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Contract law and statute: Good faith negotiations

Contract law and statute: Good faith negotiations

By Bryan Horrigan and Nicholas Young

Ethics 

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Obligations to negotiate in good faith are increasingly common and the precise scope and content of such obligations is under the spotlight. The enforceability of these obligations will be heavily influenced by the contractual context.

Snapshot
  • Lawyers should consider their clients’ obligations to negotiate in good faith under both contract law and statute.
  • While obligations to negotiate in good faith are shaped by their context, a minimum standard of conduct is developing through case law.
  • Courts are increasingly willing to enforce an obligation to negotiate in good faith where there is a pre-existing contract with an express good faith negotiations clause (eg, dispute resolution under an existing agreement).

When are commercial parties obliged to act and negotiate in good faith? Good faith is increasingly relevant in the negotiation, performance and dispute resolution of commercial agreements and business conduct surrounding them, spanning a wide range of industry sectors and legal practice areas. Founded in both case law and statute, good faith is arguably intrinsic to the notion of what courts call an informed “business conscience”.

Sources of law on good faith

In commercial transactions, obligations of good faith are no longer sourced from general contract law alone. For the franchising industry, the Franchising Code of Conduct imposes a mandatory and non-excludable obligation of good faith in all franchising contracts, with a content shaped at least in part by the judge-made law.2 In all industry sectors (including financial services), an absence or breach of good faith is an indicator of unconscionable business conduct.3 Consequently, good faith might need to be considered for the purposes of negotiation, drafting, advice and pleading from the twin perspectives of non-statutory law (eg, contractual good faith) and statutory law (eg, statutory unconscionability and the Franchising Code of Conduct).

Contract law does not impose an overarching obligation or duty of good faith in contracts generally. Nor is there an automatic obligation to negotiate in good faith to reach a final agreement in pre-contractual dealings and all other contractual contexts. However, as good faith is increasingly recognised as an essential part of contract law across common law countries, various avenues of implication and construction are available through which good faith arises in commercial agreements, including in the context of negotiation.

What does negotiating in good faith mean?

Determining which duties are encased within an obligation to negotiate in good faith is a matter of construction.4 It is dependent on the context, as well as the contract in cases where the obligation arises from contract law.5 At its core, an obligation to negotiate in good faith likely requires a party to:6

  • make an honest and genuine attempt to resolve differences by discussion
  • have an open mind and be willing to consider and put options to resolve the matter
  • have “fidelity to the bargain” and not undermine the contractual benefit.

In addition, it might in some circumstances require a party to:7

  • disclose information to the other party
  • act “reasonably and with fair dealing”.

An obligation to negotiate in good faith might be breached where a party:8

  • refuses to negotiate
  • pretends to negotiate for the sole purpose of increasing the other party’s costs
  • negotiates in an “arbitrary or capricious manner”
  • frames a starting point for negotiations which is in “direct conflict” with the object of the negotiations.

Statutory obligations to negotiate in good faith

One avenue for negotiation in good faith arises through mandated obligations by force of statute. In Bropho v Human Rights and Equal Opportunity Commission French J noted that the term “good faith” featured in 154 Commonwealth Acts.9 Over 15 years later, that number has climbed to more than 400.

The term “negotiate in good faith” also features in Commonwealth Acts, applying in contexts as various as water rights negotiations, native title claims, telecommunications and the protection of critical infrastructure.10 At a state level, a statutory obligation to “negotiate in good faith” is similarly widespread, applying to matters as diverse as the protection of workers in the clothing industry, the acquisition of land, access to natural gas and the management of roads.11

In Paciocco v Australia and New Zealand Banking Group Limited the Full Federal Court recognised that statutory unconscionability applies to pre-contractual and post-contractual conduct.12 Accordingly, there might be circumstances in either case in which failing to negotiate in good faith could risk being characterised as unconscionable conduct. Standard exclusion clauses do not automatically exclude these statutory consequences. 

Contractual obligations to negotiate in good faith

In theory, there are various contractual avenues through which obligations to negotiate in good faith can arise. First, a contract might stipulate and even define a mutual obligation of good faith, applying generally throughout the contract. 

Second, and more discretely, a contract might impose an express and mutual obligation to negotiate in good faith, in setting costings, resolving disputes or reaching ancillary agreement. Third, the issue of negotiating in good faith might arise as an incident of an implied term, or otherwise as a matter of construction13 – for example, in the interpretation of dispute resolution provisions that do not otherwise mention good faith. 

