'Good faith' as a requirement of an ADR clause
79 Clearly, the purpose of the good faith requirement in cl 28 is to require the parties to have a commitment to the dispute resolution process in advance of any dispute arising.
80 It has been said that an 'agreement to negotiate a dispute in good faith' is unenforceable for the same reasons why an 'agreement to agree' is unenforceable. This position is made clear by Lord Ackner in Walford v Miles [1992] 2 AC 128 at 138, with whom Lord Keith, Lord Goff, Lord Jauncey and Lord Browne-Wilkinson agreed:
'The reason why an agreement to negotiate, like an agreement to agree, is unenforceable, is simply because it lacks the necessary certainty. The same does not apply to an agreement to use best endeavours. This uncertainty is demonstrated in the instant case by the provision which it is said has to be implied in the agreement for the determination of the negotiations. How can a court be expected to decide whether, subjectively , a proper reason existed for the termination of negotiations? The answer suggested depends upon whether the negotiations have been determined "in good faith." However the concept of a duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties when involved in negotiations . Each party to the negotiations is entitled to pursue his (or her) own interest, so long as he avoids making misrepresentations. To advance that interest he must be entitled, if he thinks it is appropriate, to threaten to withdraw from further negotiations or to withdraw in fact, in the hope that the opposite party may seek to reopen negotiations by offering him improved terms. Mr Naughton, of course accepts that the agreement upon which he relies does not contain a duty to complete the negotiations. But that still leaves the vital question - how is a vendor ever to know that he is entitled to withdraw from further negotiations?' How is the court to police such an "agreement?" A duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with the position of a negotiating party. It is here that the uncertainty lies. In my judgment, while negotiations are in existence either party is entitled to withdraw from those negotiations, at any time and for any reason. There can be thus no obligation to continue to negotiate until there is a "proper reason" to withdraw. Accordingly a bare agreement to negotiate has no legal content.'
[emphasis added]
81 A similar position was adopted by Giles J in Elizabeth Bay at 716 who emphasised the 'necessary tension between negotiation, in which a party is free to, and may be expected to, have regard to self-interest rather than the interests of the other party, and the maintenance of good faith'. For Giles J, it was this tension, rather than the difficulty inherent in attempting to ascertain the presence or absence of good faith, which was determinative of the 'forbidding' 'vagueness' of cl 11.
82 With great respect, I disagree - such tension ought not be the linchpin in an argument that a good faith requirement in negotiation is too vague and uncertain to be meaningfully enforced.
83 It is clear that a tension may exist between negotiation from a position of self-interest and the maintenance of good faith in attempting to settle disputes. However, maintenance of good faith in a negotiating process is not inconsistent with having regard to self-interest: see D Cremean, 'Agreements to negotiate in good faith' (1996) 3 Commercial Dispute Resolution Journal 61 at 64. As Cremean points out at 65, "good faith is not co-extensive with selflessness." It does not require a party to make concession upon concession. Clearly, good faith negotiation is not the equivalent of agreement, is not a synonym for settlement, and does not require any particular outcome: see C McPheeters, 'Leading horses to water: May courts which have the power to order attendance at mediation also require good-faith negotiation?' (1992) 2 Journal of Dispute Resolution 377 at 391
84 To further take up the point raised by Lord Ackner in Walford, nor should good faith prevent a party from withdrawing from negotiations if appropriate.
85 I turn now to the related argument, that the concept of 'good faith' is too vague and uncertain to be enforceable. This argument was forcefully put by Handley JA in Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 at 41-2, where his Honour stated that there were no identifiable criteria by which the content of the obligation to negotiate in good faith could be determined. Handley JA pointed out that:
'Negotiations are conducted at the discretion of the parties. They may withdraw or continue; accept, counter offer or reject; compromise or refuse, trade-off concessions on one matter for gains on another and be as unwilling, willing or anxious and as fast or slow as they think fit.'
86 Accordingly, his Honour concluded that 'these considerations demonstrate that a promise to negotiate in good faith is illusory and therefore cannot be binding'.
