HYUNDAI ENGINEERING AND CONSTRUCTION CO LTD v. VIGOUR LTD

HCCT 100/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO. 100 OF 2003

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J U D G M E N T

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I. Background

1. By 3 building contracts the Defendant ("Vigour") as Employer engaged the Plaintiff ("Hyundai") as Main Contractor for construction work in connection with the "KCRC 5Ha Site Topside Development -- Hotel & Office Project" ("the Project"). The parties also entered into supplementary agreements. The building contracts and supplementary agreements between the parties were respectively known as Contracts A, B and SA and the Supplementary Agreements for Contracts A and B and Retail Area RAC (collectively, "the Contracts"). Under the Contracts substantial liquidated damages were payable for delay in completion. The Project was carried out under the supervision of Ronald Lu & Partners as Architect and Davis Langdon & Seah Hong Kong Limited as Quantity Surveyor.

2. The Contracts stipulated a mechanism for resolving disputes between the parties. In particular, Clause 86 ("Clause 86") of the Contracts provided:-

"(1) If any dispute or difference of any kind whatsoever shall arise between the Employer and the Contractor in connection with or arising out of the Contract or the carrying out of the works including any dispute as to any decision, instruction, order, direction, certificate of the Architect or certificate of valuation by the Surveyor whether during the progress of the Works or after their completion and whether before or after the termination, abandonment or breach of the Contract, it shall be referred to an settled by the Architect who shall state his decision in writing and give notice of the same to the Employer and the Contractor. Unless the Contract shall have already been terminated or abandoned the Contractor shall in every case continue to proceed with the Works with all due diligence and he shall give effect forthwith to every such decision of the Architect unless and until the same shall be revised in the mediation or arbitration as hereinafter provided. Such decision shall be final and binding upon the Contractor and the Employer unless either of them shall require that the matter be referred to mediation or arbitration as hereinafter provided. If the Architect shall fail to give such decision for a period of 28 days after being requested to do so or if either the Employer or the Contractor be dissatisfied with any such decision of the Architect then either the Employer or the Contractor may within 28 days after receiving notice of such decision, or within 28 days after the expiration of the said decision period of 28 days, as the case may be, request that the matter shall be referred to arbitration under the provisions of the Arbitration Ordinance or any re-enactment or amendment thereto.

(2) The arbitration shall be commenced by either party giving to the other party notice stating the subject matter and details of the dispute and the qualification which, in the opinion of the party giving the notice, should be possessed by the arbitrator.

(3) The notice requiring arbitration may include a request for conciliation. If such request is made and is acceded to by the other party then the Employer and the Contractor (as the case may be) shall endeavour to agree on a conciliator and shall submit the matter in dispute to him. The conciliator shall discuss the matter with the parties and endeavour to resolve it by their agreement. All discussions in conciliation shall be without prejudice, and shall not be referred to in any later proceedings. Failing agreement the conciliator may by written decision himself determine the matter. The conciliator's determination shall be binding on both parties unless within ten (10) Business Days either party notifies the other in writing that it rejects the conciliator's determination.

(4) If:

(a) conciliation has not been requested, or if requested has not been agreed upon within ten (10) Business Days of the request, or

(b) the parties have agreed upon conciliation but have been unable within ten (10) Business Days of such agreement to agree upon a conciliator, or

(c) no agreement has been reached in conciliation and no determination has been issued by the conciliator within one (1) month of the request for conciliation, or within such further time as the parties may agree, or

(d) either party has within the prescribed time rejected the conciliator's determination,

then the matter in dispute shall be referred to arbitration.

(5) The arbitrator appointed shall have full power to open up, review and revise any decision (other than a decision under Clause 46(3) not to vary the Works and a decision under Clause 53(5)(b) regarding the issuance of the Certificate of Completion for any substantial part of the Works), instruction, order, direction, certificate of the Architect or certificate of valuation by the Surveyor and neither party shall be limited in the proceedings before such arbitrator to the evidence or arguments put before the Architect for the purpose of obtaining his decision above referred to.

Provided that:-

(a) the giving of a Certificate of Completion in accordance with Clause 53 shall not be a condition precedent to the taking of any step in such reference;

(b) no decision given by the Architect in accordance with th foregoing provisions shall disqualify him from being called as a witness and giving evidence before the arbitrator on any matter whatsoever relevant to the dispute or difference so referred to the arbitrator as aforesaid.

(6) In the case of any dispute or difference as to the exercise of the Architect's powers under Clause 81(1) the reference to the arbitrators may proceed notwithstanding that the Works shall not then be or be alleged to be complete."

3. There was delay in completing the Project and a dispute arose between Hyundai and Vigour over whether the Architect had correctly assessed the Plaintiff's entitlement to extensions of time. Hyundai thought that greater extensions should have been granted, Vigour that the Architect had been too generous. Hyundai believed that Vigour owed Hyundai over $900 million, while Vigour believed that Hyundai owed Vigour some $200 million in liquidated damages. In respect of its claim against Hyundai, Vigour was entitled to call on a performance bond ("the Bond") for Contract B in the sum of $60 million. But such right had to be exercised by 31 March 2003.

4. Mr Kim Sun-Kyu ("Mr Kim"), Hyundai's Managing Director, was keen to resolve the differences between Hyundai and Vigour by negotiations if possible. Discussions in February 2003 among Mr S L Chung ("Mr Chung") (Senior Project Manager), Mr William Ng ("Mr Ng") (General Manager, Contracts) on behalf of Hyundai and Mr Anthony Kwan ("Mr Kwan") (Chief Manager, Building Cost and Contract Department) and Ms Grace Shen ("Ms Shen") (Senior Project Manager) on behalf of Vigour having made no progress, on 5 March 2003 Mr Kim wrote to Mr Victor Li ("Mr Li") (Managing Director and Deputy Chairman of the Cheung Kong Group ("the Group") to which Vigour belonged). In his letter Mr Kim pointed out that, despite major differences between Hyundai and the Group, a Final Account had recently been agreed between them in the Hok Un Phase II Redevelopment, "due to the attitude of a more fair and reasonable approach being adopted by both parties, and probably more important, on the basis of reciprocal commercial good faith". Mr Kim proposed that he meet with Mr Li in a similar spirit of cooperation in order amicably to resolve the parties' differences in relation to the Project.

5. By letter dated 8 March 2003 Mr Li suggested that "the appropriate time for us to meet and discuss the matter may be right after my staff have completed their review on all the documents tabled to date". Mr Li stressed that the Group "has always been fair and reasonable in all our dealings, so please rest assured that we will be the same with you on this matter, and look forward to meeting with you in the near future".

