McCabes acted for the defendants in Caves Beachside Cuisine Pty Ltd v Boydah Pty Ltd & 3 Others, an interesting matter which was recently heard before his Honour Justice Kunc in the Supreme Court of New South Wales (Commercial List). The parties are presently awaiting judgment.

The focus of this article will be one particular aspect of the case, namely, an alleged agreement to exercise good faith and use best endeavours (to enable a lease or licence between the plaintiff and the first defendant to be finalised).

FACTUAL BACKGROUND

The first defendant, Boydah Pty Ltd (Boydah), decided to develop a large parcel of land which it owned at Caves Beach, which is around 30 minutes' drive south of Newcastle (the Property), and turn it into a hotel, housing and tourist estate.

In 2005, Greg Hopper and William (Bill) Saddington, a director of Boydah, were introduced. Bill asked Mr Hopper, who had been involved in restaurants and the food service industry for many years, whether he would be interested in running the food and catering operations at the proposed new hotel. Mr Hopper said he was interested.

Mr Hopper gave evidence that shortly thereafter he said to Bill words to the effect: "I will definitely need a 15 year lease minimum and obviously we can work out rents and things separately."

Thereafter Mr Hopper consulted on the design and fit out of the kitchens at the hotel and attended numerous meetings for that purpose. He also allegedly disposed of other catering businesses in which had an interest.

In 2008, Bill and Mr Hopper agreed on a figure for rent. This was understood to be an "interim arrangement" only, until the parties could see how the business was going.

In March 2009, the new Caves Beachside Hotel opened and the plaintiff, Caves Beachside Cuisine (Cuisine), commenced operating from the kitchens on the premises. The directors and shareholders of the company are Mr Hopper and his wife.

In or about October 2009, Boydah provided a draft license agreement to Cuisine. The terms of the agreement included a 5-year term with two 5-year options to renew, a clause which entitled Boydah to buy the licence back from Cuisine at any time for a price of 200% of the net profit after tax, and terms on outgoings.

Thereafter the parties through their solicitors exchanged multiple drafts of the licence agreement but were unable to agree on terms. Amongst the aspects which could not be resolved was the buy-out price. Cuisine proposed 250% of the net profit after tax. However, Boydah was set upon a 200% multiple.

In December 2010, Mr Hopper sent Bill an email requesting that the parties sign-off on the licence agreement. He proposed deleting the clause which gave Boydah the ability to approve the party to whom Cuisine proposed to assign or sell the licence (which Bill regarded as critical), amending the buy-out price multiple to 225%, and deleting a number of the outgoings for which Cuisine was to be liable.

Bill did not respond to that email. He gave evidence that by this time he had become frustrated with the negotiations and decided to put the issue to one side for a while.

In February 2011, Bill's brother and co-director of Boydah, David Saddington, emailed Mr Hopper and advised him that Boydah would agree to a set sum for the buy-out clause but not an undetermined times earnings factor. David suggested "that $100,000 would be an amount that gives you security". He stated: "So that you can get back to dealing with just Bill, I suggest you and he come up with a fixed amount."

Mr Hopper expressed his disappointment and frustration in a lengthy response which included accusing David of"coming in at the eleventh hour once all the hands are played and making new rules." Mr Hopper gave the defendants two options:

  • "Honour the handshake deal that Bill and I made as outlined in the most recent draft licence", or
  • Boydah takes over the catering and pays out Cuisine's $250,000 'investment' as well as a consulting fee of $1,800 per day plus GST for Mr Hopper's time in the 3 years leading up to the hotel opening in March 2009.

The Saddingtons did not respond to the above proposal and in August 2011, Boydah declined an offer of mediation to attempt to finalise the licence agreement.

In the middle of 2013, Boydah gave written notice to Cuisine that it was terminating the catering arrangement effective March 2014.

In November 2013, Cuisine commenced the present proceedings in the Supreme Court.

ALLEGED AGREEMENT TO UNDERTAKE GENUINE AND GOOD FAITH NEGOTIATIONS

Cuisine's primary claim was for breach of contract. Alternative claims for misleading or deceptive conduct and for unconscionable conduct within the meaning of the Australian Consumer Law were also pleaded. As mentioned at the outset, the focus of this article is on Cuisine's claim in contract. Cuisine claimed that:

  • when in March 2009 it took occupation of the premises and commenced operations it did so pursuant to an agreement with Boydah on terms that the parties would exercise good faith and use their best endeavours to enable a lease or licence to be finalised and executed granting Cuisine security of tenure for up to 15 years;
  • in breach of the said agreement Boydah did not negotiate in good faith or use its best endeavours to enable a lease or licence to be finalised; and
  • as a consequence Cuisine had suffered loss and damage (including loss of the opportunity to obtain a lease or licence and, in turn, make profits for the period from March 2014 to March 2024.)

