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Good faith in mediation: is it enforceable?

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The obligation to negotiate in good faith is often found in commercial agreements. Commercial contracts will often include a Dispute Resolution Clause that provides that if a dispute arises in connection with the contract, a party must not commence court proceedings unless that party has participated in mediation in good faith. As well, there are certain circumstances where there is a legislative requirement to attend mediation and participate in good faith. 

S 26 of the Civil Procedure Act 2005 (NSW) (“the CPA”) provides that Courts in NSW can make an order that proceedings be referred for mediation, irrespective of whether the parties consent to an order that they attend mediation being made. S 27 of the CPA provides that participants in Court referred mediation are required to participate in the mediation in good faith.  “Good faith” is not defined in the CPA. 

The Civil Dispute Resolution Act 2011 (Cth) requires the applicant in proceedings commenced in the Federal Court or Federal Circuit Court to file a statement at the time the application is filed, setting out the steps that have been taken to try to resolve the issues in dispute. 

Case law provides insight as to how the Courts have treated contractual provisions to mediate or negotiate in good faith and in particular cases whether the parties have met the standard of “good faith”. 

In Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1, Handley JA found that a contractual agreement to negotiate in good faith was unenforceable, as it was too vague and uncertain. His Honour stated that “a promise to negotiate in good faith is illusory and therefore cannot be binding”. However, his Honour recognised that an agreement to negotiate in good faith could be certain enough to be binding in circumstances where the agreement is clear and the court is able to attribute meaning to the agreement.

In Aiton Australia Pty Ltd v Transfield Pty Ltd (1999) NSWSC 996, his Honour Justice Einstein held that the contractual requirement to mediate any dispute between the parties in good faith was sufficiently certain. His Honour rejected the submission that the contractual requirement to mediate in good faith was satisfied solely by a party merely completing the dispute resolution procedure set out in the contract and attending mediation. 

His Honour stated that the conduct that would satisfy a requirement to mediate or negotiate in good faith needs to be determined on an individual basis depending on the circumstances of each case, however went on to state that a non-exhaustive description of the essential matters necessary to satisfy a requirement to mediate or negotiate in good faith could be expressed as follows:

  1. “to undertake to subject oneself to the process of negotiation or mediation (which must be sufficiently precisely defined by the agreement to be certain and hence enforceable);
  1. to undertake in subjecting oneself to that process, to have an open mind in the sense of:
  1. a willingness to consider such options for the resolution of the dispute as may be propounded by the opposing party or by the mediator, as appropriate;
  1. a willingness to give consideration to putting forward options for the resolution of the dispute.

Subject only to these undertakings, the obligations of a party who contracts to negotiate or mediate in good faith, do not oblige nor require the party:

  1. a) to act for or on behalf of or in the interests of the other party;
  1. b) to act otherwise than by having regard to self-interest.”

In United Group Rail Services Limited v Rail Corporation (2009) NSWSCA 177, a term of the contract between the parties required them to meet and negotiate in good faith with a view to resolving any dispute and, if the dispute was not resolved within 14 days, the parties were directed to attend mediation or ultimately arbitration to resolve their dispute. It was argued that the requirement to negotiate was uncertain and therefore unenforceable. 

The Court of Appeal held that the requirement to negotiate in good faith was enforceable, as the contractual provision provided an objective measure against which the Court could determine whether the parties had complied with it. In order to determine whether there had been compliance with the contractual requirement to negotiate in good faith, the Court looked at whether the parties had brought an honest and genuine approach to settling their dispute.

As the above cases demonstrate, the enforceability of a contractual obligation to mediate or negotiate in good faith depends on the circumstances of the case and the wording of the contractual provision to mediate or negotiate in good faith.   

Authors: Adrian O’Dea and Lara Piercy

The information contained in this article is not to be taken as legal advice. Please contact us if you require specific information or advice.

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