6. Although Vigour had accepted his suggestion for negotiations, Mr Kim was aware of the deadline imposed by Article 86 on the reference of any dispute to arbitration. Accordingly, by 2 letters dated 12 March 2003 Hyundai invited Vigour to agree to the extension of the time allowed by Clause 86 for referring a dispute concerning 2 decisions of the Architect made on 18 and 26 February 2003 respectively.

7. Vigour having refused the request for extensions, Hyundai issued Notices of Arbitration ("the March Notices") in relation to Contracts A and B on 18 and 25 March 2003 respectively. It later issued a Notice of Arbitration ("the November Notice") in relation to Contract SA on 18 November 2003. Vigour took the position in March 2003 that the March Notices were time-barred under Clause 86 since the Architect had already ruled on identical matters previously and no appeal had been lodged against those earlier rulings.

8. Mr Kim regarded the March Notices as merely protective steps. Hyundai wrote to Vigour and the Group on 18 and 25 March 2003 respectively to emphasise that the March Notices were merely intended to preserve Hyundai's rights under Clause 86. In its 25 March 2003 letter to Group (marked for the attention of Mr Li), Mr Kim stated:-

"In view of the Practical Completion of the Service Apartments, the imminent expiry of the Bond for Contract B, and the forthcoming completion of Maintenance Periods for the Hotel and the Office, it is imperative that the extension of time issues be sorted out as soon as possible. Persisting huge difference in the Architect's assessment, in contrast to the Contractor's purported entitlement to extension of time, especially for the Contracts A and B, would obviously not be beneficial to either party in the administration of the project and the concerned budgets.

With all my sincerity of resolving the matters amicably, I would, once again, solicit the favour of your sparing some of your valuable time, to allow a meeting at the soonest possible, for an opportunity for us to present you with the actual status and possible solution to the outstanding issues."

Mr Kim reiterated the sentiments expressed in his 25 March 2003 letter at a meeting 2 days later with Mr Kwan and Ms Shen. Mr Kim also expressed concern over Vigour's apparent intention to call the Bond.

9. Following the latter meeting, late in the afternoon of 27 March 2003, Mr Li telephoned Mr Kim. Mr Li said that he too was prepared to negotiate a commercial settlement of the disputes between Hyundai and Vigour but he would not do so with "a gun against his head". By the latter expression Mr Li explained that he was referring to the March Notices. Mr Li said that, as a pre-condition for commercial settlement negotiations, Hyundai had to decide whether it wanted to "fight or talk". If Hyundai wished "to talk" then it had to give up the right to sue or arbitrate, regardless of the outcome of negotiation. On the other hand, if Hyundai wished "to fight", Vigour would "fight" to the end and there would be no possibility of negotiation once the parties went down that path. If Hyundai's decision was "to talk", Mr Li asked Hyundai to sign an agreement whereby it agreed to remove the threat of arbitration. Mr Kim confirmed that Hyundai would sign such an agreement and Mr Li said that he would instruct Vigour to meet Hyundai on the next day to discuss and agree on the terms of the agreement.

10. The parties met on 28 March 2003. Mr Kim, Mr Chung and Mr Ng attended for Hyundai and Mr Kwan and Ms Shen for Vigour. Ms Shen prepared a handwritten draft for comment. That read:-

"The parties will not continue arbitration and will not bring any arbitration or court action forever and ever, and any right to sue each other will not be exercised any more mutually and the parties will start to discuss together to resolve any differences under or in connection with the above contracts and any arguments that may come up now and in the future for anything about the above contracts that can not be finalized will be resolved and decided by the managing directors of the ultimate shareholder group of the highest level. To demonstrate this private settlement is in place, the Employer will let this relevant bond expire."

Amendments were proposed. Mr Kim suggested deleting the words "and ever" after "forever", joking that otherwise the agreement would sound too much like a marriage vow. Mr Ng, wondering what would happen if discussions failed to have a concrete result, proposed that there be third-party mediation by way of a fallback position. He suggested the insertion of the words "provided failing an ultimate agreement then both parties shall agree and submit to third party mediation procedure which shall be conducted and completed as soon as possible" after "highest level". Ms Shen left the room to obtain advice from Ms Amy Wong ("Ms Wong") (an in-house counsel of the Group) on the nature of mediation and instructions from Mr Li on Mr Ng's amendment. Ms Wong , who briefly joined the meeting, thought that the words "and in any case no party will exercise the right to sue against each other" immediately after the words "as soon as possible" proposed by Mr Ng.

11. Finally, Mr Kim, Mr Chung, Mr Ng, Mr Kwan and Ms Shen all signed an agreement ("the March Agreement") in the following terms:-

"RE KCRC 5 HA SITE TOP SIDE CONTRACTS: A, B, SA, RAC AND SUPPLEMENTAL AGREEMENTS

The parties will not continue arbitration and will not bring any arbitration or court action forever and any right to sue each other will not be exercised any more mutually and the parties will start to discuss together to resolve any differences under or in connection with the above contracts and any arguments that may come up now and in the future for anything about the above contracts that can not be finalized will be resolved and decided by the managing directors of the ultimate shareholder group of the highest level provided failing an ultimate agreement then both parties shall agree and submit to Third Party Mediation procedure which shall be conducted and completed as soon as possible and in any case no party will exercise the right to sue against each other. To demonstrate this private settlement is in place, the Employer will let this relevant bond for Contract B expire."

12. By letter dated 29 March 2003 to Hyundai Ms Shen enclosed a copy of the handwritten minute of the March Agreement and stated:-

"In reliance of the said minutes and your agreement thereto, Vigour Limited, will not call the relevant bonds and thereby both parties shall be estopped from continuing and/or bringing any arbitration and/or court proceedings against each other in connection with the captioned matters."

13. Vigour did not call on the Bond which expired at the end of March 2003.

14. On 7 April 2003 Mr Kim wrote to Vigour, pursuant to the March Agreement, seeking "to speed up the necessary process, for the objective of achieving an amicable resolution in the nearest future". Mr Kim stated:-

"Under the financial stress due to the alleged LDs being partially withheld, coupled with the consequential non-payment to the NSCs, it is imperative that the disputes, especially in respect of the EOT matters, be sorted out as soon as possible. As you are well aware, we have arbitration actions from various NSCs already commenced, largely as a result of the inter-related non-payment problems. The soonest settlement would help to mitigate the predicament of NSCs or subcontractors' cooperation in the defects making good and outstanding works being further deteriorated.

Following our submission of the respective EOT claims and VO summary, we note that promptly thereafter you have proceeded with your in-house reporting procedures. We consider expedient and therefore cordially request that a management meeting of the highest level, as suggested in the Agreement, be held sometime this week, at time to your best convenience and arrangement."