87 In Asia Pacific Resources Pty Ltd v Forestry Tasmania (unreported, Supreme Court of Tasmania FC, 4 September 1997), the Full Court considered 'good faith' in the context of an implied term to negotiate in good faith. Wright J, in rejecting the implication of such a term at law, stated:
'The novel 'good faith' concept, … whilst capable of statement with beguiling simplicity can never be a pure question of law … because even its most ardent proponents appear to recognise that 'good faith' is incapable of abstract definition and can only be assessed as being present or absent if the relevant facts are known or are capable of being known - a little like proximity in the law of negligence'. [at 12]
88 While there may be a vagueness about a 'good faith' obligation, it is to be noted that there is a vagueness about many commercial contracts: see D Cremean, 'Agreements to negotiate in good faith' (1996) 3 Commercial Dispute Resolution Journal 61 at 64. The author draws attention to the statement of Ormiston J in Vroon BV v Foster's Brewing Group Ltd [1994] 2 VR 32 at 67:
'. . . the courts should strive to give effect to the expressed agreements and expectations of those engaged in business, notwithstanding that there are areas of uncertainty and notwithstanding that particular terms have been omitted or not fully worked out.'
89 Further, it is worthwhile remembering the observation of Barwick CJ (with whom McTiernan, Kitto and Windeyer JJ agreed) in Council of the Upper Hunter County District v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 at 436-437:
'But a contract of which there can be more than one possible meaning or which when construed can produce in its application more than one result is not therefore void for uncertainty. As long as it is capable of a meaning, it will ultimately bear that meaning which the courts, or in an appropriate case, an arbitrator, decides on its proper construction: and the court or arbitrator will decide its application. The question becomes one of construction, of ascertaining the intention of the parties, and of applying it… so long as the language used by the parties , to use Lord Wright's words in Scammell (G) and Nephew Ltd v Ouston [1941] AC 251 is not 'so obscure and so incapable of any definite or precise meaning that the Court is unable to attribute to the parties any particular contractual intention', the contract cannot be held to be void or uncertain or meaningless . In the search for that intention, no narrow or pedantic approach is warranted, particularly in the case of commercial arrangements. Thus will uncertainty of meaning, as distinct from absence of meaning or of intention, be resolved.'
[emphasis added]
90 I note that one submission made by Mr Rudge SC for the defendant is that the good faith requirements in clause 28 are satisfied by a party merely attending the stages of the dispute resolution procedure.
91 I do not think this can be correct.
92 The very nature of the words 'good faith' must go toward the conduct of the parties involved in the agreed dispute resolution, as inclusion of those words connotes something more than mere attendance in the process.
93 I turn now to examine whether the words 'good faith' in cl 28 have meaning of sufficient certainty to be enforceable.
94 In Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234, Priestley JA at 263-268 closely examined the notions of good faith drawing extensively from developments in the United States, Canada, Australia and New Zealand. The analysis in its detail, context and conclusions draws together the several strands which argue strongly for the recognition in Australia of the implied obligation of good faith in the performance and enforcement of contracts as is clearly recognised in the United States. At 263-264, Priestley JA remarked as follows in considering an implied obligation of good faith in contract:
'The kind of reasonableness I have been discussing seems to me to have much in common with the notions of good faith which are regarded in many of the civil law systems of Europe and in all States in the United States as necessarily implied in many kinds of contract. Although this implication has not yet been accepted to the same extent in Australia as part of judge-made Australian contract law, there are many indications that the time may be fast approaching when the idea, long recognised as implicit in many of the orthodox techniques of solving contractual disputes, will gain explicit recognition in the same way as it has in Europe and in the United States.
95 His Honour continued at 265 that:
There is a close association of ideas between the terms unreasonableness, lack of good faith and unconscionability. Although they may not always be co-extensive in their connotations, partly as a result of varying senses in which each expression is used in different contexts, there can be no doubt that in many of their uses there is a great deal of overlap in their content.'
