Home Page | Cases | United Group Rail Services Ltd v Rail Corporation of NSW

United Group Rail Services Ltd v Rail Corporation of NSW

[2009] NSWCA 177; (2009) 74 NSWLR 618

Overview

United Group Rail Services entered into two contracts with Rail Corp to design and build rolling stock. The contract contained a lengthy dispute resolution clauses, including a subclause obliging parties to negotiate in good faith in certain cases.

The Court held that the agreement to negotiate was not void for uncertainty.

Train

Catchwords

CONTRACTS - Certainty of terms - agreement to undertake genuine and good faith negotiations in a commercial dispute resolution clause - sufficient certainty to be valid and enforceable - meaning

CONTRACTS - certainty of terms - severance - mediation agreement void for uncertainty because nominated dispute centre did not exist - arbitration clause severable.

 

Facts

United Group Rail Services entered into two contracts with Rail Corp to design and build rolling stock. The contract contained a lengthy dispute resolution clauses, including a subclause obliging parties to negotiate in good faith in certain cases. In particular, clause 35.11 provided as follows:

35.11 Negotiation

If:

(a) a notice of appeal is given in accordance with Clause 35.9; or

(b) the dispute or difference for which the notice under Clause 35.1 has been given does not relate to a Direction of the Principal’s Representative under one of the Clauses referred to in Attachment ‘A’,

the dispute or difference is to be referred to a senior representative of each of the Principal and Contractor who must:

(c) meet and undertake genuine and good faith negotiations with a view to resolving the dispute or difference; and

(d) if they cannot resolve the dispute or difference within 14 days after the giving of the notice under Clause 35.1 or 35.9 (whichever is later), the matter at issue will be referred to the Australian Dispute Centre for mediation.

Clause (c), in particular, was challenged for certainty.

 

Justice Allsop

After going through the English and Australian authorities on the subject (including Walford v Miles and Coal Cliff) his Honour expressed a preference for the view adopted by Justice Kirby in Coal Cliff when his Honour stated that:

'...I do not share the opinion of the English Court of Appeal that no promise to negotiate in good faith would ever be enforced by a court. I reject the notion that such a contract is unknown to the law ... in some circumstance a promise to negotiate in good faith will be enforceable, depending upon its precise terms.... so long as the promise is clear and part of an undoubted agreement between the parties, the courts will not adopt a general principle that relief for the breach of such promise must be withheld'

Justice Allsop then identified three general principles:

1. An 'agreement to agree is incomplete, lacking essential terms' (para 56)

2. The 'task of the Court is to give effect to business contracts where there is a meaning capable of being ascribed to a word or phrase or term or contract, ambiguity not being vagueness: Upper Hunter County District Council v Australian Chilling and Freezing
Co Limited
(1968) 118 CLR 429 ...'

3. '[G]ood faith is not a concept foreign to the common law, the law merchant or businessmen and women. It has been an underlying concept in the law merchant for centuries ...

His Honour distinguished agreements to negotiate from agreements to agree, noting that the former is not incomplete (but may be uncertain in some cases):

[64] An agreement to agree to another agreement may be incomplete if it lacks essential terms of the future bargain. An agreement to negotiate, if viewed as an agreement to behave in a particular way may be uncertain, but is not incomplete. The objection that no court could estimate the damages because no one could tell whether the negotiations "would be" successful ignores the availability of damages for the loss of a bargained for valuable commercial opportunity: ... The relevant question is whether the clause has certain content.'

Further:

[65] ... An obligation to undertake discussions about a subject in an honest and genuine attempt to reach an identified result is not incomplete. It 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. Honesty is such a standard: .... Whether it is capable of assessment depends on whether there is a standard of behaviour that is capable of having legal content. ... The assertion that each party has an unfettered right to have regard to any of its own interests on any basis begs the question as to what constraint the party may have imposed on itself by freely entering into a given contract. If what is required by the voluntarily assumed constraint is that a party negotiate honestly and genuinely with a view to resolution of a dispute with fidelity to the bargain, there is no inherent inconsistency with negotiation, so constrained. .... Here, the restraint is a requirement to meet and engage in genuine and good faith negotiations. ... that expression has, in the context of this contract, legal content.

His Honour then turned to the particular clause in this case, including the concept of good faith (emphasis added):

[69] ... The concern in the present case is the express mutual promises of the parties to undertake genuine and good faith negotiations to resolve disputes arising from performance of a fixed body of contractual rights and obligations.