15. Mr Li responded on 8 April 2003 as follows:-

"I write to express my appreciation of your sincerity and effort in resolving our differences in an amicable manner, and want you to know that the sincerity is mutual and your effort will be reciprocated.

As the issues involved are complicated, my staff will need some time to complete their review and assessment for my information. I therefore must appeal for your patience, and assure you that a meeting will be arranged as soon as possible."

16. On 3 July 2003 a meeting ("the July Meeting") took place between Mr Li and Mr Kim. Mr Kim tabled a document entitled "Proposed Commercial Settlement" as a basis for discussion. But no progress was made in narrowing the gap between the parties' positions.

17. By letter dated 17 July 2003 (marked for Mr Kwan's attention) Mr Kim followed up on the topics discussed at the July Meeting. Mr Kim stated that, although the July Meeting had been "favourably amicable and constructive", there persisted "substantial differences ... especially regarding the EOT hence LDs issues". Mr Kim noted from the July Meeting that "Mr Li might have certain concern that Mediation may not be able to bring about the desired result for a full and final settlement". Mr Kim wished to allay such concern. He proposed that as a practical next step the parties consider agreeing on a mediation procedure and engaging a mediator who could recommend settlement terms. An alternative to this (Mr Kim indicated) might be expert determination. On either mode of proceeding:-

"[e]xperience tells that, especially in Government contracts, these Alternative Disputes Resolution methods have been remarkably constructive, capable of resolving opposing contentions, reflecting strengths and weaknesses, enhancing understanding, and getting the parties closer to facilitate the ultimate settlement, in a more amicable way and at the expense of substantially lower costs and shorter time than traditional mandatory processes."

Mr Kim concluded his letter by stressing how imperative it was for matters to be sorted out as soon as possible, in light of financial pressures facing Hyundai as well claims from nominated sub-contractors. Upon Vigour's confirmation of a preferred mode of further process, Hyundai would be "happy to take the imitative of drafting an agreement for [Vigour's] kind approval or counter-suggestion".

18. In a letter to Mr Li dated 26 July 2003 Mr Kim again suggested that the parties initiate mediation at that stage. Mr Kim pointed out that in the Hok Un Redevelopment mediation gave rise to a settlement "notwithstanding our certain difficulties in convincing the Head Office to accept the rather conservative assessment". Accordingly:-

"[o]ur management maintains the objective of achieving amicable solutions, to the common interests of the Company and the esteemed Employers. We trust you appreciate that Hyundai has had long term favorable relationship with the Cheung Kong Group, and on grounds of commercial sincerity to maintain the valued relationship, we have to assure you that all efforts will be made to the objective of a final amicable settlement.

I sincerely look forward to the achievement of good results, and I believe that upon your kind instruction to the setting up of a preferred mediation or expert determination, the various differences will be reconciled and agreement to final accounts may be realized in the nearest future."

19. It was not until 18 August 2003 that Vigour (through Mr Kwan) replied to Hyundai's letters. Vigour's response was cryptic:-

"We refer to your letters dated 17 July 2003 and 26 July 2003.

As regards the last sentence¹ in the second paragraph of your letter dated 17 July 2003, it is an untrue note of what happened in the meeting of 3rd July 2003. Further your suggestion contained in the said letters are contrary to what have been provided in the agreement dated 28th March 2003.

Yours faithfully

For and on behalf of

VIGOUR LIMITED"

20. By answer dated 22 August 2003 Hyundai explained the benefits of mediation, including the potential saving in time and cost which the process might bring. Hyundai also enclosed a draft mediation agreement prepared with reference to the HKIAC Mediation Rules for Vigour's consideration. Hyundai's proposal was for the mediation to cover "all major disputes between us including extension of time, loss and expense, LADs, major unresolved variations and measurement issues, etc., for the various Contracts in question, with a view to bring about an overall acceptable resolution". Hyundai concluded its letter as follows:-

"We trust the above proposed mediation affords both parties the best opportunity of resolving matters through a well defined timetable and mechanism, on a constructive and amicable basis.

Since obviously considerable time has elapsed, we consider now expedient to speed up these procedures of mediation, for the earliest possible settlement, to the benefits of both parties. We believe that any further delay to the matters would be unfavorable and unacceptable.

We would be grateful if you could please let us have your response to this letter at your soonest convenience in say one week time. We sincerely look forward also to your comment and approval on the enclosed draft mediation agreement, whereupon we shall propose two or three mediators shortly, for your kind consideration and acceptance, or counter proposal as deemed appropriate."

21. Vigour's reply came on 4 September 2000. It was brief:-

"We refer to your letter dated 22nd August 2003.

Again, your suggestion in the said letters is contrary to what have been provided in the agreement dated 28th March 2003.

Yours faithfully

For and on behalf of

VIGOUR LIMITED"

22. On 5 September 2003 Hyundai asked for clarification. How precisely had its letter of 22 August 2003 been "contrary to" the March Agreement? Vigour's answer came on 10 September:-

"We would like to straighten the record that it is our intention to adhere to the provisions set out in the agreement dated 28 March 2003 in respect of KCRC 5 HA Site Top Side Contracts A, B, SA, RAC & Supplemental Agreements ('March Agreement'). It is expressly provided in the March Agreement that 'any argument that may come up now and in the future for anything about the above contracts that cannot be finalized will be resolved and decided by the managing directors of the ultimate shareholders group of the highest level provided failing an ultimate agreement then both parties shall agree and submit to third party mediation procedure....'. We regret that what you have done so far is contrary to what have been provided in the March Agreement.

We would reiterate that both sides shall adhere to what have been provided in the March Agreement."

23. Hyundai came back on 18 September 2003 as follows:-

"When we met your Mr Anthony Kwan and Ms Grace Shen on 28 March 2003, and pursuant to the Agreement drafted by Ms Shen in the meeting, we agreed that the 'Managing Directors' referred to in the Agreement were our Mr Kim and your Mr Li. They have actually met in an attempt to resolve the disputes but have not succeeded.

In the circumstances, the March Agreement requires the parties to seek to resolve their differences via mediation and we have proposed this to you. We now cordially require you to either confirm that it is your intention to comply with the March Agreement and hence respond to us substantively on the mediation agreement proposed, or confirm that is not your intention whereupon matters will have to take their natural course.

We do believe we have been as patient as could reasonably be expected of us but must now ask please to hear from you by return, as soon as possible."

24. There being no response from Vigour, Hyundai chased up on 23 September 2003 stating:-

"We have done everything that we can to convince you to comply with the terms of the March Agreement but you have to date not done so and, regrettably, show no intention of so doing.

It will be a matter of considerable regret to us if, despite all our effort to date, it is necessary for us to resolve these disputes at arbitration. We do, however, confirm that if we do not receive a formal and meaningful response to our aforementioned letter dated 18 September 2003 by 2 October 2003 we will be left with no other alternative than to commence arbitration proceedings without further notice to you."