96 An extract from the conclusions in the judgment of Priestley JA in Renard was referred to by Finn J in Hughes Aircraft Systems International v Air Services (1997) 146 ALR 1 at 36-37, who indicated that his own view inclined to that of Priestley JA. Finn J, when dealing with a suggested general implied duty of good faith and fair dealing, said:
'(a) Good faith and fair dealing
The applicant's submission is that the proposed term is a manifestation of a general implied duty of good faith and fair dealing. I have, in consequence, been invited to embrace the conclusion of Priestley JA in Renard Constructions (ME) Pty Ltd v Minister for Public Works, above, at 268 that:
people generally, including judges and other lawyers, from all strands of the community, have grown used to the courts applying standards of fairness to contract which are wholly consistent with the existence in all contracts of a duty upon the parties of good faith and fair dealing in its performance. In my view this is in these days the expected standard, and anything less is contrary to prevailing community expectations.
The primary basis upon which I was asked to make this implication was unrelated specifically to pre-award contracts in procurement cases. Rather as suggested in the Restatement of Contracts, Second, Art 205, the implied duty existed in "every contract". I make this particular observation because, as later discussed, a duty to act fairly in some form appears to have been accepted in other Commonwealth jurisdictions in pre-award contract contexts: see Pratt Contractors Ltd v Palmerston North City Council, above, at 478, 483; Martselos Services Ltd v Arctic College (1994) 111 DLR (4th) 65; and see generally N Seddon, Government Contracts, pp 235ff.
The respondent in contrast has pressed upon me the judgment of Gummow J, then of this court, in Service Station Association Ltd v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84; 117 ALR 393. After considering North American jurisprudence's acceptance of an implied duty of good faith and fair dealing, his Honour observed, at FCR 96; ALR 406:
Anglo-Australian contract law as to the implication of terms has heretofore developed differently, with greater emphasis upon specifics, rather than the identification of a genus expressed in wide terms. Equity has intervened in matters of contractual formation by the remedy of rescission, upon the grounds mentioned earlier. It has restrained freedom of contract by inventing and protecting the equity of redemption, and by relieving against forfeitures and penalties. To some extent equity has regulated the quality of contractual performance by the various defences available to suits for specific performance and for injunctive relief. In some, but not all, of this, notions of good conscience play a part. But it requires a leap of faith to translate these well established doctrines and remedies into a new term as to the quality of contractual performance, implied by law [emphasis added].
Needless to say I have been asked to remain in Gummow J's company and not take that leap.
Other Australian authority on this duty is indecisive. Notably, in the Full Court of this court in News Ltd v Australian Rugby Football League Ltd (1996) 139 ALR 193 at 285, it was found unnecessary to consider whether such a duty should be implied in that case. The court did not enter upon the question of whether our law recognised such an implication as a matter of law.
If the matter stood merely as one of choice between two conflicting views, I would, as a matter of comity, adhere to that of Gummow J: see Bank of Western Australia Ltd v FCT (1994) 55 FCR 233 at 255; 125 ALR 605 on "comity" and the cases referred to therein. This is an arena in which opinions, judicial and scholarly, differ often sharply: see, eg I Renard, "Fair Dealing and Good Faith", in Saunders (ed), Courts of Final Jurisdiction, Federation Press, Sydney, 1996. And it is difficult to disagree with Gummow J's characterisation both of the methodology of Australian contract law while it remained subject to direct English control and of the role assumed by equity in regulating contract formation and performance.
