negotiation process is required. It is here
that it becomes important to look at the words in the phrase as a whole taking
account
of the purposes to be achieved by the [Native Title Act]. In my view
subjective honesty of purpose or intention and sincerity are
essential, but not
necessarily sufficient, ingredients of good faith negotiations. It is necessary
to consider whether what is done
is reasonable in the circumstances.'
145 To further this inquiry, his Honour then turned to
examine case law arising with respect to s 170QK(2) of the Industrial
Relations Act 1988 (Cth) - the `only Australian statutory provision in
relation to negotiating in good faith which has been judicially considered'.
146 His Honour noted the following comments of the Full Bench
of the Industrial Commission in Public Sector Professional Scientific
Research, Technical, Communications, Aviation and Broadcasting Union v
Australian Broadcasting
Commission (ABC case) AILR Vol 36 No.21
374:
`However, the determination of whether or not a negotiating party is
"negotiating in good faith" may depend on the conduct of the
party when
considered as a whole. For example if a party is only participating in
negotiations in a formal sense, but not bargaining
as such then they may not be
"negotiating in good faith". Negotiating in good faith would generally involve
approaching negotiations
with an open mind and a desire to reach an agreement
as opposed to simply adopting a rigid, predetermined position and not
demonstrating
any preparedness to shift.'
147 From the academic writings cited by his Honour, it would
appear that the ABC case is in line with United States cases and
commentary on the National Labour Relations Act 1935 (US). For
instance, in NLRB v Reed & Prince Manufacturing 118 F.2d. 874,885
(1st Cir), cert. denied, 313 US 595 (1941) at 885. It was held that the
employer was required by statute to `negotiate sincerely ...with an open
mind and a sincere desire to reach an agreement in a spirit of amity and
co-operation'. Further, in NLRB v Boss Mfg Co 7 Cir., 118 F.2d.
187,189 it was stated that `mere pretended bargaining will not suffice.' Such
conduct renders the requirement futile. `The concept of
"good faith" was
brought into the law of collective bargaining as a solution to this problem.
One who merely went through the motions
knowing that they were a sham could be
said to lack good faith'.
148 Sumner CJ cited Jeff Shaw QC MLC reproduced in 1996 ALLR
(CCH) at 50, who sets out as follows, the principles discernible
in the US
cases on `negotiation in good faith' in the labour relations context:
`1. Good faith is an obligation of the parties to participate actively in
the deliberations so as to indicate a present intention
to find a basis for
agreement. A party will be bargaining in good faith if it has an open
mind and a sincere desire to reach an agreement.
2. The duty to bargain in good faith does not require that either
party must enter an agreement.
3. One test as to whether a party is acting in good faith depends upon how a
reasonable person might be expected to react to the
bargaining attitude shown
by those participating.'
149 Sumner CJ relevantly summarised points 4-6 as follows:
`4. While point 3 is an objective test the American courts have placed some
emphasis upon the `state of mind of the parties' relying
upon inferences drawn
from the conduct of the parties as a whole.
5. The taking of unilateral actions by one party at the expense of the
bargaining process may be seen as an indicator of that party's
bad
faith.
6. The failure to answer a reasonable request for relevant information from
another party may be seen as an indicator of bad faith
on the part of the party
failing to supply the information.'
150 Similarly, s 11 of the Farm Debt Mediation Act
1994 (NSW) requires that for a period after a creditor has given notice of
enforcement action to a mortgagor, the creditor attempt to
mediate in good
faith.
151 That section was considered by Badgery-Parker J in
State Bank of NSW v Freeman (unreported, Supreme Court of NSW, 31
January 1996) who at 7, made plain that the Farm Mediation Act does not
deal with the substantive rights of the parties. Rather, "what it does is to
interpose, between default of a mortgagor and
enforcement action by a
mortgagee, a barrier which is, however, limited in duration".
152 To my mind, the following observations of Badgery-Parker
J are particularly pertinent to the matter before me:
`An undertaking to mediate in good faith no doubt connotes a willingness on
the part of a party to consider such options for resolution
of a dispute as are
propounded by the mediator or the opposing party; but it does not
appear to me than an inference of lack of good faith can be drawn from the
adoption of a strong position at the outset
and a reluctance to move very far
in the direction of compromise, without more' [at 11].
[emphasis added]
153 In my view, the authorities and academic writings
referred to above demonstrate that while the content of any good faith
requirement depends on context (statutory or otherwise) and the particular
factual circumstances, it is possible to delineate an
essential framework for
the notion of `good faith' such that the requirement of `good faith' in cl 28
is sufficiently certain for
legal recognition of the agreement.
