United Group Rail Services v Rail Corporation Of New South Wales  NSWCA 177
- In a significant decision for the construction of commercial dispute resolution clauses, the NSW Court of Appeal has declined to follow the House of Lord's decision in Walford v Miles.1
- Rather, the Court of Appeal held that a clause requiring senior representatives of the parties to "meet and undertake genuine and good faith negotiations with a view to resolving the dispute or difference" was not uncertain in law and was therefore valid and enforceable.
- The decision appears consistent with a number of other jurisdictions and codes worldwide.
United Rail Group Services Limited ("United") entered into a contract whereby it would design and build new rolling stock for Rail Corporation New South Wales ("Railcorp"). The contract contained an extensive dispute resolution clause, which included clauses 35.11 and 35.12:
(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.
If the senior representatives referred to in Clause 35.11 cannot resolve the dispute or difference or, where the matter is referred to mediation under Clause 35.11(d), the matter is not settled within 42 days after the giving of the notice under Clause 35.1 or Clause 35.9 (whichever is later), or within such longer period of time as the representatives may agree in writing, the dispute or difference will be referred to arbitration."
A dispute arose between the parties. United took the dispute to the Supreme Court of NSW, arguing that the dispute resolution clause had no effect, for the following reasons:
It was agreed by both parties that the mediation subclause 35.11(d) was uncertain and unenforceable as the "Australian Dispute Centre" did not exist. United argued that clause 35.12 (arbitration) was not severable, and therefore must also be unenforceable. United also argued that the requirements of sub-clause 35.11(c) (senior representatives to negotiate in good faith) were also not enforceable, as such an agreement was effectively an "agreement to agree", and therefore uncertain and unenforceable.
At first instance, Rein J rejected the arguments of United, holding subclause 35.11(c) valid and enforceable, that the obligation to undertake "genuine and good faith negotiations" had sufficient content not to be uncertain, and that in any case clause 35.12 (arbitration) was severable from the agreed unenforceability of subclause 35.11(d) (mediation). United appealed to the NSW Court of Appeal.
On Appeal – The Enforceability Of Agreements To Negotiate In Good Faith
The judgment of the Court of Appeal was rendered by Allsop P (Ipp and Macfarlan JJA agreeing).
The primary issue before the Court was whether an agreement to negotiate in good faith is capable of enforcement. The House of Lords in Walford v Miles had held that it is not: "The reason why an agreement to negotiate, like an agreement to agree, is unenforceable is simply because it lacks the necessary certainty. ...A duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with the position of the negotiating party ... Accordingly, a bare agreement to negotiate has no legal content".2
Kirby P in Coal Cliff Colieries Pty Ltd v Sijehama Pty Ltd3 had indicated that such a clause could be enforceable, depending on the circumstances.
The Court of Appeal noted that the law in Australia was not settled. Allsop P observed "with the utmost respect" that this issue had produced "different expressions of view among great commercial judges on appeal: for example, Lord Wright, Lord Denning, Lord Diplock, Kirby P and Handley JA and among highly experienced commercial judges at first instance in this Court: Clarke J, Giles J, Einstein J and Hammerschlag J".
The Court of Appeal held that the agreement to negotiate in good faith in this case was enforceable:
"Nor with respect, do I find the views of Lord Ackner in Walford v Miles persuasive. 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 ... To say, as Lord Ackner did, that a party is entitled not to continue with, or withdraw from, negotiations at any time and for any reason assumes that there is no relevant constraint on the negotiation or the manner of its conduct by the bargain that has been freely entered into. 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".4
Allsop P set out the following "essential propositions" which led to this conclusion:
- An agreement to agree is incomplete, lacking essential terms (however this was to be distinguished from an agreement to moderate one's conduct in a particular manner as had occurred in this case);
- 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 contract5;
- Good 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. It is recognised as part of the law of performance of contracts in numerous sophisticated commercial jurisdictions6.
On the particular facts of this case, an agreement by the parties to contractually limit the manner in which they conducted disputes that might arise under the contract was distinct from a mere agreement to agree in future as to significant terms of a contract.
Allsop P also referred to a number of examples where parties would not be acting in good faith, for example:
- a party may not be entitled to threaten a breach of contract in order to bargain for a lower settlement sum than it genuinely recognises is due;
- 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 expensive arbitration that it believes that the other party cannot afford; and
- if a party recognises, without qualification, that a claim or some material part of it is due, fidelity to the bargain may well require its payment.
The Issue Of Severance
The Court of Appeal also rejected United's argument that the arbitration clause 35.12 could not be severed from the (admittedly void) mediation sub-clause 35.11(d):
"Here, the parties have constructed a detailed dispute resolution clause that placed, in one part of the structure, a reference to mediation. I do not extract from either the form or context of the clause (even if 'or' means 'and') any unseverable nexus to bring down the arbitration clause in cl 35.12 with the failure of enforceability of the mediation clause in subcl 35.11(d). The parties would not be taken to be agreeing to something of a different kind or character if they were to go to arbitration only after the failure of the senior representatives to agree".7
The Court of Appeal cited old English authority that a commercial court should eschew "subtleties and niceties" in construing a business document, which should be given operation by the application of common sense.8
- The affirmation of the enforceability of an agreement to negotiate in good faith (as part of a dispute resolution clause) provides much needed clarity in this area of the law. Dispute resolution clauses of this nature are fairly common in international commercial agreements.
- The Court of Appeal's judgment focuses strongly on the comity of nations, noting various disagreements, but taking a course that is consistent with numerous commercial codes and jurisdictions, including the Uniform Commercial Code, the UNIDROIT Principles of International Commercial Contracts and the law of the United States.
1.  2 AC 128
2. Walford v Miles  2 AC 128 at 138 per Lord Ackner
3. Coal Cliff Colieries Pty Ltd v Sijehama Pty Ltd  24 NSWLR 1 at 26 per Kirby P
4. Judgment at para 65 per Allsop P
5. Citing such authorities as New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd  AC 154 at 167; Meehan v Jones  149 CLR 571 at 589
6. References cited by Allsop J included: Uniform Commercial Code ss 1-201 and 1-203; Wigand v Bachmann-Bechtel Brewing Co 118 NE 618 at 619; UNIDROIT Principles of International Commercial Contracts (Rome, 2004).
7. Judgment at para 96
8. Hamilton v Mendes  Eng R 56; 2 Burr 1198 at 1214 per Lord Mansfield; and Glynn v Margetson  AC 351 at 359 per Lord Halsbury LC
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.