25. On 27 September 2003 Vigour wrote as follows:-

"We refer to your letters dated 18 september 2003 and 23 September 2003.

We would like to repeat that the parties should adhere to the March Agreement and that what you have said in the above letters is contrary to the provision in the March Agreement.

We would like to remind you again that we have trusted that you would honour the agreement as contained in the March Agreement and on that basis we therefore have not exercised the right to call for the relevant Bond and entered into the March Agreement. In the circumstances, the March Agreement is binding on all parties concerned."

26. By letter dated 30 September 2003 Mr Chung replied for Hyundai as follows:-

"I refer to your letter of 27 September 2003 to our Mr S K Kim.

We have asked you many times to indicate why you believe our letters are contrary to the provisions of the March Agreement and you consistently refuse to do so. With all due respect it does not help for you just to say over and over again that we are proceedings contrary to the agreement -- you must tell us why.

We have done everything that we can to convince you to comply with the terms of the March Agreement but it is clear that you have no intention of doing so. In the circumstances, you leave us with no alternative but to revert to implementation of the dispute resolution mechanism set out in the contract and we now have that in hand.

It is a matter of considerable regret to us that despite all our efforts it is obviously going to be necessary for us to resolve these disputes at arbitration."

27. Again there was no response from Vigour. Hyundai therefore wrote on 8 October 2003:-

"We are disappointed to note that you have not responded to our letter of 30 September 2003.

As you know, Notices of Arbitration were served in relation to Contracts A and B on 25 and 18 March 2003. The period for conciliation under the contracts has long expired such that we intend to proceed immediately to arbitration. It is obviously sensible for one Arbitrator to be appointed to deal with disputes under both contracts. Would you please confirm that you agree.

During the course of next week, we will provide you with the names of potential arbitrators in the hope that the arbitrator may be agreed between us. If no agreement can be reached we will proceed to secure an appointment as provided for by the contracts.

We look forward to hearing from you in relation to the matters referred to above."

28. By letter dated 16 October Hyundai's solicitors Messrs Masons ("Masons") proposed Mr Colin Wall as sole arbitrator in connection with the March Notices and sought Vigour's views on the appointment.

29. Vigour responded on 16 October 2003 as follows:-

"We refer to your letters dated 30 September 2003 and 8 October 2003 respectively.

We do not accept that you are not aware of what we have been complaining you about. When we pointed in our previous letter dated 10 September 2003 that according to the March Agreement, 'any argument that may come up now and in the future for anything about the above contracts that cannot be finalized will be resolved and decided by the managing directors of the ultimate shareholders group of the highest level provided failing an ultimate agreement then both parties shall agree and submit to third party mediation procedure......' you then responded by your letter of 18 September 2003 and alleged that the managing directors had already met.

According to our record, it is regrettable that up to now, 'the managing directors of the ultimate shareholders group of the highest level' have not yet met. You have been reminded of this in our letter of 27 September 2003.

Further it is unacceptable to us that you have been shifting the blame on us as the pretext for you to force the matters herein to be dealt with by way of arbitration in breach of the March Agreement.

We have trusted that your company would adhere to the March Agreement and have accordingly let the relevant bond expire. We demand you to act in compliance with the March Agreement and arrange the meeting of the managing directors of the ultimate shareholders group of the highest level as required under the March Agreement. In this connection, please provide us with the identity of the managing director of the ultimate shareholder group of the highest level of your side together with supporting proof to our satisfaction for our record in order to remove any uncertainty and disagreement.

You are reminded again to comply with the March Agreement and on that basis, if you commence arbitration, we will of course strenuously resist and oppose."

30. Masons replied on 17 October 2003 ("the October Letter"), denying the contents of Vigour's letter of 16 October. Among other things, Masons stated the following:-

"We do not accept that our client has not been represented at meeting(s) by representatives with the authority of the managing directors of the ultimate shareholders group of the highest level. Mr S K Kim, of our client, as full authority and express power of attorney in respect of the matters in issue and as a matter of fact Mr SK Kim met with Mr Victor Li on 3 July 2003.

As regards your question on the prerogative of the MD of Hyundai, please take note that Mr SK Kim is the Managing Director made, constituted and appointed by the President & CEO, Chairman of the board of directors, with absolute power to officiate all business in the respective region. For your record we enclose a copy of the authorising Power of Attorney in favour of Mr Kim, for your better understanding, by which Mr Kim is authorized as the true and lawful attorney-in-fact and agent of Hyundai, with full power and authority to act as the legal representative on behalf of Hyundai in HK, Macau, and PRC, and to execute and sign all contractual and legal instruments for all projects and business whatsoever in connection thereof.

This might be just a misunderstanding from your part, but presumably such misunderstanding if any should have been sensibly clarified before Mr Victor Li met Mr S K Kim, not now.

The parties have already held the first MD meeting, but failed to reach settlement. Pursuant to the Agreement, our client thereafter proposed mediation, or alternatively, subject to agreement, third party expert assessment. To date our client has received no positive response from you. Consequently our client has no option but to reactivate the contractual arbitration process as per our letter to you dated 15 October 2003 requesting your agreement to the appointment of Mr Colin Wall as Arbitrator in this matter.

We must reiterate that our client has fully complied with the March Agreement, with the best attempts and effort. As you are aware our client is, and has always been, willing and eager to have meetings but on the understanding that such meetings will be productive. Unfortunately, it is a fact that such previous meetings to date have been ineffective and have simply delayed/prevented resolution of the issues.

This cannot be allowed to continue and in the circumstances it is considered critical that the parties act promptly.

Accordingly, we look forward to your response to our letter dated 16 October 2003, failing which we have instructions to seek the appointment of an Arbitrator pursuant to the Arbitration Ordinance."

31. By an Originating Summons dated 11 November 2003 Hyundai sought declarations to the effect that:-

(1) insofar as it precludes Hyundai from resorting to court action, the March Agreement is void as contrary to public policy;

(2) insofar as it provides for negotiation of outstanding disputes between the parties, the March Agreement is no more than an agreement to agree and thus uncertain and unenforceable as a contract; and,

(3) "the mediation machinery in the [March Agreement] is unenforceable for lack of certainty or in the event the mediation machinery is enforceable but breaks down or there is a failure to achieve compromise, that either party may pursue its claim in litigation or arbitration".

