The validity of contractual obligations to negotiate in good faith has been a hotly contested issue. In the recent case of United Group Rail Services Ltd v Rail Corporation NSW  NSWSC 1364, the Supreme Court of New South Wales decided that an obligation to negotiate in good faith is not necessarily void for uncertainty. Parties are not obliged to reach a resolution, but they must be genuine in their attempts to resolve the dispute.
United Rail Group Services Ltd (United) and the Rail Corporation New South Wales (Rail Corp) entered into agreements for United to construct rail infrastructure for Rail Corp. The agreements provided for a three step dispute resolution process. If a dispute arose, it was to be referred to 'senior representatives' who were to 'meet and undertake genuine and good faith negotiations with a view to resolving the dispute or difference'. If the dispute was not resolved within 14 days, the matter was to be referred to mediation. If after 42 days the dispute was still not resolved, the dispute was to be referred to arbitration.
During the project, a series of disputes arose.
United did not want to follow the dispute resolution process and argued that the negotiation and mediation provisions were void and that the arbitration clause could not stand alone.
The key issue was whether the obligation to 'meet and undertake genuine and good faith negotiations' was void for uncertainty (ie the contract provisions concerning negotiations were too vague to ascertain the parties' obligations).
Supreme Court Decision
The Court began by acknowledging that this issue has led to a division of opinion between judges. However, the Court noted that three elements of the debate are settled:
- An agreement to agree on contractual terms is not void for uncertainty.
- An obligation of good faith in the performance of a contract has content and is not uncertain.
- An obligation to negotiate in good faith is not likely to be the subject of an order for specific performance.
The Court concluded that an obligation to negotiate a dispute in good faith is not inherently uncertain. This context is quite different to an agreement to negotiate terms of a contract which has not yet been concluded. The parties have agreed on a process for determining disputes and the range of outcomes is fairly limited.
In upholding the obligation in this case, the Court emphasised two factors. First, the involvement of senior managers was significant because they had extensive experience, commercial understanding and an appreciation of what good faith entails. Second, by providing a limited time for negotiation and further steps to be taken if negotiation failed, the contract recognised that a resolution at the negotiation stage may not be necessary.
The Court also gave some indication of what an obligation to negotiate in good faith entails. The obligation required parties to endeavour genuinely to resolve a dispute.
Although the obligation does impose some restrain on the freedom that parties have in conducting themselves under contract, it does not require parties to disregard or abandon their own interests. The Court gave two examples. An agreement to make reasonable endeavours to obtain a bank loan places a burden on one party but it does not require that party to obtain a loan at prohibitively high rates. On the other hand, a refusal to pay a claim on a spurious pretext does demonstrate an absence of good faith.
The Court also gave some examples of conduct which may demonstrate an absence of good faith including failure to attend mediation, sending someone without authority, constantly altering demands or failing to state requirements for resolution.
A subsidiary issue was whether the arbitration clause could stand alone if the negotiation and mediation clauses were found to be void. United argued that a three step dispute resolution process could not be severed. The Court disagreed and highlighted that negotiation and mediation were consensual processes which the parties could undertake before arbitration, with or without a contractual obligation.
The case highlights that contractual obligations to negotiate in good faith can be effective. However the contract should make clear that the obligation does not necessarily require resolution. This can be done by limiting the time for negotiation and providing for alternative dispute resolution processes if negotiations fail.
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