Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA

Citation : STRZELECKI HOLDINGS PTY LTD -v- CABLE SANDS PTY LTD [No 3] [2009] WASC 352

Contract - Memorandum of understanding - Express term obliging parties to deal with each other in good faith - Negotiations to conclude contract for sale of land - Content of the obligation to deal in good faith - Appellant accepting that respondent acted honestly in the negotiations - Whether unreasonable proposals were evidence of lack of good faith - Whether there were unreasonable proposals

Aiton Australia Pty Ltd v Transfield Pty Ltd [1999] NSWSC 996; (1999) 153 FLR 236

Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349

Amann Aviation Pty Ltd v Commonwealth of Australia [1990] FCA 55; (1990) 22 FCR 527

Australian Broadcasting Commission v Australasian Performing Right Association Limited [1973] HCA 36; (1973) 129 CLR 99

Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104

Burger King Corporation v Hungry Jack's Pty Ltd [2001] NSWCA 187; (2001) 69 NSWLR 558

Central Exchange Ltd v Anaconda Nickel Ltd [2001] WASC 128; (2001) 24 WAR 382

Central Exchange Ltd v Anaconda Nickel Ltd [2002] WASCA 94; (2002) 26 WAR 33

Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1

Collector of Customs v Agfa-Gevaert Ltd [1996] HCA 36; (1996) 186 CLR 389

Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64

Con Kallergis Pty Ltd v Calshonie Pty Ltd (1998) 14 BCL 201

Darlington Futures Ltd v Delco Australia Pty Ltd [1986] HCA 82; (1986) 161 CLR 500

DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423

Electronic Industries Ltd v David Jones Ltd [1954] HCA 69; (1954) 91 CLR 288

Expectation Pty Ltd v Pinnacle VRB Ltd [2001] WASC 144 (S)

Expectation Pty Ltd v Pinnacle VRB Ltd [2004] WASCA 261

Geroff v CAPD Enterprises Pty Ltd [2003] QCA 187

Hancock Prospecting Pty Ltd v BHP Minerals Pty Ltd [2003] WASCA 259

Hart v MacDonald [1910] HCA 13; (1910) 10 CLR 417

Hughes Aircraft Systems International v Airservices Australia [1997] FCA 558; (1997) 76 FCR 151

Hughes Bros Pty Ltd v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (1993) 31 NSWLR 91

Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2010] NSWCA 268

Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; (2001) 210 CLR 181

McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579

Mineralogy Pty Ltd v The State of Western Australia [2005] WASCA 69

Nissho Iwai Australia Ltd v Malaysian International Shipping Corporation [1989] HCA 32; (1989) 167 CLR 219

Overlook Management BV v Foxtel Management Pty Ltd [2002] NSWSC 17

Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd [2005] FCA 288

Pacific Carriers Pty Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451

Peters (WA) Ltd v Petersville Ltd [2001] HCA 45; (2001) 205 CLR 126

Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234

Royal Botanic Gardens & Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 240 CLR 45

Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596

Service Station Association Ltd v Berg Bennett & Associates Pty Ltd [1993] FCA 445; (1993) 45 FCR 84

Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165

United Group Rail Services Ltd v Rail Corporation New South Wales [2009] NSWCA 177; (2009) 74 NSWLR 618

Wenzel v Australian Stock Exchange Ltd [2002] FCAFC 400; (2002) 125 FCR 570

WMC Resources Ltd v Leighton Contractors Pty Ltd [1999] WASCA 10; (1999) 20 WAR 489

1 PULLIN JA: This is an appeal by the appellant against a judgment of Murray J who dismissed the appellant's claim against the respondent for specific performance of a Memorandum of Understanding (MOU), or, alternatively, damages for breach of the MOU, or, alternatively, equitable compensation in relation to an estoppel claim. The claim for specific performance of the MOU is no longer pursued. The issue on this appeal is whether the respondent breached a promise in the MOU to deal with the appellant in good faith.

2 Strzelecki Holdings Pty Ltd (Strzelecki) wished to purchase land owned by Cable Sands Pty Ltd (Cable Sands) at Minninup near Capel. Strzelecki is a developer of land and Cable Sands is a mineral sands mining company.

3 The land had been mined for mineral sands and at different locations on the land there were collections of radioactive tailings. The parties did not enter into a conventional contract of sale in relation to the land because there was a concern about how tailings were to be dealt with in view of Strzelecki's wish to develop the land for housing. Instead, the parties entered into the MOU.

4 Before the MOU was executed, officers of the two companies met and because what happened is not in dispute (although the significance of what happened is), I will incorporate from his Honour's reasons [21] - [29] which read as follows:

On 13 September 2004, Mr Poland, whom I have described as the principal of the plaintiff company, attended what appears to have been a political fundraising dinner. At that function, he met Mr Thorp, the general manager of the defendant. Mr Thorp said that the defendant wished to sell the land which is the subject of these proceedings. He suggested that if Poland was interested, they should meet, and early in October 2004 they did so.

The meeting was also attended by another officer of the defendant, and a Mr Weston, a business associate of Mr Poland, who had also been at the dinner, and had heard the conversation between Mr Thorp and Mr Poland at that event. In addition, Mr Poland had Mr Carman attend. Mr Carman was a director of Benchmark Projects, property managers and development consultants. He had also been at the dinner and had heard the discussion about the potential sale of the land. Finally, Mr Poland had the principals of a consultancy business known as Halden Burns attend. They were Mr Halden and Ms Burns.

The only people whom I have named above who did not give evidence before me were Mr Halden and Mr Thorp. As to Mr Thorp, the plaintiff had proposed to call him, although he was the general manager of the defendant, but in the process of closing the plaintiff's case, Mr Clifford told me that, having had the opportunity to speak to Mr Thorp, his independent memory of events was such that he could not relevantly add to what is in the documents. Mr Thorp was not called by the defendant, whose only witness was the company secretary, Ms Jones. There was no substantial cross-examination of Mr Carman, and Mr Weston and Ms Burns were not cross-examined at all.

At the meeting in October 2004, Mr Poland said that the plaintiff was interested in purchasing the land for development purposes. It was proposed to subdivide the land and establish residential lots. It was quite a large piece of land of about 120 hectares, but there was discussion about the fact that about 30 hectares might be taken by the authorities, by way of reservation or otherwise, for public purposes, and to the extent that there was compensation provided for the loss of that land, the defendant thought it ought to share equally in that compensation.

There seems to have been quite a bit of discussion about the remediation of the land, having regard to the mine tailings with some radioactive content which were buried in various locations. That had been a process which complied with governmental requirements when done, but if the use of the land was to change, the understanding was that the tailings would need to be differently dealt with. Mr Thorp said that there were three options which could be considered. The tailings could be relocated and buried in a different location on the land. Alternatively, they could be removed from this land and buried elsewhere. Finally, they might be dealt with by the company reprocessing them, to extract further minerals and thereby reduce their radioactivity.

Mr Thorp said that the cheapest option was to relocate the tailings on the land. He estimated that it might cost between $1 M and $1.5 M. On the other hand, as I understand the evidence, it was thought that the most expensive option would be to dig up the tailings and reprocess them. That, Mr Thorp said, might cost between $4 M and $6 M.

It is clear that Mr Poland made no pretence about the plaintiff's interest in purchasing the land. The two men generally agreed that whatever was to be done with the tailings was within the area of the defendant's expertise, and the work should be carried out by the defendant, but at the plaintiff's cost. The defendant was to undertake a study of the best way to deal with the tailings, and the cost of doing so. When that was done, the plaintiff would undertake a feasibility study in relation to the development of the land. It is clear that there was no discussion at that time about the possibility of the plaintiff providing the defendant with an indemnity, secured by bank guarantee, against the liability which might be incurred to third parties from the state of the land.

There was discussion about price, and it appears that it was agreed that the 90 hectares, which it was anticipated would remain after any resumption or other public reservation, would be purchased by the plaintiff for $3.2 M plus GST, if the plaintiff was satisfied about the feasibility of developing the land profitably once the information was available in relation to the work to be done and the expense involved in dealing with the mineral tailings.

It will be recalled that the plaintiff's case is not that the contract upon which it relies was made at that meeting, but that it was constituted by the MOU, which was subsequently drawn up. Mr Poland travelled overseas immediately after the meeting. He instructed Mr Carman to see to the preparation of the contract, and Mr Carman instructed solicitors accordingly. Mr Carman was to sign the contract for the plaintiff. A draft was prepared. It was forwarded to the defendant. Some changes were incorporated at the defendant's request. Mr Carman executed the document for the plaintiff on 8 November, and Mr Shirfan executed the document for the defendant on 10 November 2004. These arrangements were made by Ms Burns.

5 The evidence about what happened at the October 2004 meeting was unquestionably relevant at trial because the appellant pleaded in par 4(l) of its statement of claim that what was decided at this meeting gave rise to an express or implied contractual promise by the respondent to carry out the remediation work. The trial judge concluded that there was no such contract.

6 However, the respondent submits that what happened at the October 2004 meeting was irrelevant to the issue of whether there was a breach of the good faith provision in the MOU. The appellant contends it was relevant. This dispute is considered below.

7 The recitals and the operative terms of the MOU read as follows:

1. Cable Sands is the registered proprietor of the Land.
2. Cable Sands and Strzelecki Holdings are engaged in discussions with each other in relation to the sale of the Land by Cable Sands to Strzelecki Holdings

1. The parties have agreed for certain due diligence processes to be carried out in relation to the Land and wish to enter into this Memorandum of Understanding to set out the terms of their dealings with each other during the course of those due diligence processes and, on completion of those processes, for the negotiation of a contract between the parties for the sale and purchase of the Land.

1. Strzelecki Holdings acknowledges that it is aware that the Land is the subject of the Greater Bunbury Regional Scheme under which it is intended that approximately FIFTY THREE POINT FIVE (53.5) hectares of the Land will be resumed by the State of Western Australia for regional open space.

1. Cable Sands is to promptly arrange for an environmental engineering study of the Land to be carried out by a suitably qualified person to determine:

(a) which government department approvals would be required to relocate the tailings situated on the Land and the conditions that would apply to such a proposal;

(b) a strategy for relocating and encapsulating all of the tailings situated on the Land to that part of the Land which will have the least impact on any subsequent development of the Land; and

(c) the cost and practicality of implementing that strategy.

