Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd [2011] HCATrans 90

[2011] HCATrans 90

[2011] HCATrans 090

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Perth  No P51 of 2010

B e t w e e n -

STRZELECKI HOLDINGS PTY LTD (ACN 051 222 253)

Applicant

and

CABLE SANDS PTY LTD (ACN 008 678 386)

Respondent

Application for special leave to appeal

KIEFEL J
BELL J

TRANSCRIPT OF PROCEEDINGS

FROM CANBERRA BY VIDEO LINK TO PERTH

ON FRIDAY, 8 APRIL 2011, AT 12.44 PM

Copyright in the High Court of Australia

MR M.J. McCUSKER, QC:   If it please your Honours, I appear with my learned friend, MS A.L.V. SALAPAK, for the applicant.  (instructed by Hotchkin Hanly)

MR S.K. DHARMANANDA, SC:   May it please the Court, I appear with MS E.L. BLEWETT for the respondent.  (instructed by Corrs Chambers Westgarth)

KIEFEL J:   Yes.

MR McCUSKER:   Your Honours, this application for special leave turns on an issue of general importance in the administration of the law which has long been debated by both courts and academics and that is the meaning and content of the term “deal or negotiate in good faith”.  This is not a case where the term is to be implied.  This was an express contractual term.  We have in our written submissions - and I refer your Honours to appeal book pages 105 and 101 to 103 - referred to the authorities in this area which point, we would say, to the importance of this question as one which is unsettled and, indeed, one text writer went so far as to say that the state of the law of the law in this area was one of utter confusion, not merely unsettled.

KIEFEL J:   That may be so, but the particular feature of this case is that it concerns a term for negotiation in good faith in a pre‑contractual document.  The content of “good faith” is usually discussed in terms of contractual performance and even in clauses such as that considered in United Group Rail Services v Rail Corporation of New South Wales (2009) 74 NSWLR 618 there was there an existing contractual setting in which the term could be construed and the question of content determined. This case really requires perhaps even - I would say it is even further set apart from what you have already indicated as an uncertain area.

MR McCUSKER:   That is so in once sense, your Honour.  This case is perhaps something of a hybrid because it was held and not challenged that this is a contractual obligation to deal in good faith and it is a hybrid because a number of the terms of the proposed contract were set out in the memorandum of understanding, so that the way in which the parties were to negotiate was set out – I can take you, perhaps I should take your Honours the memorandum of understanding.

Before I do that, could I refer to the discussion that took place between the two principals for the applicant and respondent in October 2004 which appears at application book page 9 where at paragraphs 25 to 27 the trial judge referred to an important, we say, discussion between Thorp and Poland, Poland being for the applicant, where Mr Thorp referred to the important question, absolutely crucial question, of the remedial work to be done on the subject land, the removal or somehow dealing with the tailings which contained radioactive material.

He referred to three possibles and referred then to the cheapest option being to relocate the tailings and he gave an estimate of possible cost - that is on the subject land.  Importantly, at paragraph 27 his Honour made the finding, based on the evidence:

It is clear that Mr Poland made no pretence about the plaintiff’s interest in purchasing the land.  The two men generally agreed that whatever was to be done with the tailings was within the area of the defendant’s expertise, and the work should be carried out by the defendant, but at the plaintiff’s cost.

That was the setting ‑ ‑ ‑

KIEFEL J:   That is the high point of the finding about what the parties agreed?

MR McCUSKER:   Yes, your Honour, so far as who was to carry out the work.  The background to their subsequent dealings, included in the memorandum of understanding, was that conversation in which it was said that Cable Sands, which had expertise of course, and the applicant did not, would carry out the work but at the cost to the applicant.

KIEFEL J:   Could I just interrupt you then to ask you what would you be alleging is the breach here?  I have in mind that, I think, in the special leave materials there is reference made to Cable Sands refusal to perform the remediation works which would have reference to paragraph 27 that you have just taken us to.  But, I think, in the courts below it has been approached on the basis that Cable Sands’ requirement of an indemnity and guarantee in the situation where it was not performing, and it was not intended to perform the remediation works itself, was too onerous and unreasonable.  Which is it, or is it a combination of the two?

MR McCUSKER:   It is a combination of the two, your Honour.  In October 2004 there is the discussion that I have taken you to and then in February 2006, after a long period when various things were being done, including a feasibility study being done by the applicant, there is a meeting between Poland and Jones and a man called Shirfan, who was for the respondent.  It was stated there that the cost was going to be higher than the original estimate to which Mr Poland for the applicant said we still wish to proceed and then, only at that point, did Mr Shirfan say that he was not sure that Cable will do the work.  So for all this period of time there has been an understanding, clearly based upon the October 2004 discussion, that Cable with its expertise would do the work.