Having said this, it is also appropriate to indicate that my own view inclines to that of Priestley JA. Of that inclination I would say only this. Fair dealing is a major (if not openly articulated) organising idea in Australian law. It is unnecessary to enlarge upon that here. More germane to the present question, the implied duty is, as is well known, an accepted idea in the contract law of the United States and, probably, of Canada: see EA Farnsworth, "Good Faith in Contract Performance" in J Beatson and D Friedmann (eds), Good Faith and Fault in Contract Law, Clarendon Press, Oxford, 1995; for a convenient collection of some of the voluminous literature in the United States debating the meaning of the implied duty, see Farnsworth on Contracts, vol 2, Little, Brown & Co, Boston 1990, para 7.17a; for an English view see eg Rt Hon Lord Justice Staughton, "Good Faith and Fairness in Commercial Contract Law" (1994) 7 Jo Contract Law 193; and see Livingstone v Roskilly [1992] 3 NZLR 230 at 237-8. Its status in civil law is well recognised: see eg HK Lücke, "Good Faith and Contractual Performance" in PD Finn (ed), Essays on Contract, Law Book Co, Sydney, 1987; JF O'Connor, Good Faith in English Law, Dartmouth, 1990, Ch 8. It has been propounded as a fundamental principle to be honoured in international commercial contracts: see eg Unidroit, Principles of International Commercial Contracts, International Institute for the Unification of Private Law, Rome, 1994, Art 1.7. Its more open recognition in our own contract law is now warranted: cf Sir Anthony Mason, "Contract and its Relationship with Equitable Standards and the Doctrine of Good Faith", The Cambridge Lectures, 1993 (8 July 1993); notwithstanding the significant adjustments this would occasion to some of contract law's apparent orthodoxies: see eg Lücke, above, pp 177ff.
I should add that, unlike Gummow J, I consider a virtue of the implied duty to be that it expresses in a generalisation of universal application, the standard of conduct to which all contracting parties are to be expected to adhere throughout the lives of their contracts. It may well be that, on analysis, that standard would be found to advance little the standard that presently may be exacted from contracting parties by other means: cf the standard applied in Conoco v Inman Oil Co 774 F2d 895 (1985) at 908. But setting the appropriate standard of fair dealing is, in my view, another matter altogether from acceptance of the duty itself.'
97 In Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349 Sheller JA (with whom Powell and Beazley JJA agreed), stated at 369 as follows:
'The decisions in Renard Constructions and Hughes Bros mean that in New South Wales a duty of good faith, both in performing obligations and exercising rights , may by implication be imposed upon parties as part of a contract.'
[Emphasis added]
98 It appears to be common sense that as an obligation to act in 'good faith' may, in principle, be legally recognised as an implied or imputed obligation, there is no reason why it should be struck down as uncertain in cases where there is an express contractual term, as in the present case.
99 In Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 the majority of the Court of Appeal considered that a preliminary contract to negotiate in good faith was possible, although it was not made out on the facts (Mason P with whom Waddell A-JA agreed, Handley JA disagreeing on this point). Special leave to appeal was refused by the High Court: (1992) 4 Leg Rep SL 2.
100 The law in this area can not, however, be regarded as settled, as while the reasoning of Handley JA found support in the House of Lords' decision in Walford v Miles, the New South Wales Court of Appeal found it unnecessary to deal with the matter in Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104: see Healey v Commonwealth Bank of Australia (unreported, Supreme Court of NSW - CA, 8 December 1998) per Giles JA at 8.
101 In Tobias v QDL Ltd (unreported, Supreme Court of NSW, 12 September 1997, Simos J), the court considered whether an alleged obligation to 'review and negotiate in good faith' the terms of repayment of an amount outstanding under a mortgage to the satisfaction of both parties, gave rise to a binding legal obligation.
102 Simos J, who relied upon the reasoning of Handley JA in Coal Cliff, held that it did not, being of the opinion that 'at least in the circumstances of the present case, the alleged obligation is illusory [being no more than an agreement to agree] and, accordingly did not relevantly exist'.
103 To my mind, notwithstanding the unsettled status of law in this area, Tobias, like Coal Cliff, can be distinguished from the question presently before me. Both cases concern a clause requiring the negotiation in good faith of a substitute agreement. In the circumstances of each case, such a clause was said to be illusory (though the majority in Coal Cliff was prepared to countenance such an agreement in appropriate circumstances). In cl 28, however, the parties have made their agreement to follow a process of dispute resolution as a precondition to litigation - the obligation of good faith relates to performance of the agreement, and is, therefore, quite different.