1. Cable Sands is to keep Strzelecki Holdings informed in relation to all aspects of the study being carried out in accordance with paragraph 1 ('Tailings Relocation Study') and is to promptly advise Strzelecki Holdings of the estimated cost for relocating and encapsulating the tailings once that cost has been determined. The Tailings Relocation Study and cost details (the Confidential Information) contain information confidential to Cable Sands and will be provided to Strzelecki Holdings on a confidential basis. Strzelecki Holdings agrees not to use the Confidential Information for any purpose other than in connection with the purchase of the Land by it, pursuant to this Agreement. In these circumstances, the Confidential Information shall only be used in a manner that fully protects the Confidentiality of that information. The Confidential Information shall not be disclosed to any third parties without the written consent of Cable Sands. All Confidential Information and any copies, in whatever form, must be returned to Cable Sands upon termination of this Agreement.
2. Strzelecki Holdings is to promptly carry out a due diligence and feasibility study in relation to the subdivision and development of the Land to its highest and best use, including considering all relevant planning processes and approvals which will be required for such a development ('Feasibility Study') and agrees to provide Cable Sands with a copy of the Feasibility Study so prepared.
3. Cable Sands acknowledges that Strzelecki Holdings, in carrying out the Feasibility Study, may contact and make enquiries with the Shire of Capel, South West Planning and the Department for Planning and Infrastructure provided that at the first meeting between Strzelecki Holdings and any of those authorities a representative of Cable Sands is to be present at that meeting and provided further that Strzelecki Holdings is to keep Cable Sands informed in relation to its enquiries with those authorities and provide copies of correspondence between itself and those authorities.
4. Strzelecki Holdings is to complete the Feasibility Study by the date being the later of:

(a) NINETY (90) days after the date of this Memorandum of Understanding; or

(b) SEVEN (7) days after the date Cable Sands provides Strzelecki Holdings with a copy of the Tailings Relocation Study including the estimated cost for relocating and encapsulating the tailings determined by that study.

1. Strzelecki Holdings is within FOURTEEN (14) days of the completion of the Feasibility Study to advise Cable Sands in writing whether or not it wishes to continue with negotiations for the sale and purchase of the Land.
2. If after completion of the Feasibility Study Strzelecki Holdings advises Cable Sands that it does not wish to continue with negotiations, then the parties' dealings with each other in relation to the Land, save for the obligations in clause 2 in respect of the Confidential Information, which will continue in full force and effect for a period of the lesser of three year from the date of this agreement and the time at which a contract for the sale of the Land between the parties is completed, will be at an end and this Memorandum of Understanding will cease to be of any force or effect and no party will have any claim against the other in relation to the Land or their dealings with each other concerning the Land.
3. If after completion of the Feasibility Study Strzelecki Holdings advises Cable Sands that it wishes to continue negotiations, then the parties agree to negotiate a contract for the sale and purchase of the Land which is to include the following terms and conditions:

(a) the purchase price is to be THREE MILLION TWO HUNDRED THOUSAND DOLLARS ($3,200,000.00) plus GST;

(b) Strzelecki Holdings is to be responsible for all costs associated with relocating and encapsulating the tailings which costs shall be over and above the purchase price;

(c) any payment received from the State of Western Australia in relation to the resumption of any part of the Land on or before settlement of Strzelecki Holdings purchase of the Land is to be divided equally between the parties; and

(d) the contract is to be in the form of the REIWA Contract for Sale of Land or Strata Title by Offer and Acceptance incorporating the Joint Form of General Conditions 2002 Revision with such variations as may be agreed by the parties.

1. If the parties acting in good faith are unable to conclude a contract for the sale and purchase of the Land between themselves within THIRTY (30) days of Strzelecki Holdings advising Cable Sands of its desire to continue negotiation in accordance with clause 6 above, or such longer period as the parties may agree, then the parties' dealings with each other in relation to the Land will be at an end and this Memorandum of Understanding will cease to be of any force or effect, save for the obligations in clause 2 in respect of the Confidential Information, which will continue in full force and effect for a period of the lesser of three years from the date of this agreement and the time at which a contract for the sale of the Land between the parties is completed.
2. Any contract between the parties for the sale and purchase of the Land will supersede this Memorandum of Understanding which will cease to be of any force or effect from the date of any such contract, save for the obligations in clause 2 in respect of the Confidential Information, which will continue in full force and effect for a period of the lesser of three years from the date of this agreement and the time at which a contract for the sale of the Land between the parties is completed.
3. Cable Sands is not, until this Memorandum of Understanding is terminated:

(a) to sell or agree to sell the whole or any part of the Land to any other person or entity;

(b) to grant or agree to grant any interest in the Land to any other person or entity; or

(c) to enter into any negotiations or have any dealings whatsoever in relation to the sale of the whole or any part of the Land with any other person or entity.

1. The parties are, while this Memorandum of Understanding remains in effect, to at all times deal with each other in good faith.
2. This Memorandum of Understanding is to have legally binding force and legal relations are intended to be created by this Memorandum of Understanding.
3. In this Memorandum of Understanding 'Land' means:

(a) Lot 1 on Plan 18477 being the whole of the land contained in certificate of title volume 1946 folio 794; and

(b) Lot 394 on Deposited Plan 246115 being the whole of the land contained in certificate of title volume 1946 folio 796.

The trial judge's conclusion as to the contractual nature of the MOU

8 The trial judge's conclusion about the contractual nature of the MOU is not in dispute. His Honour concluded [88] - [91] that it was a contract which bound the parties 'immediately in terms which they have presently agreed', but that they expected 'to make a further contract to operate in substitution for the first agreement containing, by consent, additional terms' and that the parties had 'bound themselves by agreement to a process which they describe as due diligence investigation and to negotiation in good faith towards the making of a contract for the sale of the land'. The trial judge also held that the MOU was not 'enforceable as a contract for the sale of the land, the essential terms of which have been agreed, with the possibility being reserved that other terms may be added later'.

Other issues at trial which are not live on this appeal

9 Issues of estoppel which were dealt with at the trial are no longer matters in issue between the parties. Also, as already mentioned, the appellant contended at trial that Cable Sands had expressly or impliedly contracted to carry out the remediation work. That claim was dismissed and the contention is not pursued on this appeal. Also, as mentioned above, at trial, the appellant sought specific performance of the MOU. The appellant no longer seeks that remedy. Now it only pursues its claim for damages for breach of the MOU provision whereby the respondent promised to deal with the appellant in good faith.

10 The parties are not in dispute about the following facts which are either findings of fact that were made by his Honour, or facts supported by evidence which is not in dispute:

(a) Cable Sands carried out the Tailings' Relocation Study referred to in the MOU.

(b) Strzelecki carried out the Feasibility Study referred to in the MOU.

(c) On 22 December 2005, pursuant to cl 6 of the MOU, Strzelecki advised that it wished to continue with negotiations for sale and purchase of the land. Pursuant to an agreement between the parties in correspondence in January, the 30 day negotiation period commenced on 14 February 2006. The parties agreed that the 30 day period ended on 15 March 2006.

(e) During the 30 day period, the parties negotiated.

(f) The parties were unable to conclude a contract for the sale and purchase of the land within the 30 day period. No extension of that period was agreed between the parties or sought by the appellant.

(g) On 16 March 2006, Cable Sands gave notice that the 30 day period had expired without a contract being concluded.

11 To determine the ground of appeal which is set out later in these reasons, it is necessary to refer in more detail to the trial judge's recital of the evidence about the dealings between the parties after the MOU was executed and about the negotiations between the parties. None of this evidence is in dispute

Dealings after the MOU was executed and up until 13 February 2006

12 After the MOU was executed in 2004, there was a meeting in early 2005 attended by Mr Poland and Mr Shirfan. Mr Shirfan was by then the CEO of Cable Sands in place of Mr Thorp. The purpose of the meeting was for Mr Poland to show Mr Shirfan Strzelecki's proposal for the development of the land.

13 There were no significant developments after that until 10 August 2005 when Cable Sands wrote to Strzelecki referring to cl 1 of the MOU. By the letter, Cable Sands advised that:

(a) its investigations revealed that there were no simple solutions available to deal with the tailings and that, because environmental approvals could not be obtained, it was not possible to pursue the option under cl 1 of relocating the tailings to another section of the land;

(b) it had been considering a number of other options outside the terms of the MOU, all of which carried costs in excess of $7 million;

(c) it would produce the report under cl 1 of the MOU if required, but it could see no benefit in doing so as 'the environmental authorities' position is absolute'; and

(d) perhaps the time had come for the parties to terminate the MOU.

14 Strzelecki consulted its solicitors and, on 25 August 2005, the solicitors wrote to Cable Sands advising that Strzelecki wished the tailings study to be provided. On 13 September 2005, Cable Sands wrote to advise that it anticipated that the report would be available within four weeks. As soon as that period expired, Strzelecki's solicitors wrote asking for a copy of the tailings study.

15 There were issues at trial about whether the material Cable Sands provided amounted to compliance with the MOU, but that is no longer an issue between the parties. Nevertheless, the following is an abbreviated account of the events in this regard.

16 Cable Sands, by letter dated 2 December 2005, provided what it described as the study referred to in cl 1 of the MOU (exhibit 35). The letter said that Cable Sands was looking forward to receiving the plaintiff's completed feasibility study under cl 5 of the MOU.

17 The study provided by Cable Sands was headed 'Executive Summary'. It stated that there were 230,000 tonnes of tailing material buried in surveyed locations as per original approval of the State Mining Engineer. It also stated that burial occurred between 1987 and 1990 when the mine site was active, that the tailings were radioactive and that the establishment of a single depository zone for approximately 230,000 tonnes of mill tails material would not be acceptable in terms of best practice environmental management. Under the heading 'Conclusion', the study read:

Based upon the Company's extensive investigations that were conducted in connection with the preparation of this report, reburial of all Minninup Tails on the property is not an option available to the Company.

18 Strzelecki considered that the study was inadequate because it provided no costings and did not deal with the question of whether reprocessing the tailings would result in commercially saleable mineral product to offset the expense involved. However, Strzelecki proceeded to carry out its feasibility study which was a comprehensive document providing a detailed analysis of how the land might be developed into 251 lots. The study provided a summary of development costs and projected revenue. It revealed that, over time, Strzelecki might find the project profitable to the tune of about $13 - $14 million. At the hearing, counsel for the appellant submitted that the expected profit was approximately $5 million if allowance was made for the costs which Strzelecki might have to bear in respect of remedial work to deal with the tailings deposit.

19 Strzelecki did not immediately proceed under cl 6 of the MOU to advise whether or not it wished to continue. Rather, on 12 December 2005, its solicitors wrote complaining that the tailings study did not meet the requirements of cl 1 of the MOU. On 19 December 2005, Cable Sands wrote, maintaining an assertion that the report met the requirements of cl 1 of the MOU. The parties then negotiated and reached an agreement that the time period for negotiations referred to in cl 9 of the MOU commence from a date on which Cable Sands delivered an addendum to the study which it had contended met the requirements of cl 1 of the MOU. This agreement was reached on 9 January 2006. The addendum was delivered to Strzelecki on 13 February 2006.

20 The trial judge found that the first day of the 30 day period for negotiations between the parties was 14 February 2006 and the last day was 15 March 2006.

21 On 10 February, before the addendum was formally delivered, Cable Sands wrote to Strzelecki asking for Mr Poland's availability for a meeting the following week.