BELL J:   Is not one difficulty, Mr McCusker, this?  You have, as it were, on the question of reasonableness, concurrent findings against you in the Court of Appeal and from the primary judge.  You say but that it is no obstacle because the characterisation is the issue that you want to ventilate, but that depends upon acceptance that what was at issue below was that there was an agreement that included that Cable Sands would be responsible for remediation. 

Now, when one goes back to the way it was presented at trial, on application book 3 at paragraph 2, the primary judge describes the case then being put by your client as providing for Cable Sands to investigate and report upon how the tailings were to be dealt with.  There seems to have been some shift from that to an assertion that the MOU embodied in a – I withdraw that – a shift to reliance on an agreement, being the earlier discussions prior to the MOU with respect to remediation.  That was an argument you ran in terms of an implied term in the MOU and lost and is not at issue on this application.

MR McCUSKER:   It is not, your Honour.  The contention, both before the Court of Appeal and on this application, is not that it was an implied term of the MOU but that having regard to the obligation to deal in good faith, which was contained in the MOU, and having regard further to the common understanding based upon the October 2004 discussion that the remedial work would be carried out by Cable, there is a sudden shift at a very late stage during the running of the 30‑day period after which there was a cut-off - there is a sudden shift, and there is a double whammy, as it were, because Cable says not only will we not do the work - and that is the important aspect - but if you do it or get someone else to do it we will require a sweeping guarantee in very broad terms, or an indemnity, as well as a bank guarantee.  That was an entirely new proposition that was introduced into the negotiations at a late stage without any explanation.

BELL J:   Where does one find the common understanding of the parties being that Cable Sands would carry out the remediation work?  Where is a finding that would support that, Mr McCusker?

MR McCUSKER:   Well, it is not in precisely those terms, your Honour, I must say, but paragraph 27 at page 9 to which I have taken you, is a finding that the men are generally agreed that the work would be carried out by the defendant, Cable, at the plaintiff’s cost and it was on that basis that matters proceeded.  There is also a finding that when the proposal came forward in the special conditions, and this appears at paragraph 60 at AB 21, when the special conditions were produced which contained not only an obligation on the applicant to carry out the work, but also for the first time introduced the sweeping indemnity guarantee provisions, Poland, his Honour said, “was shocked”.

Now, it was said at the meeting which was held on 17 February 2006, some seven days before - and that appears at appeal book page 19, paragraph 48 - that Cable had found the cost was going to be higher than the original estimate, which Poland said we still wish to proceed and it was then for the first time that it was said on behalf of Cable by Mr Shirfan not that Cable would not do it, but he was not sure that they would do it. 

So we would submit, coming back to your question, your Honour, that if you look at the October 2004 meeting what was said then and held at paragraph 27 - and then there is nothing ever said after that to suggest that the expert in this area, Cable, was not going to do the work, that someone else would have to do it.  Then there is a suggestion, only in 17 February, maybe Cable will not work, and then finally there is the express term stated in the special conditions produced by Cable, which appear reproduced at page 21, paragraph 58.

Then his Honour found at paragraph 60, as one might expect in those circumstances, Poland was shocked.  The shock was that he is met not only the obligation to do it himself, that is the applicant, but also coupled with that is the requirement for the first time ever raised that there would need to be this sweeping indemnity.

So, in our submission, it was said at the court below and at the appeal it cannot be contended on the basis of the evidence we have that the respondent was acting dishonestly so a contention of dishonesty in that sense was not raised, but we say that honesty is something different from acting in good faith and that good faith requires, among other things, actions on the part of each party which are directed towards the fulfilment of what the common understanding or expectation of the contract was.

KIEFEL J:   What does that mean, that they were not allowed to resile from the position that had been set up in what you call the earlier agreement?

MR McCUSKER:   Your Honour, not allowed to resile at a late stage and coupled - this is the important thing - it would not have been necessary for the demand for the indemnity and the guarantee to have been made had Cable itself undertaken, as it originally had, to do the work.

KIEFEL J:   What you have said suggests that the content that you are contending for has to do with expectations rather than some more general content such as objective reasonableness.

MR McCUSKER:   Well, the objective reasonableness - I take your Honour’s point.  The objective reasonableness is to be determined, in our submission, by reference to the background and the expectation of the parties which flows back to the October 2004 discussion and what was then said was to be done.  This is not a case where you have two parties equally capable of doing this work. 