104 To my mind, the following comments of Simos J are instructive on this distinction:
'..in my opinion, there is significant difference between an obligation to "act" in good faith, compliance with which obligation may, in certain circumstances, be capable of being assessed by reference to some appropriate legal and/or factual standard, on the one hand, and on the other hand, an alleged obligation to "negotiate" in good faith to achieve an outcome "satisfactory" to both parties, which, in my opinion, as I have said, is no more than an agreement to agree giving rise to no legally binding obligation.'
105 There is clearly a difference between the obligations of good faith contained in cl 28 and the alleged obligation considered in Tobias. The former, being an obligation to 'negotiate' in good faith in an endeavour to reach agreement, is not to be equated with the latter, being "an obligation to 'negotiate' in good faith to achieve an outcome satisfactory to both parties". The former is only an obligation to participate in a negotiating process which may, but not must, achieve an outcome, which if achieved, may, but not must, be viewed as satisfactory to both parties. The outcome may indeed be viewed as unsatisfactory by either or both parties, but as an outcome which, for whatever reason, both sides accept as resolving the dispute.
106 It is interesting to note how the words 'good faith' have been treated in academic writings.
107 In Brownsword, Hird & Howells (eds) Good Faith in Contract - Concept and Context, Ashgate, Dartmouth, 1999, 'good faith' is described (at 3) as an elusive idea, taking on different meanings and emphases in different contexts.
108 A question arises as to whether the law surrounding the notion of 'good faith' as it relates to a general duty of good faith in the performance of a contract, can be imported to give content to the good faith requirement in cl 28.
109 The meaning of 'good faith', as it relates to performance of contractual obligations, was comprehensively explored in a paper by Justice Cole: TRH Cole, 'Law - All in good faith' (1994) BCL 18. His Honour noted at 19 that there is "no shortage of possible definitions for the term 'good faith' but there does not appear to be one universally accepted definition." In his overview of academic analysis on the subject, Cole J drew attention to the myriad of possible definitions for the phrase. Similarly, PD Finn in comments that the 'good faith issue' is both controversial and complex. It does not admit a simple (single) answer: 'Commerce, the Common Law and Morality' (1989) 17 MULR 87
110 Notwithstanding the difficulties inherent in defining the concept, Cole J concludes that the experience overseas suggests that good faith is a concept that has independent meaning and substance [at 20].
111 Interestingly, many commentators, rather than attempting to affirmatively define good faith, approach the issue by highlighting what does not constitute good faith. For instance, in G Shalev, 'Negotiating in Good Faith' in S Goldstein (ed) Equity and Contemporary Legal Developments, The Hebrew University of Jerusalem, Jerusalem, 1992, the author states:
'The concept of good faith cannot be independently defined or reduced to rigid rules; it acquires substance from the particular events that take place and to which it is applied. The difficulty of defining the good faith principles results also from the fact that it is not intended to dictate certain modes of behaviour. It is hard to say when good faith exists in a factual setting; it is much easier, and more common , to point to its absence.'
112 In K Kovach, 'Good faith in mediation - requested, recommended, or required? A new ethic' (1997) South Texas Law Review 575 at 612, the author includes the following as signs that a party is negotiating in bad faith: 'unexpected delays in answering correspondence; postponement of meetings; sending negotiators without authority to settle; repudiating commitments made during bargaining; shifting positions; interjecting new demands; insisting on a verbatim transcript of the negotiation; refusal to sign a written agreement; unilateral action; and withholding valuable information.'
113 In Canada, it has been judicially observed that 'good faith' cannot be defined except by providing modern examples of bad faith behaviour': Gateway Realty Ltd v Arton Holdings Ltd (No 3) (1991) 106 NSR (2d) 180 at 197; affirmed (1992) 112 NSR (2d) 180.