22 The requested meeting was held on 17 February 2006. Mr Poland attended with his daughter and solicitor. Mr Shirfan and Ms Jones were present for Cable Sands. The trial judge's reasons summarise the evidence relating to that meeting. The accuracy of this summary is not in dispute [49] - [52]:

According to Mr Poland, after some preliminary discussion, the conversation turned to what would need to be done to clean up the tailings and Mr Shirfan said that it would be necessary to excavate and re-treat the tailings at an estimated cost of $9 M. The evidence about this was given by Mr Poland and Ms Jones. There are differences in their respective recollections. Mr Poland says that when he was told what was to be done and what the defendant estimated it would cost, he said that although it was a lot higher than the original estimate, the plaintiff still wished to proceed. His evidence was that he felt he had no choice but to capitulate and was prepared to do so to finalise the deal. Although he had been advised that the information from the defendant was unsatisfactory, he realised he would have to accept that no more information would be forthcoming if, as the plaintiff wished, the transaction was to be completed to result in the sale of the land.

Mr Poland said that he told those present at the meeting that this was the plaintiff's position. Poland's evidence was that Shirfan said that he was not sure that the defendant would do the work. Poland said that he told those at the meeting that although he would prefer the defendant to do the work at the plaintiff's expense, if it would not, then the plaintiff would get someone else to do it. Ms Jones agreed that Poland said the plaintiff was prepared to arrange for the cleanup to be done. He said he asked for the study as to what was required. Ms Jones said that it would not be provided unless the plaintiff executed the confidentiality agreement. Mr Poland said he agreed. It appears that progress was being made.

There was a discussion about special conditions which Mr Shirfan said the defendant would require in relation to cleaning up the land. Ms Jones undertook to arrange for those special conditions to be prepared and forwarded to the plaintiff's solicitors. There was no discussion, Mr Poland says, about what their content might be.

Ms Jones' evidence was, and I accept, that at least there was discussion about the fact that in general terms the special conditions would be concerned to protect the defendant from liability which might be incurred to third parties who would subsequently acquire the land, if the cleanup process was done by the plaintiff and imperfectly reduced the level of radiation remaining in the land. She agreed, however, that there was at that meeting, no reference to the plaintiff agreeing to indemnify the defendant against any such liability or to the requirement for the plaintiff to support that undertaking by the provision of a bank guarantee (ts 292 - 296).

23 The critical aspect of this meeting was Cable Sands' statement via Mr Shirfan that he was 'not sure' Cable Sands would do the remediation work and Mr Poland's statement that he would prefer Cable Sands to do the work but if it would not, then Strzelecki would get someone else to do it. On the day of the 17 February 2006 meeting, Strzelecki's solicitors wrote to Cable Sands. This letter confirmed that Strzelecki wished to proceed with the purchase of the land, referred to the fact that Cable Sands was preparing proposed special conditions and asked that these be formulated and provided quickly in view of the short time for negotiations.

24 Ms Jones wasted no time in organising the provision to her of views within Cable Sands as to the special conditions which Cable Sands considered ought to be included in a contract for the sale of land and instructing solicitors to formulate them in terms suitable for inclusion in the REIWA contract which was envisaged [54].

25 The trial judge found that Cable Sands' particular concern remained its exposure to potential liability 'if [Strzelecki], rather than [Cable Sands], undertook arrangements for the remedial work on the land' [54].

26 On 24 February 2006, Cable Sands wrote to Strzelecki's solicitors attaching the proposed special conditions 'to progress the negotiations under the terms of the [MOU]' [55]. The letter was received by Strzelecki on 27 February 2006. The document setting out the proposed special conditions was substantial. It was intended as an addendum to the REIWA contract for the sale of land and the 2002 revision of the general conditions forming part of the contract. The proposed cl 4 in the special conditions commenced with an acknowledgement that the land was contaminated by radioactive mineral tailings. Clauses 4.3, 4.4 and 6.1 of the proposed special conditions provided that Strzelecki would be responsible for the remediation work, that Strzelecki would provide an indemnity to Cable Sands and that Strzelecki would provide a $25 million bank guarantee as security for Strzelecki's performance of its obligations including the indemnity. These clauses read as follows:

(a) The Buyer acknowledges and agrees that the Buyer is solely responsible for Remediation.

(b) Without limiting paragraph (a), the Buyer assumes on Settlement full and sole responsibility (to the exclusion of the Seller) for the presence of Contaminants on the Property and for compliance with any Environmental Law.

(c) The Buyer agrees with the Seller that the Buyer must, in carrying out Remediation, comply with all applicable laws (including in particular all Environmental Laws).

The Buyer indemnifies the Seller against all Loss arising directly or indirectly from any:

(a) Environmental Liability;

(b) injury or death to persons, any loss of damage to property, real or personal, arising directly or indirectly from the presence of Contamination on the Property whether before or after Remediation;

(c) claim by any third party (including any buyer of any part of the Property, the Crown, any body corporate established by any Government body, instrumentality, authority, department or agency) arising directly or indirectly from:

(i) the presence of Contamination on the Property; or

(ii) the manner or extent to which the Property has or has not been Remediated,

(d) breach by the Buyer of the Contract; or

(e) act or omission (including any negligence, unlawful conduct or wilful misconduct) by the Buyer relating to the Contract.

...

On or before execution of the Contract the Buyer must give the Seller an unconditional and irrevocable undertaking (Guarantee):

(a) from a bank or financial institution authorised to carry on banking business in Australia under the Banking Act 1959;

(b) in favour of the Seller;

(c) in form and content reasonably satisfactory to the Seller;

(d) enforceable at all times during the period commencing on the date of Settlement and concluding on the 20th anniversary of the date of Settlement.

(e) for $25 million; and

(f) as security for the due and punctual performance by the Buyer of its obligations under the Contract, including the indemnity obligations in clause 4.4, requiring the issuer to pay to the Seller on demand without prior notice to or approval of the Buyer any amount payable by the Buyer under the Contract which the Buyer fails to pay on the due date for payment.

27 Cable Sands' letter dated 24 February 2006 which enclosed the special conditions stated:

The guarantee figure has been arrived at, taking into consideration the Feasibility Study for the sale of 251 lots prepared by Benchmark Projects. Were the circumstances for a claim involving health or relocation issues to arise, this sum would barely cover a $1 million claim by 10% of the lot owners.

28 On 10 March 2006, 12 days after Strzelecki received Cable Sands' 24 February 2006 letter, Strzelecki's solicitor sent a letter which acknowledged Cable Sands' 24 February 2006 letter. Strzelecki's solicitors said that they had prepared and enclosed a contract by which Strzelecki offered to purchase the property the subject of the MOU. The letter read:

In making the enclosed offer our client has incorporated those of the special conditions forwarded by you under cover of your letter of 24 February 2006 which are reasonable to include in the contract taking into account the terms of the [MOU] and in particular clause 8 of that memorandum.

For your reference, we also enclose a marked up copy of the special conditions forwarded by you which indicates the changes which our client has made to those special conditions.

It is noteworthy in view of submissions made by Strzelecki on this appeal and referred to below, that Strzelecki did not propose a deletion of cl 4.3(a) which provided that Strzelecki was solely responsible for remediation. Strzelecki's solicitors however, in the draft, deleted cl 4.3(b) and cl 4.4, and explained in the letter that Strzelecki did not agree in the MOU to give any indemnities. Strzelecki's solicitors also commented that the 'bank guarantee has been deleted. Our client did not agree to provide a bank guarantee under the [MOU]'. It is also noteworthy, given submissions made by Strzelecki on the appeal, that the letter did not complain about the lateness of Cable Sands' proposal that Strzelecki should carry out the remediation work and did not complain that the bank guarantee was exorbitant in amount.

29 Strzelecki's solicitors' letter closed with the observation that cl 13 of the MOU expressed the intention that it was to be a legally enforceable agreement and the solicitors averred:

It is our view that the enclosed offer represents the contract that a court would say it was reasonable for the parties acting in good faith to enter into taking into account the provisions of the [MOU].

30 Mr Poland, in evidence, said that he saw the letter as the 'exercise of the [appellant's] option to purchase' [63].

31 Strzelecki's solicitors' letter of 10 March 2006 was sent by facsimile to the respondent at 11 am on Friday, 10 March 2006 (exhibit 110), five days before the last day of the negotiation period (15 March 2006). Cable Sands responded by a letter to Strzelecki's solicitors on 14 March 2006 at 3.35 pm Queensland time and therefore at 1.35 pm Western Australian time (exhibit 61). Part of the letter read:

Whilst we can further negotiate some of the clauses you have raised in your correspondence, indemnity and bank guarantee provisions are key provisions required in order for us to proceed (for, inter alia, the reasons outlined in our meeting). To progress this contract we think that resolution of these key issues must necessarily precede further discussions on the balance of the contractual provisions.

We ask that you please reconsider the position taken in your correspondence and advise as soon as possible of your acceptance, proposed amendments or otherwise of these provisions and this approach.

32 Nothing happened for the rest of 14 March or 15 March and the 30-day negotiating period expired without an extension having been sought or obtained. An extension of time was never sought by Strzelecki. No contract for the sale of the land was agreed.

33 On 16 March 2006, Ms Jones wrote for Cable Sands to Strzelecki's solicitors advising that the MOU, as varied by the agreement made by the parties on 9 January 2006, had now been discharged by the effluxion of the 30 day period to negotiate a contract for sale of the land.

34 On 16 March 2006, Strzelecki's solicitors replied to Cable Sands' letters of 14 March and 16 March (exhibit 63). They said they had been unable to obtain instructions. The solicitors said they expected to receive instructions when Mr Poland returned from overseas on 20 March 2006 and they would respond then. They did so (exhibit 66), and contended that the offer Strzelecki had made on 10 March 2006 was in their view reasonable and was made in good faith pursuant to the MOU. Strzelecki required the respondent to execute the offer and to return the executed contract within 14 days. That did not occur and the proceedings were then instituted [68].

35 His Honour said that although the law was not 'abundantly clear', he proceeded upon the basis that the promise to negotiate in good faith towards the making of a contract for the sale of the land was an enforceable obligation. His Honour said there was a difficulty inherent in determining the specific content of the duty. His Honour noted the judgment of Einstein J in Aiton Australia Pty Ltd v Transfield Pty Ltd [1999] NSWSC 996; (1999) 153 FLR 236, which was a case where dispute resolution clauses required parties to negotiate in good faith in an endeavour to settle any dispute before resorting to litigation. The trial judge quoted from Aiton [155] - [156] where Einstein J said:

[T]he 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.

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.

36 The trial judge then said that it was noteworthy that a party subject to such a duty will not be in breach of the duty because there has been a failure to agree and noted also that a party did not have to subjugate its contractual rights to the interests of the other. His Honour said that what was required to establish a breach, having regard to the content of the obligation, was 'a failure to honestly participate in the process of negotiation' [98].

