Are statutory obligations to negotiate Infrastructure Agreements in good faith enforceable?

The recent decision of the Supreme Court of Queensland (SCQ) in Baldwin & Anor v Icon Energy Ltd & Anor [2015] QSC 12 (Baldwin) confirmed that agreements to negotiate in ‘good faith’ are unenforceable. This, in turn, raises serious questions regarding the enforceability of good faith obligations imposed by statute.

BACKGROUND

Statutory obligations to negotiate in good faith

In Australia, statutory obligations to negotiate in good faith are not uncommon.[1] In a planning context, both the Sustainable Planning Act 2009 (Qld) (SPA) and South-East Queensland Water (Distribution and Retail RestructuringAct 2009 (Qld) (SEQ Water Act) impose an obligation on parties to negotiate Infrastructure Agreements (IAs) in good faith.[2]

Both of these requirements were inserted by the Sustainable Planning (Infrastructure Charges) and Other Legislation Amendment Act 2014 (Qld). The explanatory notes of which outline that the intention behind the good faith obligations “is to encourage open, timely and cost effective negotiation of infrastructure agreements.”

The amendments were in response to developers advocating for the inclusion of the good faith obligations to address concerns that assessment managers were unfairly coercing applicants into IAs under threat of refusing their applications.[3]

While Baldwin relates to obligations imposed by contract to negotiate in good faith, it provides a useful discussion of the principles relating to enforceability of the ‘good faith’ duty generally. Furthermore, the Court’s reasoning raises serious questions regarding the enforceability of good faith obligations imposed by statute, particularly in relation to IAs.

Baldwin v Icon Energy

Baldwin concerned an application by the Defendants to strike out the Plaintiffs’ claim for breach of contract on the basis that the pleadings did not disclose a reasonable cause of action.

The claim related to a memorandum of understanding (MOU) which required the parties to use ‘reasonable endeavours’ to negotiate a Gas Supply Agreement (GSA) in ‘good faith’. Ultimately, the parties were not able to negotiate a GSA.

The Plaintiffs claimed damages, alleging that the Defendants had not complied with their obligations under the MOU, by failing to negotiate the GSA in good faith.

The Court struck out the claim. In doing so, the Court highlighted that the enforceability of agreements to negotiate in good faith was an unsettled area of law, but found that the ‘reasonable endeavours’ and ‘good faith’ requirements of the MOU were unenforceable because they lacked certainty.

The case provided a comprehensive review of the case law,[4] which supported the notion that agreements to negotiate in good faith are unenforceable because the duties of good faith or reasonableness, in the context of a commercial negotiation, lack certainty.This is particularly the case in commercial negotiation where concepts of reasonableness or good faith are opposed to the “self interested position” of the parties.[5]

Implications for statutory obligations

The good faith obligations in the SPA and the SEQ Water Act are the product of recent amendments, and as such, the extent of their enforceability remains untested.

 A material factor in McMurdo J’s ruling in Baldwin was that good faith obligations are unenforceable in a commercial context because the duty is unquantifiable. The good faith obligations contained in theSPA and SEQ Water Act attempt to provide some method of quantifying the extent of the duty, by including the following examples:

  • disclosing relevant information in a timely fashion;
  • considering and responding to proposals in a timely fashion; and
  • giving reasons for decisions and responses.

The extent to which these examples quantify the duty of good faith generally remains questionable. This is because the examples provide no assistance, beyond the few examples given, in identifying the complete scope of the ‘good faith’ obligation. This means that the legislative requirements of ‘good faith’ are infected with the same uncertainty as contractual provisions that require good faith. This places the statutory obligations in a similar position to that considered in Baldwin, and those obligations are likely to be similarly unenforceable.

The commercial context in which IAs are negotiated creates further enforceability issues for the statutory duties of good faith. Most, if not all, conduct of parties throughout negotiations is subject to without prejudice privilege. Therefore, any evidence supporting an allegation of bad faith, based on the examples or more generally, would likely be subject to a valid claim of without prejudice privilege, and could not be relied upon in proceedings in relation to those matters.

In contrast, when dealing with mining lease applications and native title holders, statutory obligations to negotiate in good faith have been upheld by the Courts.[6] However, in these instances the Courts have generally formed a view on whether negotiations have occurred, rather than whether they occurred in ‘good faith’.

The reason why ‘good faith’ has not been considered in this context is possibly explained in Western Australia v Taylor where Member Sumner of the National Native Title Tribunal commented upon the ambiguity of the term good faith, by quoting TRH Cole,

“there is no shortage of possible definitions of the term ‘good faith’ but there does not appear to be one universally accepted definition.’ The meaning of the phrase ‘negotiate in good faith’ will vary in accordance with the context in which it is used.”[7]

Comment

The Baldwin decision suggests that, despite the inclusion of examples in the statutes as to what constitutes good faith, the good faith obligations in the SPA and SEQ Water Act may not be enforceable. Measuring ‘bad faith’ in a self interested commercial negotiation is a difficult exercise and, in any event, the presence of without prejudice privilege claims is likely to frustrate the evidence-gathering abilities of potential plaintiffs.