A transnational common law jurisprudence is emerging on contractual good faith fuelled by Australian cases since Renard Constructions (ME) Pty Ltd v Minister for Public Works in 1992,14 UK cases since Yam Seng v International Trade Corp Ltd case in 201315 and Canadian cases since Bhasin v Hrynew in 2014,16 with arguments and outcomes in one jurisdiction becoming available for testing in others. In particular, the last decade has witnessed a reawakening of interest in issues of contractual obligation to negotiate in good faith in several common law jurisdictions, including Australia, the UK and Singapore.

Broadly speaking, there are three types of cases that have attracted judicial consideration of an obligation to negotiate in good faith:

  • where there is no pre-existing contract between the parties
  • where there is a binding contract between the parties containing an express obligation to negotiate in good faith
  • where there is a binding contract between the parties but no express obligation to negotiate in good faith. 

In the first category (where there is no pre-exisitng contract between the parties), the leading authority is Walford v Miles17 where the parties negotiated the sale of a business but did not finalise a contract of sale. Nonetheless, it was argued that the Court should imply an obligation to negotiate the sale in good faith, preventing recourse to negotiations with a third-party purchaser. The House of Lords found that an agreement to negotiate, or to negotiate in good faith, was unenforceable for want of certainty and legal content. UK law remains cautious about obligations to negotiate in good faith or even to use “best endeavours” to reach additional agreement on something essential within an existing agreement.18

In contrast, in cases of the second category (binding contracts with express obligations to negotiate in good faith) courts in Australia,19 the UK20 and Singapore21 have found such obligations enforceable, most readily in the context of dispute resolution under specific conditions and time periods in pre-existing agreements. Professor Carter suggests an obligation to negotiate in good faith is more likely to be enforceable if the agreement is “certain and complete” and there is a “sufficient statement of criteria to determine breach”.22

However, in cases of the third category (binding contracts with no express obligations to negotiate in good faith) courts in Australia and internationally have been hesitant to imply an obligation to negotiate in good faith, either directly or indirectly (eg, as an incident of a general implied term).23 For example, in both Caves Beachside Cuisine Pty Ltd v Boydah Pty Ltd24 and Jobern Pty Ltd v BreakFree Resorts (Victoria) Pty Ltd25 the Court discussed, but ultimately decided against, implying an obligation to negotiate in good faith. While some commentators support the use of an implied obligation to negotiate in good faith where a party is “led up the garden path”,26 Professor Carter contends that such use of an implied term is “unlikely” given the state of Australian case law.27 This unlikelihood is understandable given that the High Court’s decision in Commonwealth Bank of Australia v Barker28 sets a high bar for an implied term to meet the requisite standard of “necessity”.

Conclusion

Even express obligations to negotiate in good faith have their limits. Where an impasse is reached in negotiations, parties retain a capacity to walk away from the negotiations.29 Similarly, negotiating in good faith within a pre-existing agreement is different from doing so to form an initial agreement or reach additional agreement. Nevertheless, in the right context, obligations to negotiate in good faith are enforceable. ■


Bryan Horrigan is executive dean of the Faculty of Law, Monash University. Nicholas Young is a law student at Monash University.