37 The trial judge then referred to Expectation Pty Ltd v Pinnacle VRB Ltd [2004] WASCA 261 and said that Steytler J expressed the 'same notions' at [42] and [66] of that case, adopting the statement of principle by Parker J in Central Exchange Ltd v Anaconda Nickel Ltd [2001] WASC 128; (2001) 24 WAR 382 [24] - [25]. The trial judge then referred to Parker J's reasons where he referred to three related notions involved in acting in good faith. They were:

(a) an obligation on the parties to cooperate in achieving the contractual objects (loyalty to the promise itself),

(b) compliance with honest standards of conduct, and

(c) compliance with standards of conduct which are reasonable having regard to the interests of the parties [24].

His Honour also referred to United Group Rail Services Ltd v Rail Corporation New South Wales [2009] NSWCA 177; (2009) 74 NSWLR 618 [70] - [74] (Allsop P).

38 Having so directed himself, the trial judge then stated that although the focus would be upon Cable Sands' conduct, it had to be evaluated in the context of the conduct of Strzelecki because the obligation to act in good faith in pursuing the negotiations was an obligation imposed on both parties. At [101], his Honour then said that he had summarised the material facts and that '[t]hey lead me to the firm conclusion that the [respondent] has not been established to have breached its contractual obligation to act in good faith'.

39 His Honour noted Strzelecki's wish to purchase the land had been made clear in October 2004 and that Cable Sands wished to sell the land which was surplus to its requirements, but that 'it appreciated that the change of use to which [Strzelecki] proposed to put the land would require a remediation process designed to deal with the radioactive tailings'. His Honour noted that the MOU focused attention upon that issue and that the investigation which had to be done by Cable Sands was 'effectively derailed when it received advice, which it conveyed to [Strzelecki], that the solution envisaged by cl 1 was not possible'. At [104], the trial judge found that 'it is clear that [Cable Sands] did not wish [Strzelecki] to be prejudiced by its advised wish to continue the negotiations' and that Cable Sands acted to prevent time running against Strzelecki.

40 His Honour also found that, at the meeting on 17 February 2006, it was

abundantly clear that whether or not the investigation processes contemplated by the MOU had been properly undertaken, both parties were committed to progressing negotiations and both did so in the knowledge of the 30 day period provided for that to occur, unless an extension was obtained. In my view, there is no evidence to suggest that the discussion at that meeting implicated the defendant in any evasive or dishonest behaviour [105].

His Honour noted that the express concern was Cable Sands' potential liability, particularly if the clean up was done by Strzelecki. His Honour concluded that Cable Sands' concern was to protect itself against that liability, although no specific contractual terms were advised until the special conditions were formulated and provided by Cable Sands, with Cable Sands expressing the hope that the negotiations would 'progress'. His Honour found [106] that there was 'no evidence to suggest that this was dishonest or duplicitous and the ball was then in the court of [Strzelecki]'. His Honour noted that once Strzelecki found itself unable to agree to those special conditions, the negotiations were significantly set back with little time remaining and that when Strzelecki sent its letter of 10 March 2006 attaching its proposed contract, 'it was expressing something of a final view that it would not accept the requirements of [Cable Sands] because it regarded them as unreasonable demands'.

41 His Honour noted that Cable Sands, by its letter dated 14 March 2006, urged Strzelecki to reconsider its position and that 'the ball was again in [Strzelecki's] court' [109]. His Honour noted that Strzelecki could have sought an extension of time, but did not do so, insisted that its present position was reasonable and took the position that Cable Sands was bound to execute the contract it proposed. His Honour said that Cable Sands was not obliged to warn Strzelecki of the consequences and that it was at liberty, upon the expiry of the time allowed, to regard the MOU as at an end. His Honour said that Cable Sands did so and that the outcome was 'without fault on the part of either party and without breach of the obligation to act in good faith'. The trial judge noted that Strzelecki also honestly took the position it did as a reasonable reflection of its own interest. At [111], his Honour said:

As to the relevant question of good faith, it seems to me that the nub of the case lies in [Cable Sands'] assertion of special conditions in relation to the indemnity and bank guarantee and [Strzelecki's] view that these were unreasonable, unusual, not within reasonable contemplation as being attendant upon a contract for the sale of land of the type being sought to be negotiated, and unnecessary. None of that, it seems to me, is to the point in relation to [Cable Sands'] discharge of its obligation to act in good faith once it is seen, as I have concluded, that [Cable Sands] was, by the terms proposed, honestly seeking to protect itself from a liability it feared might arise out of its activities interfering with the radioactive content of the soil and the measures which might be taken to prevent any harmful effects on persons or the value their properties.

The Trial Court erred in fact in finding Cable Sands had not failed to act in good faith.

Particulars of Cable Sands' failure to act in good faith

Cable Sands failed to act in good faith because the circumstances and terms of its demand for an indemnity and $25 million, 20 year bank guarantee as express terms of a REIWA contract for the $3.2 million plus GST purchase of the Land ('Indemnity and Bank Guarantee'), involved a failure to co-operate in achieving the contractual objects of Strzelecki, and/or did not comply with reasonable standards of conduct having regard to the interests of Strzelecki and Cable Sands.

These circumstances and terms of the demand for the Indemnity and Bank Guarantee which involved a lack of co-operation in achieving the contractual objects of Strzelecki, and/or a failure to comply with reasonable standards of conduct having regard to the interests of Strzelecki and Cable Sands, were:

(i) the context in which the demand for the Indemnity and Bank Guarantee was made, in particular the insistence by Cable Sands that the remediation be performed by Strzelecki, despite Strzelecki's preparedness to capitulate to any terms required by Cable Sands, even the $9 million remediation cost (net), and Cable Sands' ability to perform the remediation; and/or

(ii) the timing of the demand by Cable Sands for the Indemnity and Bank Guarantee being approximately two weeks before the conclusion of negotiations, and after approximately a year and five months without any suggestion that such a demand might be made; and/or

(iii) the onerous terms of the Indemnity and Bank Guarantee, and associated conditions, demanded by Cable Sands which were such that no reasonable person in Strzelecki's position could ever comply with them.

43 The ground, on its face, alleges, in effect, that the 'demand' by Cable Sands for an indemnity and a $25 million, 20 year bank guarantee was the conduct which established a breach of the obligation on Cable Sands to deal with the appellant in good faith.

44 In oral submissions however, an additional point was made. It was that the conduct of Cable Sands at a meeting on 17 February 2006 stating that it was 'not sure that [it] would do the [remediation] work' and its subsequent proposal that Strzelecki should be responsible for the remediation work was conduct evidencing a lack of good faith. Although that point is not referred to in the ground of appeal, it was a point argued by counsel for the appellant without objection by the respondent and so that aspect will also be considered.

45 The case requires consideration of the meaning of the express promise of the parties to 'deal with each other in good faith'. As a result, cases dealing with the question about whether such a term is to be implied as a term in every contract, do not have to be considered.

46 The interpretation of the meaning of these words is not determined by the parties' subjective understanding but by the objective meaning of the words which a reasonable person would have understood them to mean: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165. In ascertaining the objective meaning, the court has to consider the contract as a whole: Australian Broadcasting Commission v Australasian Performing Right Association Limited [1973] HCA 36; (1973) 129 CLR 99, 109; Mineralogy Pty Ltd v The State of Western Australia [2005] WASCA 69 [14] - [16], [68]. The construction of the contract and interpretation of words is determined by taking into account the objective background of the transaction or factual matrix of the contract (Toll [40] - [41]) but not the subjective intention of the parties: DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423, 429; N C Seddon and M P Ellinghaus, Cheshire & Fifoot's Law of Contract (9th ed, 2008) [10.13]. When the issue is about the meaning of words, the natural and ordinary meaning is given to the words: Darlington Futures Ltd v Delco Australia Pty Ltd [1986] HCA 82; (1986) 161 CLR 500, 510; Nissho Iwai Australia Ltd v Malaysian International Shipping Corporation [1989] HCA 32; (1989) 167 CLR 219, 227.

47 The phrase 'in good faith' is not yet a term of art because a term of art is a word or phrase used in a precise sense in a particular subject or field. The precise meaning or sense of the word has not yet been worked out. The natural and ordinary meaning of the phrase 'good faith' means honesty of purpose (Macquarie Dictionary) or honesty of intention in entering in engagements (Oxford English Dictionary).

Case law concerning the meaning of the phrase 'good faith' in a contractual context

48 Much more has been written about the meaning of the phrase in the cases. I will refer to some of the most important of those cases. In Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234, Priestley JA, after reviewing the law in the United States and Australia and referring to developments in the United Kingdom and Canada, considered that there was a strong case in Australia for accepting a good faith obligation similar to that prevailing in Europe and the United States.

49 Sir Anthony Mason, in an address given at the University of Cambridge in 1993 (subsequently published in (2000) 116 LQR 66), discussed the question of whether an obligation of good faith should be implied in every contract, and then went on to consider the 'concept of good faith'. He referred to the United States Uniform Commercial Code and the Restatement Of Contracts, Second, and said that it was 'by no means clear' what 'good faith' in the context of American provisions meant, but he said it was probable that the concept embraced no less than three related notions, namely:

(1) an obligation on the parties to cooperate in achieving the contractual objects (loyalty to the promise itself);

(2) compliance with honest standards of conduct; and

(3) compliance with standards of conduct which are reasonable having regard to the interests of the parties.

Sir Anthony added that, in his address, he would use '"good faith" mainly in the sense of loyalty to the promise itself and as excluding bad faith behaviour' and that he would 'avoid becoming enmeshed in the American arguments about what "good faith" means'.

50 In 1998, in Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349, the question arose as to whether the duty of good faith was to be implied by law in the commercial contract in question. Sheller JA wrote the reasons with the other members of the court agreeing. The bulk of the reasons concern the question about whether a term was to be implied at law and the conclusion was that such a term could be implied. That aspect of the judgment is not relevant in this case. Sheller JA did not spend much time discussing the content of the duty but he did quote Mason J's address and the three aspects which Sheller JA stated that Sir Anthony said were 'probably' involved. It appears that Sheller JA treated the well-known implied term obliging parties to cooperate in achieving the objects of the contract (see Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596) as being an aspect of the obligation of good faith, adding that:

Sir Anthony Mason said that such cases come close to a recognition of the good faith doctrine described as 'loyalty to the promise itself' (368).