[70] What the phrase "good faith" signifies in any particular context and contract will depend on that context and that contract. A number of things, however, can be said as to the place of good faith in the operation of the common law in Australia. The phrase does not, by its terms, necessarily import, or presumptively introduce, notions of fiduciary obligation familiar in equity or the law of trusts. Nor does it necessarily import any notion or requirement to act in the interests of the other party to the contract. The content and context here is a clearly worded dispute resolution clause of an engineering contract. It is to be anticipated at the time of entry into the contract that disputes and differences that may arise will be anchored to a finite body of rights and obligations capable of ascertainment and resolution by the chosen arbitral process ... The negotiations ... will be anticipated to involve or comprise a discussion of rights, entitlements and obligations said by the parties to arise from a finite and fixed legal framework about acts or omissions that will be said to have happened or not happened. The aim of the negotiations will be anticipated to be to resolve a dispute about an existing bargain and its performance. Honest and genuine differences of opinion may attend the parties' views of their rights and obligations. Such things as difficulties of proof and uncertainty as to fact or law may perfectly legitimately strike the parties differently. That accepted, honest business people who approach a dispute about an existing contract will often be able to settle it. This requires an honest and genuine attempt to resolve differences by discussion and, if thought to be reasonable and appropriate, by compromise, in the context of showing a faithfulness and fidelity to the existing bargain.

[71] The phrase "genuine and good faith" in cl 35.11 is ... a composite phrase. It is a phrase concerning an obligation to behave in a particular way in the conduct of an essentially self-interested commercial activity: the negotiation of a resolution of a commercial dispute. Given that context, the content of the phrase involves the notions of honesty and genuineness. Whilst the activity is of a self-interested character, the parties have not left its conduct unconstrained. They have promised to undertake negotiations in a genuine and good faith manner for a limited period (14 days). As a matter of language, the phrase "genuine and good faith" in this context needs little explication: it connotes an honest and genuine approach to the task. This task, rooted as it is in the existing bargain, carries with it an honest and genuine commitment to the bargain (fidelity to the bargain) and to the process of negotiation for the designated purpose.

[72] The notion of fidelity to the bargain can be seen as founded, at least in part, on the requirement of a party to do all things necessary to enable the other party to have the benefit of the contract: ... The encompassing of fidelity to the bargain within the concept of good faith, at least in the context at hand – the genuine and good faith negotiation of an existing dispute by reference to an existing contract — does no violence to the language used here by the parties. ... parties have expressly bound themselves to a good faith standard in seeking to resolve a dispute arising from an existing bargain about the resolution of which dispute they anticipate having different views. The parties have mutually agreed to bring an approach of genuineness and good faith to that process of seeking resolution of any such disagreement. That agreement carried with it, in ordinary language, 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.

[73] These are not empty obligations; nor do they represent empty rhetoric. An honest and genuine approach to settling a contractual dispute, giving fidelity to the existing bargain, does constrain a party. The constraint arises from the bargain the parties have willingly entered into. It requires the honest and genuine assessment of rights and obligations and it requires that a party negotiate by reference to such. A party, for instance, may well not be entitled to threaten a future breach of contract in order to bargain for a lower settlement sum than it genuinely recognises as due. That would not, in all likelihood, reflect a fidelity to the bargain. A party would not be entitled to pretend to negotiate, having decided not to settle what is recognised to be a good claim, in order to drive the other party into an expensive arbitration that it believes the other party cannot afford. ... 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 in connection with it within the limits of a clause such as cl 35.1.

[74] With respect to those who assert to the contrary, a promise to negotiate (that is to treat and discuss) genuinely and in good faith with a view to resolving claims to entitlement by reference to a known body of rights and obligations, in a manner that respects the respective contractual rights of the parties, giving due allowance for honest and genuinely held views about those pre-existing rights is not vague, illusory or uncertain. It may be comprised of wide notions difficult to falsify. However, a business person, an arbitrator or a judge may well be able to identify some conduct (if it exists) which departs from the contractual norm that the parties have agreed, even if doubt may attend other conduct. If business people are prepared in the exercise of their commercial judgement to constrain themselves by reference to express words that are broad and general, but which have sensible and ascribable meaning, the task of the Court is to give effect to, and not to impede, such solemn express contractual provisions. It may well be that it will be difficult, in any given case, to conclude that a party has not undertaken an honest and genuine attempt to settle a dispute exhibiting a fidelity to the existing bargain. In other cases, however, such a conclusion might be blindingly obvious. Uncertainty of proof, however, does not mean that this is not a real obligation with real content.

...

[78] This is a dispute resolution clause. To require in such a clause this degree of constraint on the positions of the parties reflects developments in dispute resolution generally. The recognition of the important public policy in the interests of the efficient use of public and private resources and the promotion of the private interests of members of the public and the commercial community in the efficient conduct of dispute resolution in litigation, mediation and arbitration in a fair, speedy and cost efficient manner attends all aspects of dispute resolution: ... Parties are expected to co-operate with each other in the isolation of real issues for litigation and to deal with each other in litigation in court in a manner requiring co-operation, clarity and disclosure: ...

His Honour concluded subclause 35.11(c) was not uncertain.

His Honour went on to consider the question of severence; he considered no question of severance arose, but if wrong on that point would conclude cl 35.12 was severable from subcl 35.11(d). His Honour noted in this respect that the principles relating to whether severance was available were not in doubt: 'It is a question depending upon the intention of the parties to be gathered from the instrument as a whole' (para 90). 

 

Justice Ipp

Agreed with Allsop P

 

Justice Macfarlan

Agreed with Allsop P