The evaluation work that was commissioned by Cable was clearly for the purpose of it determining which was the best way for it to do the remediation work and it was only at a very late stage in all these – over several years in fact, that the suggestion is put forward first, “We may not do the work”, and then that is followed hot on the heels of that seven days later with the special conditions which say, “You have to do the work” – Strzelecki – “and what is more, you have to give us this sweeping indemnity”.  In our submission that constitutes an act of bad faith.  It is not acting in good faith in those circumstances.  So it cannot be said ‑ ‑ ‑

KIEFEL J:   Essentially, what you say is that Cable Sands could not, in good faith, resile from the position you earlier referred to, the general agreement that his Honour Justice Murray found?

MR McCUSKER:   I do not put it quite that way, your Honour, because had it not been for the resiling, coupled with the requirement for this guarantee - and resiling without any explanation.  There was no explanation given whatever at trial for Cable Sands having said, at the very last moment, as it were, “We are not going to do the remediation work.  You will have to do it and you will have to give us the guarantee.”  But we say that standing back and looking at that objectively against the background of their negotiations and the October 2004 discussion, that that constitutes bad faith.  It is not any longer dealing in good faith because it has suddenly at the very last - at the 11th hour, as it were, whipped the rug out from under the intended agreement between the parties.

KIEFEL J:   I appreciate the additional component you have put with it, but in a way the argument you have foreshadowed seems to have good faith and a kind of promissory estoppel - notions more familiar to promissory estoppel somehow working together.

MR McCUSKER:   That is so, although we do not rely upon estoppel as such.  We say that this is an area where the question of where the parties have actually agreed that they will deal with each other in good faith, there then has to be determined objectively whether a particular action – in this

case the requirement, the reversal of the party to carry out the remediation, coupled with that guarantee indemnity – whether that is consistent with dealing in good faith in those circumstances.

KIEFEL J:   When you say agreed, the agreement that you refer to is only the memorandum of understanding, or is it also the general agreement to which you earlier referred us at paragraph 27 of Justice Murray’s reasons?

MR McCUSKER:   The general agreement is part of the, as it were, the matrix within which the court has to determine whether objectively there has been a dealing in good faith.  Objectively is one party acting reasonably against a background of the MOU and the prior discussions which led to the MOU?

KIEFEL J:   I see.  Is there anything further?

MR McCUSKER:   No, thank you, your Honours.

KIEFEL J:   Thank you, Mr Dharmananda.

MR DHARMANANDA:   May it please, your Honours.  Your Honours, if I could deal firstly with the discussions in October 2004, which my learned friend, Mr McCusker, refers to as the general agreement.  Insofar as that is concerned if I could invite your Honours’ attention to paragraph 9 of Justice of Appeal Pullin’s decision at application book 54 where Appeal Justice Pullin records that:

the appellant contended at trial that Cable Sands had expressly or impliedly contracted to carry out the remediation work.  That claim was dismissed and the contention is not pursued on this appeal.

To similar effect at paragraph 102 of appeal Justice Murphy’s decision at page 89 of the application papers is ‑ ‑ ‑

KIEFEL J:   I am sorry, what was the point you made about Justice Pullin’s ‑ ‑ ‑

MR DHARMANANDA:   The point there, your Honour, is that the argument was run that somehow there was an obligation, a contracted obligation, on Cable Sands to carry out ‑ ‑ ‑

KIEFEL J:   Arising out of that general agreement?

MR DHARMANANDA:   Yes, and that contention, as your Honour has already observed, failed at trial.  It was not thought to be resuscitated on appeal.  In those circumstances it is quite clear that there was no reliance upon whatever discussions took place in October 2004 as giving rise to any contractual obligation.  It is in that context that the observations of the court need to be understood.

If I could take your Honours to paragraph 102 at application book 89 where Appeal Justice Murphy deals, similarly, with that same matter and records that there was no contractual obligation which required Cable Sands to undertake the remedial work and the argument was put that Strezlecki’s argument was that the spirit of the bargain – or fidelity to the bargain, notions relevant to the construction of the term “good faith” – required Cable Sands to do the remediation work.  That submission was considered and it was rejected.  It was rejected after a proper construction of the memorandum of understanding. 

The important point to observe, your Honours, is that determining what the content of good faith is requires a proper understanding of what the agreement is about.  Insofar as that is concerned, it is the memorandum of understanding that is the agreement, not some discussions that may have taken place in October 2004 preceding that.  Similarly, your Honours, one must look at what occurred afterwards and insofar as what happened afterwards, there was a meeting on 17 February 2006 and at that meeting conversations took place between Mr Poland and Mr Shirfan at which Mr Poland said that if there was to be some issue as to who was to remediate and if it was going to cost that much, then he would do it.  He took on and accepted the obligation to remediate or to carry out the works.