51 In 2001, Parker J in Central Exchange Ltd v Anaconda Nickel Ltd, dealing with an interlocutory application for pre-action discovery, noted the submission of the plaintiff that there was an implied 'term of good faith'. Reference was made to Alcatel and subsequent decisions which applied Alcatel. As to the content of the obligation, Parker J referred to the Sir Anthony Mason address and noted a submission to him that good faith involved the three 'related notions' to which Sir Anthony referred. Parker J said that rather than spend more time on the issues, because he was dealing with an interlocutory application 'hardly suited to the full analysis of a possible major development in the law of contract', he would proceed to consider what the consequences would be if there was an implied term of good faith. His Honour reached the conclusion that there was no unreasonable conduct on the part of the defendant and dismissed the application. On appeal, in Central Exchange Ltd v Anaconda Nickel Ltd [2002] WASCA 94; (2002) 26 WAR 33, the same approach was taken. The appeal was dismissed. Malcolm CJ referred to Parker J's preparedness to approach the matter on the basis of 'an assumption that a term that the respondent would deal with the appellant in good faith was to be implied' [19]. Steytler J, with whom Wallwork J agreed, also made the assumption and dealt with the matter on the assumption that a term of good faith was to be implied, but 'without deciding that question'.

52 By the time the Full Court dealt with the Central Exchange case, the New South Wales Court of Appeal had once again said something on the topic in Burger King Corporation v Hungry Jack's Pty Ltd [2001] NSWCA 187; (2001) 69 NSWLR 558. The dispute in that case arose out of a franchise agreement. At [169] - [173], Sheller, Beazley and Stein JJA discussed the content of the duty of an implied term requiring good faith to be displayed by the contracting parties. The Mason lecture was again referred to. Their Honours concluded that a term of 'reasonableness' and 'good faith' should be implied [183]. The content of the duty of good faith was the content referred to in the Mason address.

53 In 2004, in Expectation Pty Ltd v Pinnacle VRB Ltd, there was a contract containing an express term requiring the parties to a 'Letter Agreement' to 'negotiate in good faith to close the transactions contemplated in this Letter Agreement'. The trial judge found that the defendant had not breached the term requiring the parties to negotiate in good faith. Steytler J wrote the reasons with the other members of the court agreeing. His Honour referred to the trial judge's reasons which noted that the obligation of good faith involved the three related notions referred to in the Mason lecture. In the context of a duty of good faith in relation to negotiations, Steytler J noted the trial judge's observation that 'the term would be breached by the abandonment of the process of negotiation in the sense of a failure to do what was reasonably required if the defendant was to remain loyal to the promise it had made' [43]. (I have added emphasis to words of importance in this sentence.) Later, Steytler J said [45] that the trial judge was fully cognisant of the fact that the good faith term would be breached by failure 'to take reasonable action to negotiate the agreement'.

54 In another case referred to by the parties, Overlook Management BV v Foxtel Management Pty Ltd [2002] NSWSC 17, Barrett J accepted that the content of the duty of good faith was as explained in the Mason lecture. Barrett J noted [64] that there was 'some overlap' with the term implied by law to do everything necessary to enable the other party to have the benefit of the promise in a contract. His Honour observed that the more substantial and separate content of the duty of good faith itself would therefore seem to lie in the second and third limbs of Sir Anthony's formulation, that is adherence to standards of conduct which are 'honest, as well as being reasonable having regard to the parties' interests'. His Honour noted [65] that that meant that it became necessary to inquire about the extent to which selflessness is required. He added [65]:

It must be accepted that the party subject to the obligation is not required to subordinate the party's own interests, so long as pursuit of those interests does not entail unreasonable interference with the enjoyment of a benefit conferred by the express contractual terms so that the enjoyment becomes (or could become) ... 'nugatory, worthless or, perhaps, seriously undermined'.

55 Finally, reference should be made to the recent decision in 2009 of United Group Rail Services Ltd v Rail Corporation of New South Wales, which the trial judge cited in this case. Allsop P wrote the reasons in that case with the other members of the court agreeing. As part of a dispute resolution clause, the parties expressly agreed to undertake 'genuine and good faith negotiations' to resolve disputes arising from the performance of a fixed body of contractual rights and obligations. An issue was whether the agreement was incomplete. Allsop P reviewed the authorities. At [65], Allsop P said that an obligation to undertake discussions about a subject in an 'honest and genuine attempt' to reach an identified result is not incomplete. He then added '[i]t may be referable to a standard concerned with conduct assessed by subjective standards, but that does not make the standard or compliance with the standard impossible of assessment'. His Honour noted that '[w]hat the phrase "good faith" signifies in any particular context and contract will depend on that context and that contract', but that a number of things could be said, namely that '[t]he phrase does not, by its terms, necessarily import, or presumptively introduce, notions of fiduciary obligation' and '[n]or does it necessarily import any notion or requirement to act in the interests of the other party to the contract' [70].

56 The particular agreement under consideration there led Allsop P to conclude that the agreement carried with it 'a requirement to bring an honestly held and genuine belief about their mutual rights and obligations and about the controversy to the negotiations, and to negotiate by reference to such beliefs' [72]. He said that a party would not be entitled to 'pretend to negotiate' in order to drive the other party into an expensive arbitration that it believes the other party cannot afford and concluded:

It is sufficient to say that the standard required by the notion of genuineness and good faith within a process of otherwise tactical and self-interested behaviour (negotiation) is rooted in the honest and genuine views of the parties about their existing bargain and the controversy that has arisen [73].

I have already referred to the Aiton case, the relevant passages of which were set out in the trial judge's reasons.

57 Many other authorities and learned articles were referred to, but they were all thoroughly reviewed in the more recent cases and particularly in Allsop P's reasons for decision in The United Group Rail Services case. In my view, it is unnecessary to add to the already voluminous material dealing with the subject given that the natural and ordinary meaning is straightforward.

58 The objective background or factual matrix which has to be considered when interpreting the phrase 'deal with each other in good faith' is partly set out in the recitals to the MOU. The objective facts were that Cable Sands was the registered proprietor of the land. Located on the land was some radioactive material. Strzelecki was interested in purchasing the land with a view to subdividing and developing the land for a housing estate. The parties were not prepared to enter into a binding contact for the sale of the land until due diligence processes were carried out.

The meaning of the phrase 'good faith' in the MOU

59 Counsel for Strzelecki submitted that the tripartite test referred to in the Mason lecture was the test to be applied. He submitted that the third notion mentioned by Sir Anthony meant that the court should determine whether Cable Sands' conduct was 'objectively' reasonable. He submitted that United Rail supported that submission. In United Rail, Allsop P discussed the meaning of 'good faith' which was used in a composite phrase ('genuine and good faith') in the contract in that case. Counsel for Strzelecki conceded that if the requirement of good faith only required a party to act honestly, then it could not succeed on the appeal because it acknowledged that Cable Sands acted honestly. However, counsel for Strzelecki submitted that Allsop P's reasons supported the submission that a 'good faith' provision in a contract required the court to apply the objective concept of reasonableness. He submitted that Cable Sands' conduct and the content of its proposals were objectively unreasonable and that both aspects constituted a breach of the duty to act in good faith.

60 In my opinion, nothing in Allsop P's reasons in United Rail supports the appellant's submission. Allsop P concluded that the obligation to act in 'good faith' to resolve disagreements required no more than that a party act honestly 'within the framework of fidelity to the bargain' [77]. The expression 'fidelity to the bargain' is a reference to the requirement that a party do all things necessary to enable the other party to have the benefit of the contract: see Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd. But that does not require in this case that one party give in to the demands of the other.

61 In my opinion, the MOU only required that the parties 'deal' with each other honestly. That is the natural and ordinary meaning of the phrase 'good faith'. As Allsop P noted in Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2010] NSWCA 268 [9], the expression 'good faith' is a phrase with readily available content as an English phrase. I have already referred to the Macquarie Dictionary and Oxford English Dictionary references supporting this. As to the tripartite test referred to in the Mason lecture, there may be uncertainty about precisely what is meant by the third aspect, namely 'compliance with standards of conduct which are reasonable having regard to the interests of the parties', which is perhaps why Mason J preferred to refer only to the first two concepts, namely, loyalty to the promise itself and compliance with honest standards of conduct. That was clear when, in the article, Sir Anthony said 'I use "good faith" mainly in the sense of loyalty to the promise itself and as excluding bad faith behaviour'.

62 Parties engaged in negotiations to conclude a contract owe each other no fiduciary obligations and they are not required to act in the interests of the other party: United Rail [70]; Macquarie International [13] (Allsop P), [147] (Hodgson JA, MacFarlan JA agreeing). That being so, it is difficult to know what the third aspect means in this context unless the reference to reasonable standards of 'conduct' is a reference to conduct which permits the negotiations to proceed. The MOU clearly contemplates that they 'deal' with each other by negotiating. This does not suggest that the content of an offer made in negotiations where the parties must deal with each other in good faith must pass some objective test of reasonableness to be assessed by the courts. The parties should 'deal' with each other in good faith by doing what Einstein J said the parties should do in Aiton's case [155] - [156], that is:

(a) subject themselves to the process of negotiation; and

(b) keep an open mind in the sense of being willing to consider such proposals as may be propounded by the other party and put forward options for the resolution of any differences which may develop in the negotiations.

63 To deal with each other in that fashion would be to deal with each other in good faith because that would show fidelity or loyalty to the MOU promise to negotiate (see United Rail [77]) and involve an honest standard of conduct. Unreasonable or capricious 'conduct' would be relevant but only insofar as it provided evidence from which it may be inferred that a party was not honestly subjecting themselves to the process of negotiation or not keeping an open mind and therefore not acting in good faith.

64 When it comes to the content of a proposal made during negotiations, I do not accept Strzelecki's submission that the mere content of a proposal which relates to the subject matter of the negotiations could amount to a breach of good faith. Parties must be given continued freedom to engage in self-interested behaviour so long as they do so honestly and in a manner allowing the negotiations to proceed. Merely putting up a proposal which the other party or the court considered unreasonable does not provide evidence allowing the court to infer a lack of honesty, if the party making the proposal does not rule out negotiations about the proposal.

65 In this case, there was no evidence of conduct from which it may be inferred that Cable Sands was not acting honestly and did not subject itself to the process of negotiation and Strzelecki does not contend otherwise. The evidence that Cable Sands had indicated in October 2004 that it would carry out remediation work was not evidence relevant in determining whether Cable Sands was acting in good faith. What was discussed at the October 2004 meeting was eventually reduced to writing in the form of the MOU. The parol evidence rule excludes the evidence about what was 'agreed' at the meeting in October 2004 when construing the MOU. It was only received in evidence at trial because of the pleaded case advanced by Strzelecki that there was an oral agreement for Cable Sands to carry out the remediation work. Once that claim was dismissed, the evidence was irrelevant. There was no underlying 'spirit' of the MOU to be gleaned from pre-contract discussions (as counsel for Strzelecki submitted) which bound Cable Sands to do the work.

66 In any event, even if Cable Sands' statement in October 2004 was relevant, Strzelecki expressed a preparedness to carry out the remediation work when Cable Sands said on 17 February 2006 that it was not sure it would do the work. It is significant that Strzelecki did not, until recently, contend that a lack of good faith was demonstrated by Cable Sands' rather mild statement on 17 February 2006 that it was not 'sure' that it would carry out the remediation work and Cable Sands' proposal in the special conditions that Strzelecki would be solely responsible for the remediation work. It is clearly a recently formulated contention. It is a contention which should be dismissed because the question of who should do the work was successfully resolved by the process of negotiation conducted in good faith.