Essential or core content of an obligation to negotiate or mediate in good
faith
154 As already pointed out, the courts have always avoided
hampering themselves by defining or laying down as a general proposition
what
shall be held to constitute fraud. Yet, however difficult it may be to define
what fraud is in all cases, it is relatively
easy to identify some of the
elements which must necessarily exist.
155 In the same way the court ought be wary in the extreme of
hampering itself by defining in any exhaustive way or by laying
down as a
general proposition, the ambit of what will constitute a compliance with or
failure to comply with an obligation to negotiate
or mediate in good faith.
156 These are matters to be determined depending always on
the precise circumstances of each individual case. But the `certainty'
issue
does require that the court spell out, even in non-exhaustive terms, the
perceived essential or core content of an obligation
to negotiate or mediate in
good faith. To my mind, but without being exhaustive, the essential or core
content of an obligation
to negotiate or mediate in good faith may be expressed
in the following terms:
(1) to undertake to subject oneself to the process of negotiation or mediation
(which must be sufficiently precisely defined by
the agreement to be certain
and hence enforceable).
(2) to undertake in subjecting oneself to that process, to have an open mind
in the sense of:
(a) a willingness to consider such options for the resolution of the dispute as
may be propounded by the opposing party or by the
mediator, as appropriate.
(b) a willingness to give consideration to putting forward options for the
resolution of the dispute.
Subject only to these undertakings, the obligations of a party who contracts to
negotiate or mediate in good faith, do not oblige
nor require the party:
(a) to act for or on behalf of or in the interests of the other party;
(b) to act otherwise than by having regard to self-interest.
157 The fact that in the hope of achieving a better result,
party A may pretend to be entirely disinterested in considering options
for
resolution of the dispute propounded by party B or by the mediator, is of
itself far from conclusive proof that party A has breached
undertaking 2(a).
At the same time as putting up such pretence, party A might be giving the
closest constructive consideration to
such options.
158 Again, the fact that in the hope of achieving a better
result, party A may pretend to be entirely disinterested in putting
forward any
or any constructive options for resolving the dispute, is of itself far from
conclusive proof that party A has breached
undertaking 2(b). At the same time
as putting up such pretence, party A might be awaiting a first offer from party
B or giving close
consideration to itself making an offer at what it perceives
to be an appropriate time, as for example after some additional time
has
elapsed or after some further step is taken in the relevant discussions or
communications.
159 That there are in certain situations clear and even grave
difficulties in being able to prove the breach by a party of an
obligation to
negotiate or mediate in good faith, is not to be taken as meaning that those
obligations lack necessary identifiable
content and are therefore so uncertain
as to be unenforceable in law. Certainty or uncertainty of contractual
obligation is not
to be measured by difficulties of proving breach of
contractual obligations. The two fields of discourse ought not be collapsed.
Reasonable endeavours / Diligent efforts
160 It appears that the concept of 'reasonable endeavours'
does not suffer from the same controversy in relation to agreements
to
negotiate as does 'good faith'. 'Reasonable endeavours' is a term well known
to the law: Graeme Webb Investments Pty Ltd v Soerpyk Pty Ltd (1993)
NSWConvR. 555-661; Walford v Miles [1992] 2 AC 128. It is not imprecise
or vague and would not render cl 28 unenforceable.
161 The wording of clause 28.2(h) of course requires the use
of `all reasonable endeavours in good faith to expeditiously resolve the
dispute by mediation'.
162 There is, of course, a body of jurisprudence dealing with
the content of an obligation to act reasonably in the performance
of a
contract. In the particular field of discourse with which the subject
application is concerned, namely, the content of an obligation
to negotiate or
mediate in good faith, it does not seem to me that the addition of the words
`reasonable endeavours' contributes
at all to the otherwise content of the
obligation absent the use of such words. In short, the court would, in any
event, in this
particular type of contractual obligation, imply an obligation
to act reasonably.
163 In the same way, the word `diligent', to be read with
`good faith efforts to resolve all disputes' [cl 28.1] may not add
anything to
the otherwise content of the obligation, absent the use of such word.
Futility
164 I note the plaintiff's submission that even if the Court
were otherwise minded to exercise its discretion in favour of a
stay, such a
stay would be futile. On the affidavit evidence of the plaintiff's witnesses,
Mr Neil Price and Mr Keith Walker-Smith,
there is no realistic prospect that
the matters the subject of litigation would be resolved within the time limited
by clause 28.2
of the Commercial Terms.
165 This is not a submission of substance. As stated
previously, parties ought be bound by their freely negotiated contracts.