Now, as Appeal Justice Pullin records, that was a matter of negotiation and it came to that as a result of negotiation.  That is at paragraph 66 of Appeal Justice Pullin’s decision appearing at the bottom of page 74 of the application book and carrying over the page onto application book 75.  It is in that context, your Honours, that the suggestion that somehow “discussions took place between the parties preceding the memorandum of understanding is irrelevant to a consideration” must be understood. 

There was a failure in relation to an argument about an expressed or an implied term.  The trial judge concluded there simply was no agreement about who was to carry out the remediation.  Those findings were not the subject of any appeal.  One of the outcomes of the meeting on 17 February was that the appellant was prepared to undertake the remediation.  Indeed, when the conditions that the respondent prepared were sent to the appellant, there was no rejection of the proposal that the appellant carry out the remediation.  That is recorded, your Honours, at application book 61 in the judgment of Appeal Justice Pullin and it is around about line 35.  He records that:

Strzelecki did not propose a deletion of [the clause] which provided that Strzelecki was solely responsible for remediation. 

In such circumstances it was not any breach to seek to negotiate the issue of who was to carry out the remediation.  Indeed, Appeal Justice Murphy expressly makes a finding to this effect at paragraph 96 which appears at application book 88, around about line 18.

BELL J:   It does remain, nonetheless, there is a difference of approach to the issue between Justice Murphy and Justices Pullin and ‑ ‑ ‑

MR DHARMANANDA:   Justice Newnes, your Honour.

BELL J:   Justice Newnes, yes.

MR DHARMANANDA:   Yes, your Honour.  With respect to the construction of the clause, your Honour, it may be that they approached that issue with different emphasis, but both their Honours were able to consider whether the conduct of Cable Sands was arbitrary or capricious.  In our submission, the construction accorded by the Court of Appeal and the trial judge to the memorandum of understanding, and particularly clauses 12 and 9 of the memorandum, was correct.  In any event, nothing that emerges from the Court of Appeal’s judgments could in any way elevate to some general level of application what their Honours found in relation to whether there had been a breach in the relevant circumstances.

What must be understood is that the meaning of the express clause imposing the obligation to act in good faith derives from the purpose and object of the contract within which it was contained.  As Mr McCusker has already identified to your Honours, this is not a case concerned with an implied term.  Nor is it a case concerned with the performance of a contractual power.  The case was essentially concerned, and as it was argued in the Court of Appeal, with whether there was a breach of the obligation cast on the parties to negotiate in good faith.  More specifically the question was whether the respondent breached that obligation by, in effect ‑ ‑ ‑

KIEFEL J:   Putting aside the prospects of success of the applicant for the moment, the differences of views of the members of the Court of Appeal to which Justice Bell has referred may be indicative, on one view, of the wider question about the content of good faith, albeit that it depends very much upon its contractual context, but there has been very little said by this Court upon the matter, whereas some of the intermediate appellate courts have been dealing with this issue.  I suppose what Mr McCusker originally said was this is the time for this Court to say something upon the topic.

MR DHARMANANDA:   Your Honour, the facts simply do not lend themselves for the Court to express anything about the content of good faith in the circumstances, because the nature of this particular memorandum and the nature of the conduct that occurred does not lend itself to any exposition of the nature of the concept of good faith.

KIEFEL J:   Why would that not have to be determined before a conclusion was reached?

MR DHARMANANDA:   Well, your Honour, that is because on any analysis of the factual position - and Justice of Appeal Pullin specifically deals with this issue, he comes to the view that even if he were to consider the objective reasonableness of what Cable Sands had done or whether objectively it had behaved reasonably, he comes to the conclusion that Cable Sands did, in fact, behave reasonably.

When the analysis turns to the judgments of Appeal Justice Pullin and Appeal Justice Murphy, both of them in the end recognise that unreasonable or capricious conduct is relevant.  It is just the manner of the expression as to how it becomes relevant, but both of them recognised the relevance of that, your Honour.  So insofar as any division is concerned, it is not so great at all. 

KIEFEL J:   Would I be correct in inferring that the approach of some of the members of the Court of Appeal in this case does not, in all respects, tally with the approach taken in the New South Wales Court of Appeal to the question?

MR DHARMANANDA:   Your Honour, Appeal Justice Pullin refers to the two most recent New South Wales decisions, including United Rail, and he takes from that that one must examine the clause in context and he refers specifically to the necessity to accord relevance to the spirit of the bargain and fidelity to the promise.  So in that regard there is not much diversion, we would say, in relation to what Appeal Justice Pullin says, and what the Court of Appeal said in New South Wales. 