32. By a Summons dated 17 February 2004 Vigour applied for other issues to be dealt with in the substantive hearing of the Originating Summons. In particular, Vigour sought the following reliefs:-

(1) declarations to the effect that:-

(a) by entering into the March Agreement, Hyundai and Vigour have revoked the arbitration agreements contained in Clause 86 of the Contracts; and,

(b) in any event, by operation of the doctrine of estoppel by convention, Hyundai is "estopped from commencing or continuing arbitration proceedings against [Vigour] purported under or in connection with the Contracts";

(2) damages of $60,017,000 (the amount of the Bond) for misrepresentation; and,

(3) an injunction restraining Hyundai from "commencing or further continuing any purported arbitration proceedings against [Vigour] under or in connection with the arbitration agreements contained in the Contracts".

33. The alleged misrepresentation for which Vigour seeks damages is described in Vigour's Summons as follows:-

"On 27th and 28th March 2003, Mr S K Kim the Managing Director of the Plaintiff based in Hong Kong knowingly but falsely, alternatively negligently, represented to the Defendant that there existed a 'managing director of the ultimate shareholder group of the highest level' other than the said S K Kim. The said representative was made for the purpose of, and had the effect of, inducing the Defendant to enter into the March Agreement. In accordance with the March Agreement the Defendant allowed a surety bond in the sum of $60,017,000.00 to lapse, without making demand for payment under the said bond as it otherwise would have done."

34. At the hearing of Vigour's Summons on 20 February 2004, I granted an interim injunction ("the Interim Injunction") restraining Hyundai until 19 March 2004 (the date when the Originating Summons was to be heard substantively) or further order from proceeding with the arbitrations invoked by the March and November Notices (including appointing any arbitrator in respect thereof) or commencing any other arbitration proceedings in connection with the Contracts. I also directed that Vigour file a Counterclaim under the Originating Summons setting out the facts and matters upon which Vigour relied in support of its claim against Hyundai for misrepresentation. I ordered that Hyundai file a defence within 14 days of Vigour's filing its Counterclaim². I further suggested to the parties (and the parties by their counsel agreed) that the hearing of the Originating Summons on 19 March 2004 be devoted to the determination of the parties' entitlement to the declarations sought by them with Vigour's Counterclaim being heard at a later date.

35. For the Court's convenience, I had on 20 February 2004 invited the parties to sharpen the issues between them by framing discrete questions, preferably in "yes-or-no" or "multiple-choice" format, of the matters on which they required the Court's ruling. Ultimately, the parties could not agree the precise wording of any questions. But, through the efforts of both sides' counsel (Mr Michael Thomas SC for Hyundai and Mr Robert Kotewall SC and Ms Katrina Lam for Vigour), the issues raised by the Originating Summons were sufficiently evident to enable the matter to be heard expeditiously on 19 March 2004.

II. Discussion

A. Issues of construction

36. In his opening, Mr Thomas identified 4 issues of construction arising out of the March Agreement. It is convenient to start with those 4 issues. They are:-

(1) Whether by the March Agreement Hyundai and Vigour agreed to compromise or settle their differences on the basis that, if the negotiations or mediation envisaged by the March Agreement proved fruitless, the parties would be bound by (and would not seek to re-open) the extensions of time previously certified by the Architect.

(2) Whether by the March Agreement the parties discharged the submissions to arbitration contained in Clause 86 of the Contracts?

(3) What is meant by the words "managing directors of the ultimate shareholder group of the highest level" in the March Agreement? In particular, does Mr Kim fall within that description (as Hyundai contends) or are the words inapplicable to Mr Kim (as Vigour claims)?

(4) Does the March Agreement bar the parties from invoking the Court's jurisdiction in all circumstances or does the agreement only bar them from going to the Court in limited situations?

A. 1 Was the March Agreement a compromise or settlement?

37. Mr Kotewall's case is that the peremptory language of the March Agreement's opening words (for example, "The parties ... will not bring any arbitration or court action forever"; "any right to sue ... will not be exercised any more mutually"; "in any case no party will exercise the right to sue against each other"; and "[t]o demonstrate this private settlement is in place,...") must mean that the parties fully intended to compromise their differences by the document. Mr Kotewall submits that the effect of the March Agreement is that, '[u]nless the parties agree some other solution by negotiation or mediation, the architect's certificates become final and binding".

38. I disagree with Mr Kotewall's construction. It is difficult to see how the parties could have regarded the March Agreement as a settlement along the lines proposed by Mr Kotewall, where (as far as Hyundai was concerned) Vigour owed it over $900 million and (as far as Vigour was concerned) Hyundai owed it over $200 million. In the absence of clear words to the effect that each party was giving up its claims and settling on the status quo as exemplified by the Architect's certificates already issued, I cannot read into the March Agreement an agreement between the parties to give up their very substantive claims against each other in the event that negotiation and mediation should fail. At the time of signing the March Agreement, I think that the parties would be surprised by such a suggestion.

39. Seen in the factual matrix which I have set out in Section I of this Judgment, the March Agreement was plainly intended by both sides to provide no more than a mechanism whereby their considerable differences might ultimately be resolved with a significant saving of time, cost and antagonism. However, agreeing a mechanism to resolve disputes is just a first step towards resolution of those disputes. It is not in itself (and must not be confused with) the actual resolution or settlement of such disputes.

40. One might, especially as a layman, legitimately describe an agreement to resolve differences by recourse to a particular process (for instance, negotiation or mediation) as a "settlement". But that does not mean that there has a been a full and final settlement of all differences. Only a method of proceeding has been "settled". That is all. Thus, I do not think that the reference to a "private settlement" in the last sentence of the March Agreement supports Mr Kotewall's argument.

A. 2 Did the March Agreement revoke the arbitration agreements in Clause 86?

41. Mr Kotewall suggests the words "the parties will not continue arbitration and will not bring any arbitration" should be taken to mean that the parties have agreed not to invoke Clause 86. He states in his Reply Submissions (at §9):-

"A reasonable person (rather than a pedantic lawyer - to quote Lord Hoffmann) would have understood these words to cover every eventuality in putting together a compromise solution. These experience construction people have simply agreed not to go to arbitration on any of the matters which would have been arbitrated."

42. Mr Thomas points out that there is a world of difference between agreeing not to exercise rights under an arbitration agreement to arbitrate and an agreement to revoke the submission to arbitration contained in the arbitration agreement. In the first case one merely agrees to refrain from exercising rights, while in the second instance one agrees not just to refrain from exercising rights but to forego such rights altogether and treat the underlying arbitration agreement as discharged.

43. The language of the March Agreement suggests that the parties only agreed to refrain from exercising rights under Clause 86 and the March Agreement did not have the effect of revoking the submission to arbitration under Clause 86. Thus, the March Agreement says the parties "will not bring any arbitration ... forever", indicating an agreement not to exercise a right to bring an arbitration even though such right remains available under Clause 86. More tellingly, the March Agreement states that "any right to sue each other will not be exercised any more mutually" and "in any case no party will exercise the right to sue against each other". In both sets of expression the emphasis is on a permanent restraint in the exercise of a right to arbitrate, as opposed to the abrogation of such right (including its source in Clause 86).