67 I then turn to Cable Sands' proposal in the special conditions that Strzelecki provide an indemnity and a bank guarantee. Strzelecki submits that this was objectively unreasonable. Strzelecki pointed to some evidence that the estimated profit from the development was only $5 million. It submitted that the proposal that it provide a bank guarantee of $25 million and provide a complete indemnity against claims no matter whether Cable Sands or Strzelecki was responsible was not a proposal that any reasonable person could proffer.

68 However, the bank guarantee was only to cover a contingency and was not a requirement that a certain amount be paid out at any time. If the parties had negotiated, they may have concluded that the contingency was very unlikely to arise if the work was properly carried out or they may have negotiated a lower amount for the bank guarantee. The appellant also submitted that the cost of a $25 million guarantee was evidence of unreasonableness, but there was no evidence to support the submission. It is not for this court to speculate what that cost might be. In any event, the explanation offered by Cable Sands as to why it wanted the guarantee does not appear unreasonable. Further, the proposal that Strzelecki should indemnify Cable Sands does not appear unreasonable. If the development had gone ahead and persons who purchased housing lots had to relocate because of the presence of residual radioactive material not removed by Strzelecki, then it would not be any surprise if both Strzelecki and Cable Sands were sued.

69 However, even if by some unspecified test the proposals by Cable Sands concerning the bank guarantee and the indemnity were unreasonable, it was clear from Cable Sands' subsequent letter of 10 March 2006 that it was prepared to negotiate in relation to those aspects. Cable Sands said that the issues about the clauses were 'key' issues to be resolved. That showed a willingness to continue the negotiations in good faith.

70 Strzelecki did not take up the opportunity to negotiate. Strzelecki instead took the position that its offer was one that Cable Sands had to accept. It was Strzelecki that took an uncompromising view about what the special conditions should be.

71 Further, there was nothing unreasonable about Cable Sands proffering the special conditions when it did. Time was tight, and it took less time to draft and proffer its proposed special conditions than that Strzelecki took to respond with its proposed conditions.

72 If, contrary to the view I have expressed above, the trial judge erred in [111] by not considering the reasonableness of the proposals, then this court is in as good a position as the trial judge to reach a conclusion and the conclusion I would reach is that there was no objectively unreasonable proposal by Cable Sands (and no unreasonable conduct). In my opinion, Cable Sands dealt with Strzelecki in good faith during the negotiations. The trial judge did not err. The appeal should be dismissed.

74 MURPHY JA: I agree with Pullin JA that the appeal should be dismissed. I am indebted to his Honour for his recitation of the facts, and his recitation of the findings made by the primary judge, and I will not repeat them. I will also adopt the abbreviations used by Pullin JA in his reasons.

75 The appeal turns on the meaning and application of the terms of a binding contract, the MOU. The MOU provided relevantly, in effect, that:

(a) Cable Sands and Strzelecki Holdings were engaged in discussions in relation to the sale of the Land by Cable Sands to Strzelecki Holdings (recital B);

(b) The parties had agreed for certain due diligence processes to be carried out with respect to the Land, and the MOU set out the terms of their dealings with each other:

(i) during the course of those due diligence processes; and

(ii) on completion of those processes, for the negotiation of a contract between the parties for the sale and purchase of the Land (recital C);

(c) Strzelecki was aware that 53.5 ha of the Land was to be resumed by the State of Western Australia for regional open space (recital D);

(d) Cable Sands would promptly arrange for an environmental engineering study (Tailings Relocation Study) of the Land to be carried out to determine:

(i) which governmental approvals would be required in order to relocate the tailings situated on the Land and the conditions that would apply to such proposed relocation;

(ii) a strategy for relocating and encapsulating all tailings on the Land to some other part of the Land, which would have the least impact on the development of the Land; and

(iii) the cost and practicality of implementing such a strategy (cl 1);

(e) Cable Sands would keep Strzelecki Holdings informed in relation to all aspects of the Tailings Relocation Study, and would promptly advise Strzelecki Holdings of the estimated costs for relocating and encapsulating the tailings once the cost had been determined (cl 2);

(f) Strzelecki Holdings would promptly carry out a due diligence and feasibility study in relation to the subdivision and development of the Land to its highest and best use, including all relevant planning and development approvals (Feasibility Study), and would provide Cable Sands with a copy of the Feasibility Study once completed (cl 3);

(g) Strzelecki Holdings would complete the Feasibility Study within 90 days of entry into the MOU, or within seven days after it received a copy of the Tailings Relocation Study, whichever was the later (cl 5);

(h) Strzelecki Holdings would, within 14 days after completing the Feasibility Study, advise Cable Sands whether it wished to continue with negotiations for the purchase of the Land and if it did not, the MOU would come to an end save for the continued operation of certain confidentiality obligations (cl 6 and cl 7);

(i) If Strzelecki Holdings advised that it wished to continue negotiations for the purchase of the Land the parties would negotiate the contract for the sale and purchase of the Land including on terms:

(i) that the purchase price would be $3.2 million plus GST;

(ii) that Strzelecki Holdings would, in addition to paying the purchase price, be responsible for all costs associated with relocating and encapsulating the tailings;

(iii) that any payment received, prior to settlement, from the State of Western Australia for resumption would be shared by the parties equally; and

(iv) otherwise in accordance with standard REIWA terms, with such variations as may be agreed (cl 8);

(j) During the currency of the MOU, Cable Sands would not sell, agree to sell, or negotiate the sale of, the Land or any part of it, to a third party (cl 11);

(k) The parties would deal with each other in good faith during the currency of the MOU (cl 12), including in relation to the negotiation for a contract for sale pursuant to cl 8 (cl 9); and

(l) The period of negotiation for the purposes of cl 8 would be 30 days from the date of Strzelecki Holdings' advice under cl 6, or such further term as the parties may agree, and absent a concluded agreement in such time, the MOU would come to an end, save for the continued operation of certain confidentiality obligations (cl 9).

76 As Pullin JA has observed, the parties subsequently agreed on 9 January 2006, that the time period for the negotiations in cl 8 would commence from the date that Cable Sands delivered an addendum to the study which it had contended met the requirements of cl 1 of the MOU, thereby in effect varying the MOU in that respect. The addendum was delivered on 13 February 2006.

77 The following principles of construction are relevant:

(a) The unit of communication by language is the sentence and not the parts of which it is composed; the significance of individual words is affected by other words and the syntax of the whole: Collector of Customs v Agfa-Gevaert Ltd [1996] HCA 36; (1996) 186 CLR 389, 397.

(b) The court's primary task in construction is to discover the intention of the parties from the words used by the parties in the contract, read as a whole: Australian Broadcasting Commission v Australasian Performing Right Association Limited [1973] HCA 36; (1973) 129 CLR 99, 109.

(c) The common intention of the parties to a contract is to be ascertained by reference to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contract is to be determined by what a reasonable person would have understood them to mean: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165, 176 [40]. This normally requires a consideration of not only the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction, including the market in which the parties were operating: Toll (FGCT) v Alphapharm (179) [40]; Pacific Carriers Pty Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451, 461 - 462 [22]; Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; (2001) 210 CLR 181, 188 [11]; McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579, 589 [22].

(d) Contracts dealing with matters of business are to be construed in a reasonable and business manner: Hart v MacDonald [1910] HCA 13; (1910) 10 CLR 417, 431. Commercial contracts should be construed so as to make commercial sense of them - a conclusion that reflects business common sense is to be preferred to one that flouts it: Geroff v CAPD Enterprises Pty Ltd [2003] QCA 187 [36] - [40]. Thus, the contract should be construed practically to give effect to its commercial purpose: Hancock Prospecting Pty Ltd v BHP Minerals Pty Ltd [2003] WASCA 259 [72].

78 Further, the law implies a positive obligation on each party to a contract to do all things necessary on its part to enable the other party to have the benefit of the contract. The law also implies a negative covenant not to hinder or prevent the fulfilment of the purpose of the express promises in the contract. See Peters (WA) Ltd v Petersville Ltd [2001] HCA 45; (2001) 205 CLR 126 [36]; Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596, 607 - 608. Similarly, in all cases where the performance of the parties' obligations requires cooperative acts, there is imposed on the parties a duty of complying with the reasonable requests for performance made by the other: Electronic Industries Ltd v David Jones Ltd [1954] HCA 69; (1954) 91 CLR 288, 297 - 298.

79 It is important to note that this case does not involve the question of whether a term of good faith should be implied (whether by law or as a matter of fact) in connection with the performance of the contract in general, or in the exercise of contractual powers or rights in particular - compare for example Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349; Burger King Corporation v Hungry Jack's Pty Ltd [2001] NSWCA 187; [2001] NSWCA 187; (2001) 69 NSWLR 558, 569 - 573; Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd [2005] FCA 288 [64]; and Hughes Aircraft Systems International v Airservices Australia [1997] FCA 558; (1997) 76 FCR 151, 188 - 198 on the one hand, with Service Station Association Ltd v Berg Bennett & Associates Pty Ltd [1993] FCA 445; (1993) 45 FCR 84, 91 - 98; and Wenzel v Australian Stock Exchange Ltd [2002] FCAFC 400; (2002) 125 FCR 570 [80], on the other.

80 The question of whether an implied term to that effect exists has been assumed for the purposes of argument, but not decided, in this Court: Central Exchange Ltd v Anaconda Nickel Ltd [2002] WASCA 94; (2002) 26 WAR 33 [21], [24], [55]. In Royal Botanic Gardens & Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 240 CLR 45, Gleeson CJ, and Gaudron, McHugh, Gummow and Hayne JJ left the issue open on the basis that the case was not an appropriate vehicle for the consideration of the issue [40]. Kirby J found it unnecessary to explore the issue, but expressed the view that such an implied term appeared to conflict with fundamental notions inherent in common law conceptions of economic freedom, and appeared to be inconsistent with the development of the law with respect to the implication of terms into written contracts [86] - [88]. Callinan J said that it was 'unnecessary to answer the points raised by the rather far reaching contentions' [156] of the appellant in that case concerning the effect of the decisions in Alcatel Australia v Scarcella and Burger King v Hungry Jack's.

81 It is also important to note that this case does not raise questions of whether certain contractual powers, by their nature and when considered within the overall contractual scheme in question, are required to be exercised not just honestly but also reasonably. See in this regard, for example, Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 (where wide contractual powers were conferred on one party, including to terminate the contract, which powers were exercisable only upon it being satisfied that a certain state of affairs existed); WMC Resources Ltd v Leighton Contractors Pty Ltd [1999] WASCA 10; (1999) 20 WAR 489 [46] (where the contractual task of valuing works had been committed to the principal in a building contract); Amann Aviation Pty Ltd v Commonwealth of Australia [1990] FCA 55; (1990) 22 FCR 527, 533, 542 - 544; and in the High Court Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64, 96. See also the discussion by Gummow J in Service Station v Berg Bennett (94).