In addition, your Honour, the significant point is that as is recognised in both United Rail as well as the Macquarie Case that was cited and referred to by Appeal Justice Murphy, all one must do in order fully to comprehend what good faith requires is to examine the contract and particularly its purpose and its object.  So that, insofar as an express clause is concerned, is a very significant aspect of giving colour to the scope of an obligation to act in good faith.

Now, in those circumstances, having construed the clause, the court, as did the trial judge, proceeded to consider whether there had been any

breach of the obligation and they both concluded that there was no breach.  Regardless of the exact terminology to be used defining the obligation to negotiate in good faith, as it appears in the memorandum, it is clear that the respondent’s conduct did not breach that obligation. 

To put it another way, even if consideration had to turn to issues of unreasonableness in merely making a particular demand, or the objective reasonableness of the proposals raised in negotiations, the Court of Appeal’s finding was that the respondent was not in breach and this appears most clearly at paragraph 69, line 34, in the application book at page 75 ‑ ‑ ‑

BELL J:   And even more clearly at paragraph 72 on the following page.

MR DHARMANANDA:   Exactly, your Honour, more clearly at that page.  So, in essence, what the applicant seeks to challenge is the evaluative judgments made as to the respondent’s conduct and represented by concurrent findings of fact by the trial judge and the Court of Appeal.  It was held in both courts that the respondent’s statements as to its preparedness to carry out the remediation for an indemnity on the basis that the appellant was to carry out the remediation and to seek an indemnity and guarantee in those circumstances for a particular amount, did not breach the requirement to act in good faith.  It was only part of the process of negotiation. 

What occurred ultimately was that after the applicant rejected the proposal put forward by the respondent, the respondent invited the applicant to put up a different proposal or to reconsider the approach to advancing the negotiations, particularly as to the indemnity and guarantee.  No response came before the end of the 30‑day negotiation period and no extension of time was sought by the applicant.  In those circumstances, the true cause of the applicant’s predicament is the applicant’s own conduct. 

The decision that there was no breach by the respondent by the trial judge and by the Court of Appeal is, with respect, correct.  The matter turns ultimately on a particular set of circumstances.  The case was about a particular provision in a unique contract.  There was certainly no indication anywhere on the face of the judgments that any principle has been misapplied.  If it please your Honours, those are our submissions.

KIEFEL J:   Thank you.  Is there anything in reply, Mr McCusker?

MR McCUSKER:   Briefly, your Honours.  On the last point my learned friend made, I invite your Honours’ attention to paragraph 66 of the judgment of Justice Murray at page 23.  My learned friend has referred to

an invitation, as it were, to further negotiate but you will see the letter which was written on 14 March and sent to the applicant’s solicitors:

Whilst we can further negotiate some of the clauses you have raised in your correspondence, indemnity and bank guarantee provisions are key provisions. . .To progress this contract we think that resolution of these key issues must necessarily precede further discussions on the balance of the contractual provisions.

So, although there was a willingness, perhaps, to negotiate some provisions, there was no willingness to negotiate what were referred to as “key provisions”, in my respectful submission.  Coming to a couple of other points, your Honour, we do not contend that there was a contractual obligation raised by the earlier discussion in October 2004.  What we say is that it is part of the factual matrix within which the question of breach of good faith can be determined.

There is, and I have taken your Honours to it, so I will not repeat it, set out at page 105 of our written submissions a compendium of some of the decisions relating to this issue and I just bring to your attention at page 105, subparagraph(1), we refer to what this Court said in Royal Botanic Gardens:

“issues respecting the existence and scope of a good faith doctrine in the contract” as “important” although that case was “an inappropriate occasion to consider them” because the dispute in that case –

and there is a difference of opinion between the members of the courts in Western Australia on this.  Although reference was made by Justice Murray to whether or not the test of reasonableness would pass anyway, and he said it would, he and his fellow judge, Justice Newnes, approached the matter on the basis that good faith meant simply honesty and no more.  They are out submissions, your Honour.

KIEFEL J:   The Court will adjourn briefly.

AT 1.21 PM SHORT ADJOURNMENT

UPON RESUMING AT 1.26 PM:

KIEFEL J:   This matter is not an appropriate vehicle for this Court to consider the principles, if any, relating to terms requiring parties to negotiate in good faith towards a further agreement.  There are insufficient prospects of success to warrant the grant of special leave to appeal.  Special leave is refused with costs.

AT 1.27 PM THE MATTER WAS CONCLUDED