As to allegation 2 above, Cuisine contended that by late 2010 "the negotiations had reached a point where there was very little left in issue between the parties and nothing which would have been expected to be a "deal breaker". It argued that despite the advanced stage which the negotiations had reached, David Saddington in February 2011 proposed a completely different and far less favourable arrangement from Cuisine's perspective; and thereafter Boydah simply refused to engage in any meaningful attempt to finalise the negotiations.

Each of the above allegations was denied by the defendants.

RELEVANT LEGAL PRINCIPLES

The leading authority in New South Wales is United Group Rail Services Ltd v Rail Corp (NSW) 2009 74 NSWLR 618. That case concerned a clause dealing with dispute resolution in a contract between Rail Corporation New South Wales ("Railcorp") and United Rail Group Services Limited ("United"). The clause said that a senior representative of each of the parties "must meet and undertake genuine and good faith negotiations with a view to resolving the dispute or difference".

United claimed that this clause was uncertain and therefore void and unenforceable.

It is a fundamental principle of contract law that a contract or a particular term must be certain, that is, clear and capable of precise or definite meaning. If a term is not certain it may be severed from the contract, provided that severance is possible without undermining the agreement as a whole. If a contract is not certain it is said to be void, that is, treated as a nullity as from the beginning.

In United Group Rail Services, the Court of Appeal rejected the previous generally expressed view to the effect that a promise to negotiate in good faith is uncertain and 'binding only in honour'. It held that in some circumstances, depending on its specific terms and context, an agreement to negotiate in good faith will be enforceable. The Court of Appeal's reasons included:

"With respect to those who assert to the contrary, a promise to negotiate (that is to treat and discuss) genuinely and in good faith with a view to resolving claims to entitlement by reference to a known body of rights and obligations, in a manner that respects the respective contractual rights of the parties, giving due allowance for honest and genuinely held views about those pre-existing rights is not vague, illusory or uncertain." (Allsop P, at 639)

It is clear from the above extract that the particular context of an agreement to negotiate in good faith found in an dispute resolution clause in an existing contract was crucial to the Court of Appeal finding that the agreement in that case was certain and enforceable.

The Court of Appeal also drew a distinction between an agreement to undertake good faith negotiations to resolve disputes arising from an existing contract, on the one hand, and an agreement to negotiate in bringing about a commercial agreement in the first instance, on the other. It observed that the difference "is of great importance".

Baldwin & Anor v Icon Energy Ltd & Anor [2015] QSC 12 (3 February 2015) is an example of a recent decision where an alleged agreement to negotiate to bring about a contract was held to lack sufficient certainty to be enforceable. That case concerned a term in a Memorandum of Understanding which had been executed as a deed. The term stated in effect that the parties agree to use reasonable endeavours to negotiate a Gas Supply Agreement. The Queensland Supreme Court (Philip McMurdo J) said :

"[I]n an agreement of the present kind (as distinct from that in United Group Rail Services), how can a standard of reasonableness or good faith be measured and applied so as to give the promise a sufficiently certain content? ... there is no existing contractual relationship to which that standard of reasonableness could be anchored. A duty to carry on negotiations in good faith or reasonably in a context such as the present is, as Lord Ackner said, "repugnant to the adverserial position of the parties when involved in negotiations"."( At [51])

CONCLUSION

It will be interesting to see how the Supreme Court rules on the alleged agreement to negotiate in good faith in the Caves Beach case (to bring about a lease or licence granting Cuisine security of tenure for up to 15 years). And, if the Court finds that such an agreement is sufficiently certain to be enforceable, how the Court determines the allegation that Boydah breached the agreement. For example, it has been observed that: "An appropriate (and indeed often effective) negotiating strategy may be a refusal to negotiate." ([2007] NSWSC 723, Hammerschlag J at [50]) However, a refusal to negotiate is one of the main actions of the defendants which Cuisine attacked at the hearing.

An additional hurdle which Cuisine faces is that the agreement to negotiate which it has asked the Court to find is one implied from the conduct of the parties. In United Group Rail Services the Court of Appeal said at [61]:"Many issues arise in respect of any implication (whether as a matter of fact or by law) of any term requiring performance of a contract, or the exercise of contractual rights, in good faith. Those issues need not be explored here in a case dealing with an express clause as part of a dispute resolution clause." However, counsel for Cuisine submitted that the fact that the alleged agreement to negotiate is implied should not make any difference.