44. If Mr Kotewall only means that the parties have agreed not to arbitrate while the March Agreement is in effect, I would agree. If Mr Kotewall means to go further and suggest that, since (potentially at least) the negotiation and mediation mechanism implemented by the March Agreement could completely resolve the differences between Hyundai and Vigour, both parties must have agreed not just to restrain the exercise of their rights but to give up those rights altogether, I would disagree. In the absence of clear words to that effect, there is nothing in the factual matrix or the March Agreement to warrant such a construction. Undoubtedly, the parties thought that the March Agreement would preclude the need to exercise any rights of arbitration "forever". But that does not logically mean that the parties in fact surrendered the right to arbitrate arising from Clause 86 if the March Agreement should somehow be (or become) void, inoperative or ineffective.

A. 3 What is meant by the reference to "managing director"?

45. This issue can be disposed of shortly. The words "managing directors of the ultimate shareholder group of the highest level" mean exactly what they say.

46. In Hyundai's case, there is no further shareholding company behind Hyundai exerting a higher level of command. Hyundai is a South Korean company which is registered under the Companies Ordinance (Cap.32) to carry on business in Hong Kong. The company had gone bankrupt in October 2000. It was restructured in 2001 and became disaffiliated from the Hyundai Group in August 2001. Its major shareholders are 4 banks: Korea Development Bank (9.88%), Korea Exchange Bank (7.34%), Woori Bank (6.14%) and Kookmin Bank (10.82%). Mr Kim is Hyundai's managing director who since at least 3 May 2002 has had full power to act as the company's representative in Hong Kong, Macau and the Mainland ("the Region") and to execute all contractual and legal documents necessary "in relation to every respective authority for all prospects and business activities in the Region".

47. In light of those undisputed facts, I do not see how Mr Kim can be anything other than Hyundai's managing director at the highest level of corporate command.

48. Mr Kotewall points out that Hyundai has a President and Chief Executive Officer (Mr Shim Hyun-Young) and that previously there had been dealings between Mr Li and Mr M S Ro, an Executive Vice-President of Hyundai. That may well be the case. But merely because Hyundai happens to have a President and CEO and at least one Executive Vice-President does not render Mr Kim any less a managing director at Hyundai's highest level. The March Agreement specified a "managing director" at the highest corporate shareholding level and that is exactly what Hyundai put forward in the presence of Mr Kim.

49. In my view, there is no substance to Vigour's assertion that, in proffering Mr Kim and no higher officer for negotiations with Mr Li, Hyundai went outside the terms of the March Agreement.

A. 4 Does the March Agreement rule out any or some recourse to the Courts?

50. Mr Kotewall says that the March Agreement does not completely bar the parties from resorting to the Court. For example, Mr Kotewall agrees that the March Agreement did not preclude Hyundai from bringing the present Originating Summons for the purpose of construing the parties' rights and obligation under the March Agreement. In his Reply Submissions (at §19) Mr Kotewall further states:-

"Clearly, the courts still have a residual part to play in the March Agreement as in the case of the present Originating Summons and also where, for example, the decisions of the Architect [are] challenged on the ground of fraud or an abuse of power or that he departed from his instructions in a material respect (i.e. he had not done what he was appointed to do) or if it is shown that there has been a breach of the March Agreement itself."

51. Nevertheless, if Hyundai commences Court proceedings which are not merely ancillary to the enforcement of the March Agreement or which do not wholly relate to questions of the fraud or vires of (say) the Architect's certifications, Vigour (Mr Kotewall suggests) could apply to the Court:-

(5) to strike out Hyundai's action on the ground that any claim by Hyundai arising out of the Contracts has been compromised by the March Agreement; or,

(6) to stay Hyundai's action on the ground that Hyundai agreed to follow the process specified in the March Agreement for the resolution of differences arising out of the Contracts.

Thus, Hyundai may be free to invoke the Court's jurisdiction. But, by reason of the March Agreement, I understand Mr Kotewall to be submitting that Hyundai would not get far before the Court in any substantive action as Vigour would apply to the Court to enforce the terms of the March Agreement.

52. On arbitration, Mr Kotewall's position is that all rights under Clause 86 ceased to be effective as a result of the March Agreement. This means that, if Hyundai continues with the March and November Notices or commences fresh arbitrations, Vigour could apply to the Court for a permanent injunction restraining Hyundai. Again, by reason of the March Agreement, Mr Kotewall submits that Hyundai would not get far along the arbitration route.

53. I have earlier concluded that the March Agreement does not constitute a final settlement of the parties' differences as contended by Mr Kotewall. It follows that, whatever its jurisdiction to grant a stay based on the March Agreement, the Court would not strike out any action by Hyundai on an alleged basis that there has been a full and final compromise with which any cause of action under the contracts has merged.

54. I have also concluded that the March Agreement did not revoke the submission to arbitration under Clause 86. The parties merely agreed that, so long as the March Agreement remained operative, neither party would exercise its rights to arbitrate under Clause 86. Consequently, whether or not the Court would enjoin arbitration proceedings depends on the validity of the negotiation and mediation provisions in the March Agreement. If those provisions are unenforceable or have somehow become inoperative, the continued existence of Clause 86 means that the Court should allow Hyundai to arbitrate to the extent that relevant disputes fall within the ambit of Clause 86.

55. In reality then it seems to me that Mr Kotewall's case on the effect of the March Agreement on the Court's jurisdiction reduces itself to 2 propositions:-

(1) If Hyundai were now to commence Court proceedings, Vigour would be entitled to stay such action and force Hyundai to abide by the negotiation and mediation process set out in the March Agreement.

(2) If Hyundai were now to proceed with arbitration proceedings, Vigour would be entitled to enjoin those proceedings and compel Hyundai to abide by the negotiation and mediation process in the March Agreement.

Both propositions focus on the validity of the March Agreement, a subject to which I shall turn in the ensuing section of this Judgment. Strictly, the 2 propositions do not involve the interpretation of the March Agreement at all.

56. In my view, by the March Agreement, properly construed, the parties essentially bound themselves to forebear from suing each other while negotiations and mediation were taking place and the dispute resolution regime established by the document remained operative. I do not think the March Agreement went beyond this. On this interpretation, the words "not bring any ... court action forever" and "in any case no party will exercise the right to sue against each other" merely reflectd the parties' belief (now seen, with the benefit of hindsight, to have been over-optimistic) that the March Agreement provided a mechanism whereby their differences would definitely be resolved such that there would never need to be recourse to litigation.