114 This approach is evident in Australian courts. For instance, it has been held that failure to co-operate at a mediation conference or adopting an obstructive attitude in regard to an attempt to narrow issues, may constitute a lack of good faith. Accordingly, this may lead to adverse costs orders being made against the unco-operative or obstructive party in later court proceedings: Capolingua v Phylum Pty Ltd (1991) 5 WAR 137. In Capolingua v Phylum, Ipp J held that where it was later shown that issues would otherwise have been narrowed, this was a relevant factor in awarding costs in respect of a later trial that had been unnecessarily extended.
115 To my mind, however, reference to what good faith is not, does not adequately give content to the obligation at any particular stage. In saying this, I recall the comments of Handley JA in Coal Cliff at 43. With respect I do not, however, agree with Handley JA to the extent that his Honour remarks that determination of bad faith does not 'even provide guidance' as to the 'content of the obligation at any particular stage'.
116 The following observations of Brownsword, Hird & Howells (supra) go towards on an affirmative understanding of the good faith concept:
'It is commonplace that good faith can be read as having both a subjective sense (requiring honesty in fact) and an objective sense (requiring compliance with standards of fair dealing). [I interpolate to note the footnote reference to the UNIDROIT principles of International Commercial Contracts, Article 1.106(1) which provides that each party, in 'exercising his rights and performing his duties …must act in accordance with good faith and fair dealing'. The authors point out that the Commission takes 'good faith' to mean 'honesty and fairness in mind, which are subjective concepts', and 'fair dealing' to mean 'observance of fairness in fact which is an objective test'.] It is also commonplace that the most troublesome aspects of good faith relate to its objective dimension. In particular, if good faith is understood as prescribing standards of fair dealing, who are the good-faith standard setters, by what authority do they set such standards, and what are the standards that they so set?' [at 4]
117 In this context, it is instructive to examine the impact lexicon plays in our understanding of the notion of good faith.
118 In light of the interest generated by international instruments such as the UNIDROIT Principles of International Commercial Contracts prepared by the International Institute for the Unification of Private Law (Rome: UNIDROIT, 1994), which specifically refer to a requirement of "good faith" in contracts, the Quebec Research Centre of Private and Comparative Law at McGill University set about preparing partner dictionaries, in French and English, which set out the fundamental vocabulary of Quebec private law.
119 'Good faith' as it relates to contracts, was chosen by the Editorial Committee as the first term to be presented as a sample in a paper published in advance of the release of the dictionary. The Editorial committee stated as follows:
'…the concept of good faith may now be thought of as one of the cannons of international contract law. Since the notion of good faith is seen as fundamental to understanding all aspects of the law of contract, civilians generally express surprise at how little place "good faith' occupies as a formal construct in the Common Law tradition. This is not to say "good faith" is absent in the Common Law - on the contrary - but its mode of expression is such that it may be buried in the cases of that tradition rather than expressed formally as an abstract principle . This is especially problematic when it comes to articulating "good faith" in English, the language most commonly associated with Common law parlance, in a document such as the UNIDROIT Principles. In this respect, the usage of good faith in English civilian parlance in Quebec is of particular interest.
It is often said that in Civil law, "good faith" is not only understood in a subjective manner but also objectively, whereas Common lawyers tend to measure "good faith" on a subjective basis corresponding essentially to a given actor's state of mind. In order to ensure the notions of "good faith" and "bonne foi" be taken as equivalents, the expression "good faith and fair dealings" was chosen to underline the objective aspect of "good faith" in the EUROPEAN Principles and the UNIDROIT Principles. In this choice of terms, there is a lingering sense that law's expression in French corresponds naturally to the Civil law and that English and Common law are also more natural partners. Yet, the English language may certainly be thought of as sufficiently elastic to express the civilian notion of good faith. English-speaking civilians in Quebec do not feel any need to add the expression "fair dealings" in order to make the scope of the notion of good faith clearer.
GOOD FAITH Loyalty, honesty, in the exercise of civil rights
[Emphasis added]