82 Rather, this is a case in which there is, as part of a binding contract involving the undertaking of due diligence exercises in connection with the potential sale of an asset, an express term to negotiate the sale and purchase of the asset 'in good faith'. This appeal raises two issues. The first is, what, in the context of this contract, is the content of the term to negotiate the sale and purchase of the Land 'in good faith', and secondly, whether that term has been breached. Again, at this point it is important to note what is not involved. There is no issue as to whether, in the performance of any other aspects of the MOU (eg, in the arrangement and disclosure of the respective studies) there has been a breach of the term requiring the parties to 'deal' with each other in good faith, or a breach of any of the other terms of the MOU in relation to the studies produced or otherwise. Nor, in relation to the issue of whether there has been a breach of the term to negotiate in good faith, has it been suggested that, in the context of the overall agreement, the term is too illusory, too vague or too uncertain to be enforceable: cf, for example, Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 and Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104 on the one hand; and Con Kallergis Pty Ltd v Calshonie Pty Ltd (1998) 14 BCL 201, and United Group Rail Services Ltd v Rail Corporation New South Wales [2009] NSWCA 177; (2009) 74 NSWLR 618, on the other.

83 Strzelecki Holdings argued, in effect, that the words 'good faith' in the MOU are to be read as comprehending three elements referred to by Sir Anthony Mason, in an article in (2000) 116 LQR 66, viz:

(a) an obligation on the parties to cooperate in achieving the contractual objects (loyalty to the promise itself);

(b) compliance with honest standards of conduct; and

(c) compliance with standards of conduct which are reasonable having regard to the interests of the parties.

84 In his submissions, counsel for Strzelecki Holdings submitted, in effect, that the three matters to which Sir Anthony Mason referred were independent, cumulative criteria each of which had to be satisfied in order to establish compliance with the requirement of 'good faith'. He said that in this case, the judge erred in failing to find a breach of the first and third notions. He eschewed any suggestion that Cable Sands failed to act honestly. He said that there 'is a fundamental distinction between, on the one hand, the objective, "reasonableness" standard inherent in the first/third notions of good faith ... and, the subjective, "honesty" standard in the second notion'.

85 In substance, Strzelecki Holdings contended that Cable Sands acted unreasonably, and thereby failed to comply with the first and third postulated criteria of good faith having regard to:

(a) the circumstances in which Cable Sands sought the guarantee and indemnity as proposed terms of the potential sale and purchase of the Land, in that:

(i) the guarantee and indemnity were proposed in connection with a proposed requirement by Cable Sands that Strzelecki Holdings undertake the remediation despite Cable Sands' ability to do so;

(ii) the demand for a guarantee and indemnity was made two weeks into the 30 day negotiation period without it ever having previously been raised during the currency of the MOU; and

(i) the guarantee and indemnity were not reasonably necessary to protect Cable Sands' interests; and

(ii) Cable Sands knew or ought to have known that Strzelecki Holdings would never be able to agree to such terms.

86 Before addressing these arguments in detail, I should make some preliminary observations on Strzelecki Holdings' reliance on what was described by counsel as Sir Anthony Mason's 'triptych'.

87 As Pullin JA has observed, Sir Anthony was referring to the duty of good faith in the United States Uniform Commercial Code and the Restatement of Contracts, Second. The former included a definition of 'good faith' to include 'the observance of reasonable commercial standards of fair dealing in the trade' and the latter referred to a 'duty of good faith and fair dealing' in performance and enforcement of the contract. Sir Anthony said that whilst he was 'by no means clear what "good faith" in the context of these provisions means', it was 'probable that the concept embraces no less than' the three notions to which he referred. Sir Anthony added in the article that he would use 'good faith mainly in the sense of loyalty to the promise itself and as excluding bad faith behaviour' and that he would 'avoid becoming enmeshed in the American arguments about what "good faith" means'. Also, Sir Anthony Mason referred to the three notions as 'related', rather than operating independently of each other. Moreover, in the same journal article, in the section dealing with contract negotiation (as opposed to the discussion on performance), Sir Anthony said:

Ordinarily an agreement to negotiate in good faith would simply exclude bad faith conduct ... without more, an agreement to negotiate in good faith would not disentitle a party from having regard to commercial self interest in its conduct of the negotiations except insofar as its conduct involved bad faith. The nature and subject matter of the agreement might, however, qualify that general statement (80).

88 The three notions described by Sir Anthony Mason were referred to in Alcatel Australia v Scarcella (367) and Burger King v Hungry Jack's (570), as part of a general review of 'good faith' in the performance of contracts. Both those cases were concerned with the exercise of contractual powers. The three notions were also considered to be elements of good faith by Hodgson JA (Macfarlan JA agreeing) in Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2010] NSWCA 268 [146], cf [1], [12] (Allsop P). That case concerned a contract for a relationship which was to last for 99 years, involving the expenditure of large sums of money on acquiring leases and the construction of substantial works. The relevant contractual term required the parties to act with the utmost good faith in the performance of their respective duties, in the exercise of these respective powers, and in their respective dealings with one another. Hodgson JA, after referring to Sir Anthony's three notions, and to Alcatel Australia v Scarcella and Burger King v Hungry Jack's said [147]:

However, a contractual obligation of good faith does not require a party to act in the interest of the other party or to subordinate its own legitimate interest to the interests of the other party; although it does require it to have due regard to the legitimate interests of both parties: cf Overlook v Foxtel [2002] NSWSC 17 at [65] - [67] (Barrett J). (emphasis added)

89 In Overlook Management BV v Foxtel Management Pty Ltd [2002] NSWSC 17, Barrett J also referred to the article by Sir Anthony Mason and the three notions to which he referred [63] - [67]. His Honour went on to say that the concept of 'good faith' is in many ways best regarded as precluding bad faith. Barrett J said [68] - [69]:

In many ways, the implied obligation of good faith is best regarded as an obligation to eschew bad faith. This is borne out by the following succinct statement by Lord Scott of Foscote in Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd [2001] UKHL 1; [2001] 2 WLR 170, a case concerning the duty of good faith in the insurance context:

'Unless the assured has acted in bad faith, he cannot, in my opinion, be in breach of a duty of good faith, utmost or otherwise.'

The approach which regards a duty of good faith as a duty to eschew bad faith is also supported by United States jurisprudence to which resort may appropriately be had: Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234; Burger King at para 147ff. Writing in 1968, Professor Summers described the duty of good faith imposed by the United States Uniform Commercial Code as an 'excluder': R S Summers, 'Good Faith in General Contract Law and the Sales Provisions of the Uniform Commercial Code', (1968) 54 Va L Rev 195. Its operation and effect were stated as follows:

'It is a phrase without general meaning (or meanings) of its own and serves to exclude a wide range of heterogeneous forms of bad faith. In a particular context the phrase takes on specific meaning, but usually this is only by way of contrast with the specific form of bad faith actually or hypothetically ruled out.'

90 In relation to the notion of good faith operating, in substance, as an excluder of bad faith, in Service Station v Berg Bennett, Gummow J observed (95 - 96):

[I]n Canada, it has been said that 'good faith' cannot be defined with any meaningful precision and the only definition or guidance that can be provided 'is via modern examples of bad faith behaviour': Gateway Realty Ltd v Arton Holdings Ltd (No 3) (1991) 106 NSR (2d) 180 at 197. It is difficult to see how in many cases an injunction of the appropriate specificity might then be framed.

What does appear is that the various North American jurisdictions have not yet developed 'a coherent theory of good faith': H K Lücke, 'Good Faith and Contractual Performance' in Finn (ed), Essays on Contract (1987), p 155 at p 161, the paper to which counsel for the applicant referred. In Gateway Realty Ltd v Arton Holdings Ltd (No 3) supra it was said:

'"Good faith" conduct is the guide to the manner in which the parties should pursue their mutual contractual objectives. Such conduct is breached [sic] when a party acts in "bad faith" - a conduct that is contrary to community standards of honesty, reasonableness or fairness.'

Invocation of 'community standards' may be no more than an invention by the judicial branch of government of new heads of 'public policy', something long ago regarded as a risky enterprise; cf Gollan v Nugent [1988] HCA 59; (1988) 166 CLR 18 at 35, per Brennan J. It cannot be less so in the modern administrative state 'shaped by explicitly adopted policies, incorporated in legislation and implemented by a large array of large regulatory agencies': N Gunningham 'Public Choice: The Economic Analysis of Public Law' (1992) 21 Fed L Rev 117.

However, in Gateway Realty (at 197) it was then said:

'In most cases, bad faith can be said to occur when one party, without reasonable justification, acts in relation to the contracts in a manner where the result would be to substantially nullify the bargained objective or benefit contracted for by the other, or to cause significant harm to the other, contrary to the original purpose and expectation of the parties.'

That bears a closer relationship to the generally accepted position in Anglo-Australian law.

His Honour's reference in the last sentence quoted is, as I understand it, a reference to the implied term to cooperate, considered by Mason J in Secured Income Real Estate v St Martins, to which Gummow J had earlier referred at (93).

91 The three notions adverted to by Sir Anthony Mason were referred to by Parker J in Central Exchange Ltd v Anaconda Nickel Ltd [2001] WASC 128; (2001) 24 WAR 382 [24] - [25]. That case involved an interlocutory decision which assumed, rather than decided, the existence of a term of good faith encompassing the three notions described by Sir Anthony Mason. By reference to Parker J's decision in Central Exchange v Anaconda Nickel, Murray J referred to the same three elements in Expectation Pty Ltd v Pinnacle VRB Ltd [2001] WASC 144 (S) [16]. His Honour was there considering a clause (cl 6 of a letter agreement) to the effect that the parties would 'negotiate in good faith to close the transactions contemplated in this Letter Agreement in an expeditious manner and as soon as practicable'. On appeal, the court was not required to determine the meaning of the relevant clause as a matter of its proper construction: Expectation Pty Ltd v Pinnacle VRB Ltd [2004] WASCA 261. Rather, the proper construction of the clause (as opposed to its application) appears not to have been in dispute. In the Full Court, Steytler J (with whom McKechnie and Jenkins JJ agreed) noted that the primary judge had also determined in that case that the particular clauses involved an obligation on the parties 'to use their best endeavours to ensure the making of the agreements contemplated by the letter agreement within the time framework provided so as to ensure that each had the benefit of the agreement' [44]. Steytler J said that the trial judge was fully cognisant of the fact that cl 6 would be breached by failure to take reasonable action to negotiate the agreement [49]. His Honour also said that the trial judge had 'correctly understood the nature and extent of the obligations imposed by cl 6 of the Letter Agreement' [70]. As I understand Steytler J's reasons, his Honour was not considering the question of whether the defendant had proposed objectively unreasonable terms, but rather whether it could be said that the defendant failed to do what was reasonably required in the circumstances and having regard to the requirement of expedition, to participate in the process of negotiation (see [89]).