  1. Paciocco v ANZ Banking Group [2015] 236 FCR 199, at [263], [298], [306], [331] (Allsop CJ, Besanko and Middleton JJ agreeing) (Paciocco).
  2. Competition and Consumer (Industry Codes— Franchising) Regulation 2014 (Cth) cl 6. 
  3. Competition and Consumer Act 2010 (Cth) sch 2 ss20-22; Australian Securities and Investment Commission Act 2001 (Cth) ss12CA-12CC. 
  4. John Carter, LexisNexis, Carter on Contract (online at 21 May 2020) [04-001] (Carter). 
  5. Note 4 above; United Group Rail Services Ltd v Rail Corporation New South Wales [2009] 74 NSWLR 618, [70] (United). 
  6. United (note 5 above), at [70]-[71] and [77], Caves Beachside Cuisine Pty Ltd v Boydah Pty Ltd [2015] NSWSC 1273 (Caves), at [125] and Jobern Pty Ltd v BreakFree Resorts (Victoria) Pty Ltd [2007] FCA 1066] (Jobern), at [142] (on honest and genuine attempts to resolve differences); Aiton Australia Pty Ltd v Transfield Pty Ltd [1999] NSWSC 996 (Aiton), at [156] and Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd [2010] WASCA 222 (Strzelecki), at [94] (on having an open mind); Masters Home Improvement Pty Ltd v North East Solution Pty Ltd [2017] VSCA 88 (Masters), at [99] and United (note 5 above), at [71]-[72] (on fidelity to the bargain).
  7. Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2010] NSWCA 268 (Macquarie), at [15]–[16] (Allsop P), at [148] and [158] (Hodgson JA), Yam Seng v International Trade Corp Ltd [2013] EWHC 111 (QB) (Yam Seng), at [141]–[142] and HSBC Institutional Trust Services v Toshin Development Singapore Pte Ltd [2012] SGCA 48 (HSBC), at [50]–[51] (on disclosing information); Masters (note 6 above), at [99], Macquarie, at [12] (on acting reasonably and with fair dealing).
  8. Con Kallergis Pty Ltd v Calshonie Pty Ltd [1998] 14 BCL 201, at 212 (Hayne J) (on refusing to negotiate); United (note 5 above), at [73] (on pretending to negotiate); Strzelecki (note 6 above), at [95] (on arbitrary and capricious negotiation); Crown Sydney Property Pty Ltd v Barangaroo Delivery Authority [2018] NSWSC 1931, at [141]–[142] (on fixing an inappropriate starting point). 
  9. [2004] 135 FCR 105, at [84].
  10. Water Act 2007 (Cth); Native Title Act 1993 (Cth); Telecommunications Act 1997 (Cth); Security of Critical Infrastructure Act 2018 (Cth). 
  11. Outworkers (Improved Protection) Act 2003 (Vic); Land Acquisition (Just Terms Compensation) Act 1991 (NSW); National Gas Access Act 2009 (WA); Roads Management Act 2004 (Vic).
  12. Note 1 above; this point was unchallenged on appeal in Paciocco v Australia and New Zealand Banking Group Ltd [2016] 258 CLR 525; see also Commonwealth Bank of Australia v Kojic [2016] 249 FCR 421, at [55] (Allsop CJ).
  13. On the broader debate about whether good faith is properly the subject of an implied term or, alternatively, an obligation that can arise as a matter of construction (including other modes of implication), see generally John Carter and Elisabeth Peden, “Good Faith in Australian Contract Law” (2003) 19 Journal of Contract Law 155; Chief Justice James Allsop, “Conscience, Fair-Dealing and Commerce” (2017) 91 Australian Law Journal 820, 832–3.
  14. 1[1992] 26 NSWLR 234.
  15. Yam Seng (note 7 above).
  16. [2014] 3 SCR 494.
  17. [1992] 2 AC 128.
  18. Petromec v Petroleo Brasileiro [2005] EWCA Civ 891 (Petromec); Morris v Swanton [2018] EWCA Civ 2763; Emagine Films Ltd v Mister Smith Entertainment Ltd [2019] EWHC 2085 (Ch).
  19. United (note 5 above); Strzelecki (note 6 above); Aiton (note 6 above). 
  20. Petromec (note 18 above); Emirates Trading Agency LLC v Prime Mineral Exports Pte Ltd [2014] EWHC 2104.
  21. HSBC (note 7 above). 
  22. John Carter, LexisNexis, Carter on Contract (online at 21 May 2020) Chapter 4 Uncertainty and Incompleteness – Drafting Questions and Checklist; John Carter, “Good Faith in Contract: Why Australian Law is Incoherent” (Legal Studies Research Paper No 14/38, University of Sydney Law School, 2014) 48.
  23. In the UK, see Donwin Productions Ltd v EMI Films Ltd (Queen’s Bench Division Crown Office List, Pain J, 2 March 1984); in Canada, see Empress Towers Ltd v Bank of Nova Scotia [1991] 1 WWR 537 (CA); in the United States, see Aviation Contractor Employees, Inc v US, 945 F.2d 1568 (Fed. Cir. 1991). 
  24. Caves (note 6 above).
  25. Jobern (note 6 above).
  26. Michael Furmston, Gregory Tolhurst and Eliza Mik, “Is There a Duty to Negotiate in Good Faith” in Michael Furmston and Gregory Tolhurst (eds), Contract Formation: Law and Practice (2nd edn, OUP, 2016) 426.
  27. Carter (note 4 above). 
  28. [2014] 253 CLR 169. On meeting the test of “necessity” for implied terms, see John Carter et al, “Terms Implied in Law: Trust and Confidence in the High Court of Australia” (2015) 32 Journal of Contract Law 203. 
  29. Caves (note 6 above), at [128].

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