57. Much was made by both Mr Thomas and Mr Kotewall of Mr Li's comment that Hyundai had to choose whether "to fight" or "to talk". Even if such remark formed part of the factual matrix, I do not think that the reading in §56 above is affected in any way. Insofar as Hyundai agreed to forebear from suing Vigour in arbitration or Court proceedings pending negotiations and mediation, Hyundai was plainly agreeing "to talk" rather than "to fight". Insofar as the negotiation or mediation arrived at a final settlement, Hyundai undertook to be bound by such result (whatever it might be) and not subsequently "to fight" for some better deal. I do not believe that the admonition "to talk" or "to fight" can be taken further as precluding Hyundai's right to arbitrate or sue even if there occurred what the parties probably regarded as unlikely at the time of the March Agreement and negotiations coupled with mediation failed.

58. I disagree with a wider construction of the March Agreement as entailing the parties surrendering their right to litigate in Court in respect of the Contracts. Purely, as a matter of construction and ignoring the public policy implications of a surrender of rights of suit, it would require far clearer words than those in the March Agreement before the Court could find that a person has given up his right to sue in Court in respect of any matter. No person would readily surrender such a fundamental right and in my judgment neither Hyundai nor Vigour can be taken to have done so here.

B. The validity and enforceability of the March Agreement

59. Mr Thomas identified 4 main issues in respect of the validity or enforceability of the March Agreement. The issues may be summarised thus:-

(1) Insofar as it purports to deny access to the Courts, is the March Agreement contrary to public policy and so unenforceable in whole or in part?

(2) Insofar as it requires the parties to proceed by negotiation and mediation to resolve differences, is the March Agreement no more than an agreement to agree and therefore uncertain and unenforceable in whole or in part?

(3) If the March Agreement is enforceable in whole or in part, has Vigour repudiated the contract and (if so) with what result?

(4) Whether or not the March Agreement is enforceable, is Hyundai estopped from commencing or continuing legal and arbitration proceedings against Vigour under the Contracts?

B. 1 Whether the March Agreement is contrary to public policy

60. The Court jealously protects its jurisdiction. It will not enforce an agreement wherein 2 persons bind themselves not to sue each other in any circumstance. Treitel, The Law of Contract (11th ed.), p.446 states:-

"A contract is at common law contrary to public policy if it purports to deprive the courts of a jurisdiction which they would otherwise have. For example, a clause in an insurance policy which provides that the policy is in certain events to become 'incontestable' does not prevent the court from deciding whether the insured had any insurable interest. Such agreements are contrary to public policy because they would, if valid, make it possible to evade or contravene many peremptory rules of law. It follows that they are invalid only so far as they purport to exclude the jurisdiction of the courts on a point of law. An agreement is not invalid to the extent that it gives a non-judicial body power to make final and binding decision on questions of fact. Such a provision does not, moreover, normally rule out the possibility of a legal challenge to the decision on the ground of 'unfairness, bad faith or perversion', so that the provision does not wholly exclude the jurisdiction of the courts even on the question of fact."

61. Mr Thomas submits that the March Agreement constitutes a contract not to sue in Court and must therefore be illegal.

62. On the reading of the March Agreement which I have suggested in Section II A4 of this Judgment, the issue of public policy does not arise. If all that the parties agreed was that while negotiations and mediation were afoot, each would forebear from suing the other in arbitration or Court proceedings, no question of ouster of jurisdiction arises. The parties have not purported to bar the Court from adjudicating on their differences, but have only postponed the time when the Court's jurisdiction may be invoked by either side pending negotiations and mediation. Although the hope may have been that the Court would never have to be seised of the matter, there has been no ouster.

63. Given the foregoing, it is unnecessary to me to consider the validity of the March Agreement if the parties bound themselves thereby never to sue each other on the Contracts even if negotiations or mediation proved abortive. But, in deference to Mr Thomas' submissions, I briefly set out below what my views on the March Agreement would have been if (contrary to my conclusion) it prohibited one party from suing the other.

64. On that hypothesis, the agreement not to sue would be contrary to public policy. The March Agreement being then partly legal and partly unlawful, it would be unenforceable as a whole if the illegal part could not be severed from the body of the agreement. Words ousting the Court's jurisdiction are normally assumed to be severable (see Treitel at p.507, citing Re Davstone Estate Ltd's Leases [1969] 2 Ch 378). Therefore, as a matter of first impression, only that portion of the March Agreement barring the bringing of suits in Court should be struck down.

65. However, Mr Thomas has stressed that there are 2 components to the March Agreement. A negative component whereby the parties agreed not "to fight" (that is, not to sue each other in arbitration or Court proceedings) and a positive component whereby the parties agreed "to talk" (that is, to negotiate or mediate). Mr Thomas invited me to infer from Mr Li's observation on "fighting" and "talking" that the 2 components comprise a "package deal". To sever one (the stricture against "fighting") from the other (the promotion of "talking") would so alter the nature of the parties' bargain that the Court would be re-writing the March Agreement and enforcing something to which the parties had not agreed. Severance according to Mr Thomas should accordingly be ruled out.

66. I disagree with Mr Thomas' submission. It does not follow from a severance of the provision against going to Court that the parties would immediately be able "to fight" in contravention of Mr Li's admonition. Deleting the relevant words would not (for example) prevent Vigour from applying to the Court to hold Hyundai to any enforceable dispute resolution procedure agreed under the March Agreement. It is true that as a 2nd limb of argument Hyundai claims that the negotiation and mediation procedures in the March Agreement are inadequate and unenforceable. That is a separate matter. The immediate question is whether striking out the offending words from the March Agreement would by itself, without more, negate any legally effective mechanisms for the promotion of "talk" contained in the March Agreement. I do not think that it would.

67. To recapitulate, for the reasons which I have explained, I do not believe that, properly construed, the provision against going to Court in the March Agreement is contrary to public policy. If I am wrong in my construction, I would only have severed the relevant words and would not have found the whole of the March Agreement to be unenforceable.

B.2 Is the agreement to negotiate or mediate enforceable?

68. Mr Thomas contends that the agreement to negotiate and mediate in the March Agreement is unenforceable. That part of the March Agreement is no more than an agreement to agree. Further, Mr Thomas submits that the agreement to negotiate and mediate is void for uncertainty. This is because it does not identify any specific procedure or time frame for the proposed negotiations or mediation.