92 Whilst I would, with respect, agree that the three notions referred to by Sir Anthony Mason may in a general sense be regarded as illustrating related aspects of the concept of 'good faith', it is nevertheless important, in my view, to bear in mind the following matters. The first is that they are 'notions' which are 'related' to each other. It would be wrong in my view to regard them as, in effect, statutory criteria, each to be interpreted in its own right, and then applied independently of the other. The second and related matter is that the assessment of what is 'reasonable having regards to the interests of the parties' in the third notion, will itself in my view be informed by the identification of the 'contractual objects' and the scope of the obligation 'to cooperate in achieving [those] objects' with which the first notion is concerned, having regard to the proper construction of the contract as a whole. In this sense, the reference to the 'interests' of the parties in the third notion is to be understood as a reference to the 'legitimate' interests of the parties. The third is that the question for the court, in this case, is ultimately one of the proper construction of the contract, according to recognised principles. It would not, it seems to me, be appropriate, as at times the appellant's submissions tended to suggest, to substitute the interpretation and application of a predetermined and external formula for the process of construction of the terms of the contract.

93 In my view, the following matters are relevant to the proper construction of the contractual terms in this case. First, the nature of the arrangement was that the Land would be sold by Cable Sands to Strzelecki Holdings if suitable terms could be mutually agreed within the time stipulated for the negotiations to be undertaken. This is underscored by the 'lockout' provision precluding sale elsewhere, and the fact that it was recognised that Cable Sands would disclose confidential information to Strzelecki Holdings for the purpose of facilitating a sale of the Land (if terms could be agreed) to Strzelecki Holdings. Secondly, the parties had agreed on important terms involving price, the application of any resumption compensation, and the panoply of machinery provisions (the standard REIWA terms) designed to effectuate the sale of land in this State. Thirdly, apart from embodying the principle that in any binding agreement for sale to be negotiated between the parties, Strzelecki Holdings would be responsible for 'all costs' associated with relocating and encapsulating the tailings, the MOU was silent as to whether Cable Sands, or Strzelecki Holdings, or some third party, should undertake the task of dealing with the tailings. Fourthly, whilst cl 1 of the MOU indicates that, at the time of contracting, the parties assumed that it would be feasible to relocate the tailings from one part of the Land to another part of the Land in a way which would facilitate the overall commercial development of the Land, the Tailings Report had not then been prepared and the parties were unaware of the full nature, complexity, magnitude and expense of the tasks associated with the process of dealing with the tailings and rendering the Land safe and suitable for residential development and occupation. (As noted below, the assumption made by the parties, as events transpired, proved incorrect). Fifthly, the MOU is between two arms-length commercially astute parties, the subject matter of which concerns a valuable asset. Sixthly, negotiation is 'an essentially self-interested commercial activity': United Group Rail Services v Rail Corporation NSW [71].

94 In light of the foregoing considerations, in my view, the agreement to negotiate in good faith would, on its proper construction, connote both positive and negative obligations. In its positive aspects, it would include, relevantly, obligations on the parties:

(a) to make proposals and (if thought appropriate) counterproposals for terms of the sale and purchase of the Land;

(b) to make such proposals and counterproposals which respected and gave effect to the material terms already agreed, and which addressed other matters relating to their respective positions as potential vendor and potential purchaser of the Land;

(c) to give serious and genuine consideration to proposals and counterproposals made and received;

(d) to make and respond to proposals and counterproposals in a reasonably timeous manner having regard to the time allotted for negotiations and to the nature and scope of the issues to be negotiated, their technical and factual complexity, and their commercial significance to the parties;

(e) in accordance with the ordinary meaning of 'good faith', to negotiate with 'honesty of purpose' and 'sincerity of declaration' (Macquarie Dictionary).

95 In its negative aspect, the obligation on each party would include not to negotiate in an arbitrary or capricious manner, particularly having regard to the need to construe the MOU in a commonsense and businesslike manner. Only the rational pursuit of commercial self-interest in negotiating terms connected with the subject matter of the contract is contemplated.

96 In relation to the obligation referred to in [94(b)] above, it was, in my view, within the scope of the terms to be negotiated to address at least the following:

(b) the nature and extent of, and processes by which, remediation work would be undertaken;

(c) the costs to be incurred in undertaking the remediation work; and

(d) the allocation of the risks concerning, and the assumption of financial exposure associated with, the prospect of the remediation work not completely and effectively rendering the Land suitable and safe for residential occupation or use.

97 An assessment of the content of good faith by reference to Sir Anthony Mason's three 'related notions' would not, in the context of the MOU in this case, lead to an alteration or enlargement of the parties' contractual obligations as I have sought to outline them. The terms to which I have referred embody, in my view, the three notions of loyalty to the bargain, compliance with honest standards of conduct and compliance with standards of conduct which are reasonable, having regard to the parties' respective legitimate interests.

98 The positive and negative obligations to which I have referred might also be regarded as compendiously characterised as a duty not to negotiate in bad faith, which in my view is, at least in general terms, an apposite descriptor of the content of a duty to negotiate in good faith.

99 Further, in relation to a contractual power exercisable in connection with a 'show cause' provision which was held in Hughes Bros Pty Ltd v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (1993) 31 NSWLR 91, to be subject to a requirement of reasonableness, Handley JA observed that 'it will not be difficult in ordinary circumstances for the principal to fulfil the reasonableness obligation' (101). Whilst the MOU does not require the parties to negotiate 'reasonably', Handley JA's observations have in my view an a fortiori application where the subject matter of the contract is negotiation. In ordinary circumstances, the requirement to negotiate in good faith will not be difficult to fulfil.

100 The primary judge, in my view, approached the question of the scope and nature of the parties' obligations consistently with the construction of the MOU to which I have referred: see reasons [97] - [99], [105] - [106], [109] - [111]. Read as a whole, the judge's reasons indicate that Strzelecki Holdings' arguments were considered within a broader perspective than just subjective dishonesty.

101 In this appeal, the breaches asserted by Strzelecki Holdings are, in my opinion, premised on a requirement to conform to a standard of behaviour which is inconsistent with the parties' contractual intention.

102 In relation to the proposition advanced by Strzelecki Holdings in [85(a)] above, it is to be noted that there was no contractual obligation (and a binding estoppel was not asserted in this appeal) which required Cable Sands to undertake the remedial work despite its technical ability to do so. Nevertheless, Strzelecki Holdings argues that the 'spirit of the bargain' or 'fidelity to the bargain' required Cable Sands to do the remediation work. In my view, that submission cannot be sustained. Fidelity to the bargain encompassed by the MOU required the topic of the remediation works to be negotiated within the contractual negotiation period. The parties expected, at the time of contracting, that it would be feasible to relocate the tailings from one part of the Land to the other. As the judge found, that approach to dealing with the tailings could not be pursued. The primary judge found [39]:

The report conceded that the tailings comprised radioactive material, 'naturally occurring levels of thorium and uranium'. As I understand the document, it was expected that the defendant [Cable Sands] would need to deal with the tailings in accordance with current industry practices, because although it had done what the law required at the time, it would now be necessary to deal differently with the tailings. The defendant [Cable Sands] would not be permitted to move the tailings to one or more different locations and endeavour to provide the required depth of deposit to achieve between two and five metres of inert soil covering the buried tailings. Industry practice since 2000 had been to dispose of radioactive tailings by diluting them with bulk volumes of tailings which were not radioactive, so as to reduce the level of radioactivity to equate with the radiation levels of the soil in the area before it was mined. The report concludes:

'Based upon the Company's extensive investigations that were conducted in connection with the preparation of this report, reburial of all Minninup Tails on the property is not an option available to the Company.'

From the time of the meeting in October 2004, it was clear that the plaintiff [Strzelecki Holdings] wished to purchase the land for purposes it made clear. The defendant [Cable Sands] wished to sell the land which was surplus to its requirements, but it appreciated that the change of use to which the plaintiff [Strzelecki Holdings] proposed to put the land would require a remediation process designed to deal with the radioactive tailings. The MOU focused attention upon that issue. That was the investigation to be done by the defendant [Cable Sands], the proposal being to investigate and cost the limited solution to which I have found cl 1 of the MOU refers. The investigation by the defendant [Cable Sands] was effectively derailed when it received advice, which it conveyed to the plaintiff [Strzelecki Holdings], that the solution envisaged by cl 1 was not possible. (emphasis added)

104 The remediation was thus greater than initially anticipated. In my view, adherence to fidelity to the bargain did not preclude the parties from negotiating all aspects of the remediation work and its commercial consequences for the parties, including who would undertake it and on what terms. On the contrary, fidelity to the bargain involved the parties so negotiating.

105 Pullin JA has recorded the progress of the parties' negotiations in his reasons under the heading 'The negotiations in the 30 day period'. In my opinion, the timing and circumstances in which Cable Sands proposed that Strzelecki Holdings carry out the remedial work were in conformity with the MOU.

106 In relation to the second proposition advanced by Strzelecki Holdings (see [85(b)] above), two matters are relied on. One is that the guarantee and indemnity were not reasonably necessary to protect Cable Sands' interests. The other is that Cable Sands knew or ought to have known that Strzelecki Holdings would never be able to agree to such terms.

107 As to the first of those matters, it is to be recalled that the Land, the sale of which was being negotiated, contained radioactive tailings with, it may be inferred, potential long-term consequences for the use of the Land. Each party, subject to the constraints referred to in [94] - [95] above, was entitled under the MOU to negotiate terms having regard to its own commercial interests. Cable Sands' proposal for the guarantee and indemnity could not be characterised as capricious or made for purposes unconnected with its commercial self-interest as a potential vendor of the Land. The trial judge referred to the letter from Cable Sands accompanying the proposals [59]:

'The guarantee figure has been arrived at, taking into consideration the Feasibility Study for the sale of 251 lots prepared by Benchmark Projects. Were the circumstances for a claim involving health or relocation issues to arise, this sum would barely cover a $1 Million claim by 10% of the lot owners.'

108 It is accepted by Strzelecki Holdings that this was an honest assessment by Cable Sands of its position. The issue raised for negotiation was, in my view, a matter for each party's commercial judgment. Strzelecki Holdings' submission in effect invites the court to resolve disputes arising in the negotiation process by determining 'objectively' the permissible content of each party's commercial self-interest in relation to proposed terms addressing the subject matter of the sale. That, in my view, does not accord with the intention of the parties to the MOU.

109 In relation to the second of the matters relied upon, there was no obligation on Cable Sands to subjugate its own commercial interests by only proposing terms that it thought might be acceptable to Strzelecki Holdings in the pursuit of Strzelecki Holdings' commercial self-interest.