Further, as Giles J made clear in Hooper Bailie, `what is enforced is
not co-operation and consent but participation in a process from which consent
might come'. Outside of a submission
that the agreement had been frustrated
(which was not advanced), it is not for the Court to assess whether matters
falling within
a dispute resolution clause are or are not likely to be resolved
within the time frame stipulated by the clause.
Exercise of discretion
166 It is clear that a court order for stay of proceedings,
having the effect of indirect enforcement of a dispute resolution
clause,
should not be made unless it can be done in accordance with fairness. See
AWA Ltd v Daniels (Unreported, Supreme Court NSW, 24 February 1992) per
Rogers CJ in Comm D. at 5 citing Rogers & McEwan Mediation Law, Policy,
Practice at 225ff.
167 In Elizabeth Bay Giles J appears to accept at 715
the parties' submission that the party contesting the stay application bears
the `practical burden
of persuading the Court that it should not be held to an
apparent agreement to endeavour to settle its dispute with [the other
contracting
party] by [the agreed dispute resolution process]'.
168 The plaintiff submits that
Transfield has waived anyentitlement to rely upon clause 28 of the Commercial Terms by reason
of its
conduct in frustrating the plaintiff's early attempts to invoke the cl 28
procedures. Specifically, the plaintiff submits
that as to the hourly rates
site variations claims (labour rates claims), this waiver is evidenced by the
facsimile dated 8 October
1998 (Ex NEP49 to the affidavit of Mr Neil Price) and
also by the manner in which it subsequently dealt with
Aiton 's claims (seeparagraphs 115 to 124 and Exs NEP77 to NEP84 to the affidavit of Mr Neil
Price).
169 The
Transfield facsimile of 8 October 1998 was asfollows:
`With regard to your notice of dispute of 23 September 1998, would you
please identify by reference to the attached "register of
Aiton Variation
Claims" (Site - 18 pages) the particular claims that are the subject of your
said notification of dispute, and the specific
reasons why you reject our
settlement terms, and now seek to resolve those claims using the dispute
resolution procedures of the
contract. In many cases where there has been a
reduction from an
Aiton claim, Transfield has provided Aiton with the reasonsfor
the reduction of the claim.
As you know there are some 348 claims which make up
Aiton 's labour claimsfor site variations. In addition to the procedures in the fifth
paragraph of your letter not being acceptable to us, we do not think that they
are realistic
or practical.'
[emphasis added - I note that the fifth paragraph referred to, outlined the cl
28.1 procedures.]
170 As mentioned above, in my view on the evidence,
Transfield has not dealt with Aiton 's early claims in a manner which couldreasonably be expected of a party in its position, particularly given the
reference to `good faith' in clause 28.1 in respect of
negotiations between the
parties under that clause. Indeed,
Transfield on my findings has sought tofrustrate
Aiton 's attempts,where made, to regularly invoke the provisions of
cl 28.
171
Aiton has, however, failed to regularly invoke thedispute resolution process with respect to all the claims contained in
the consolidated claim, later reflected in the summons.
172 Notwithstanding the extensive judicial and academic
comment on the appropriateness of requiring parties to adhere to dispute
resolution clauses as a precondition to litigation in the face of evident
reluctance on the part of certain players, it seems to
me that strict
compliance with a dispute resolution procedure by a party invoking the process
[
Transfield ] is, subject to one matter,an essential precondition to being
entitled to relief by way of enforcing, albeit indirectly, the other party to
comply with the
procedure. The proviso is that where both parties have agreed
that something shall be done which cannot effectively be done unless
both
concur in doing it, the contract is construed to oblige each party to do all
that is necessary to be done on his or her part
for the carrying out of that
thing, although there were no express words to that effect: Mackay v
Dick (1881) 6 AC 251 at 263 per Lord Blackburn.
173 Had
Aiton persevered and regularly invoked the disputeresolution procedures with respect to all claims it sought to subject
to those
procedures, then
Transfield 's conduct in endeavouring to frustrate theinvocation of those procedures is likely to have
been the dominant
consideration in the Court refusing to exercise its discretion to order the
stay of proceedings.
174 For the reasons earlier given, the mediation agreement is
unenforceable by reason of its failure to spell out how responsibility
for
payment of the mediators' costs was to be dealt with. The mediation clause not
being severable from the negotiation clause,
the agreement to negotiate is also
unenforceable. If the above holding be incorrect, the finding is that clause
28, including the
obligations to negotiate and to mediate in good faith, is
sufficiently certain to be enforceable.
175 In the result, the application for an order staying the
proceedings is unsuccessful.
LAST UPDATED: 01/10/1999
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