Aiton Australia Pty Ltd v Transfield Pty Ltd [1999] NSWSC 996
In the Supreme Court of New South Wales, Einstein J refused the defendant's application to stay proceedings pending a contractual dispute resolution procedure, holding that the mediation clause was unenforceable because it did not say how the mediator's costs were to be borne, and that the negotiation clause, not being severable from it, was also unenforceable [2], [70], [71], [174], [175].
What the court decided
Aiton sued Transfield over a construction project, alleging misleading representations and claiming for additional work [3], [4], [6]. Clause 28 of each contract set out a dispute resolution procedure [7]. It required "diligent and good faith efforts" to resolve disputes through notices and meetings of designated officers, followed by compulsory mediation [8]. Transfield sought a stay because those procedures had not been carried out [2], [20]. His Honour held that the staged procedures had to be strictly observed as necessary pre-conditions to the right to commence proceedings [35]. He also held that the claims based on the tender representations, in negligence and on a quantum meruit all fell within the clause [33], [36].
Equity will not order specific performance of a dispute resolution clause, but the court may stay or adjourn proceedings until the agreed process is completed [26]. His Honour noted a commentators' list of minimum requirements for an enforceable mediation clause, which in his opinion applied to any stage of a dispute resolution clause [69]. One listed requirement was that the clause provide for selecting a mediator and determining the mediator's remuneration [69].
The mediation clause was silent about the mediator's remuneration [65]. His Honour saw as of particular difficulty the lack of a mechanism for apportioning the mediator's costs, and declined to imply a term that the parties would jointly share them [66]. The parties may have intended the expert costs regime in clause 28.3(h) to apply, or that the mediator determine costs, or that they share them, so the term was not so obvious that "it goes without saying" [67]. By contrast, the absence of a procedure for determining the mediator's remuneration did not, in his view, affect enforceability [68]. It followed that the mediation clause was unenforceable [70]. The two clauses were "intended to walk together", so the negotiation clause was not severable and was also unenforceable [71].
In case he was wrong about the implied term, his Honour dealt with the other issues [72]. But for the allocation of the mediator's costs, and disregarding the good faith requirement for the moment, the procedure would be sufficiently certain to be enforced [78]. He respectfully disagreed with Giles J in Elizabeth Bay Developments Pty Ltd v Boral Building Services Pty Ltd that the tension between self-interest and good faith made such an obligation too vague [81], [82]. On this alternative footing, he found the good faith requirement in clause 28 certain enough to be legally recognised [153], [174].
In that alternative reasoning, and without being exhaustive, his Honour said that the core content of an obligation to negotiate or mediate in good faith is to subject oneself to a sufficiently defined process with an open mind, being willing to consider options put by the other party or the mediator and to consider putting forward options [156]. Subject only to these undertakings, it does not require a party to act in the other party's interests or otherwise than by having regard to self-interest [156].
He found that Transfield had sought to frustrate Aiton's attempts, where made, to invoke clause 28 [22], [170]. Aiton had itself, however, failed to adhere to the procedures for all its heads of claim and its consolidated claim [24], [171]. His Honour said that strict compliance by the party invoking the process (Transfield) is, subject to the principle in Mackay v Dick, an essential pre-condition to indirect enforcement [172]. He indicated that, had Aiton persevered and regularly invoked the procedures for all its claims, Transfield's conduct was likely to have been the dominant consideration in refusing a stay [173]. His Honour rested the result on the unenforceability of the clause, and did not say how he would otherwise have exercised the discretion [174], [175].
Why it matters
The decision shows that a detailed mediation clause may fail, and take an earlier negotiation stage with it, if it does not say who bears the mediator's costs. The statement of the core content of an obligation to negotiate or mediate in good faith is a useful guide, although it formed part of the alternative reasoning [72], [156], [174]. His Honour's observations on the discretion, which were not needed for the result, indicate that a court may weigh both parties' conduct under the clause [172], [173].
Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.