69. In Courtney & Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd and another [1975] 1 WLR 297 Lord Denning MR (with whom Lord Diplock and Lawton LJ agreed) stated (at 301D - 302B):-

"In the ordinary course of things the architects and the quantity surveyors get out the specification and the bills of quantities. They are submitted to the contractors. They work out the figures and tender for the work at a named price: and thee is a specified means of altering it up or down for extras or omissions and so forth, usually by means of an architect's certificate. In the absence of some such machinery, the only contract which you might find is a contract to do the work for a reasonable sum, or for a sum to be fixed by a third party. But here there is no such contract at all. There is no machinery for ascertaining the price except by negotiation. In other words, the price is still to be agreed. Seeing that there is no agreement on so fundamental matter as the price, there is no contract.

But then this point was raised: even if there was not a contract actually to build, was not there a contract to negotiate? In this case Mr Tolaini did instruct his quantity surveyor to negotiate, but the negotiations broke down. It may be suggested that the quantity surveyor was to blame for the failure of the negotiations. But does that give rise to a cause of action? There is very little guidance in the books about a contract to negotiate. It was touched upon by Lord Wright in Hillas & Arcos Co. Ltd v Arcos Ltd (1932) 147 LT 503, 515, where he said:

'There is then no bargain except to negotiate, and negotiations may be fruitless and end without any contract ensuing; yet even then, in strict theory, there is a contract (if there is good consideration) to negotiate, though in the event of repudiation by one party the damages may be nominal, unless a jury think that the opportunity to negotiate was of some appreciable value to the injured party.'

That tentative opinion by Lord Wright does not seem to me to be well founded. If the law does not recognise a contract to enter into a contract (when there is a fundamental term yet to be agreed) it seems to me it cannot recognise a contract to negotiate. The reason is because it is too uncertain to have any binding force. No court could estimate the damages because no one can tell whether the negotiations would be successful or fall through: or if successful, what the result would be. It seems to me that a contract to negotiate, like a contract to enter into a contract, is not a contract known to law. We were referred to the recent decision of Brightman J about an option, Mountford v Scott [[1975] Ch 258]: but that does not seem to me to touch this point. I think we must apply the general principle that when there is a fundamental matter left undecided and to be the subject of negotiation, there is no contract. So I would hold that there was not any enforceable agreement in the letters between the plaintiff and the defendants. I would allow the appeal accordingly."

70. The enforceability of agreements to agree was subsequently discussed by the Privy Council in The Queensland Electricity Generating Board v New Hope Collieries Pty Ltd [1989] 1 Lloyds Rep 205. The company agreed to supply coal to the board for 15 years. The tariff for the initial 5 years would follow a base scale and variation provisions. The latter were subject to review upon request by either party. After 5 years the base scale would continue to apply but new variation provisions were to be agreed. The agreement included an arbitration clause. The board sought a declaration that the agreement was uncertain beyond the first 5 year period as there was only an agreement to agree new variation provisions.

71. Sir Robin Cooke (delivering the opinion of the Privy Council) stated (at 210 (col.1)):-

"At the present day, in cases where the parties have agreed on an arbitration or variation clause in wide enough terms, the Courts accord full weight to their manifest intention to create continuing legal relations. Arguments invoking alleged uncertainty, or alleged inadequacy in the machinery available to the Courts for making contractual rights effective, exert minimal attraction. Sudbrook [[1983] AC 444] is now the leading English case in the field. The same tendency has been apparent elsewhere in the Commonwealth, as illustrated by Calvan Consolidated Oil and Gas Co. Ltd v Manning, [1959] SCR 253; Attorney-General v Barker Bros. Ltd [1976] 2 NZLR 495; and Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd, [1982] 56 ALJR 825.

In accordance with the approach adopted in those cases, their Lordships have no doubt that here, by the agreement, the parties undertook implied primary obligations to make reasonable endeavours to agree on the terms of supply beyond the initial five-year period and, failing agreement and upon proper notice, to do everything reasonably necessary to procure appointment of an arbitrator. Further, it is implicit in a commercial agreement of this kind that the terms of the new price structure are to be fair and reasonable as between the parties. That is the criterion or standard by which the arbitrator is to be guided. If there are cases where the true meaning of the contract is that the arbitrator is to aim, but merely at some result which appeals to him subjectively, they must be rare indeed and the present is certainly not one of them. The statements of basic intention in the recitals and in cl.9.1, together with the detailed pricing provisions for the first five years, supplement the ordinary implication of a fair and reasonable test. They lay down broad guidelines as to the object to be achieved; and how the system has worked during the first five years is likely to provide the arbitrator with much help in determining what is fair and reasonable for later periods."

72. Sir Robin Cooke points out that the Court is slow to conclude that any agreement reached after arm's length dealings between the parties is void for uncertainty³ . It is apparent from Queensland that not every agreement to agree should automatically be held to be unenforceable. In Queensland, for example, the Privy Council found that the contract was sufficiently certain because it was possible in all the circumstances of that case to imply 3 obligations:-

(1) an obligation to use reasonable endeavours to agree;

(2) failing agreement, an obligation to use reasonable endeavours to procure an arbitration to determine a price structure; and,

(3) an obligation to agree a fair and reasonable price structure.

But it is unclear from Queensland whether the Privy Council would have held that an obligation (express or implied) to use reasonable endeavours to agree a price structure was certain enough on its own to be enforceable as a contract.

73. In Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1, the New South Wales Court of Appeal reviewed the law relating to agreements to agree in some detail. The relevant agreement stipulated that the parties would "proceed in good faith to consult together upon the formulation of a more comprehensive and detailed Joint Venture Agreement".

74. Kirby P (with whom Waddell AJA agreed, Handley JA dissenting) concluded (at 26D - 27F):-

"From the foregoing it will, I hope, be clear that I do not share the opinion of the English Court of Appeal that no promise to negotiate in good faith would ever be enforced by a court. I reject the notion that such a contract is unknown to the law, whatever its term. I agree with Lord Wright's speech in Hillas that, provided there was consideration for the promise, in some circumstance a promise to negotiate in good faith will be enforceable, depending upon its precise terms. Likewise I agree with Pain J in Donwin [Productions Ltd v EMI Films Ltd, QBD Crown Office List, 2 March 1984, (unreported)] that, so long as the promise is clear and part of an undoubted agreement between the parties, the courts will not adopt a general principle that relief for the breach of such promise must be withheld. It follows that in this regard I agree with the conclusion of Clarke J on the principle presented by the first issue before him -- and not before this Court.

Nevertheless, alike with Goff LJ in Mallozi and the substantial body of United States authority which has been cited in this case, I believe that the proper approach to be taken in each case depends upon the construction of the particular contract: Australia & New Zealand Banking Group Ltd v Frost Holdings Pty Ltd [1989] VR 695; see note (1991) 65 ALJ 59. In many contracts it will be plain that the promise to negotiate is intended to be a binding legal obligation to which the parties should then be held. The clearest illustration of this class will be cases where an identified third party has been given the power to settle ambiguities and uncertainties: see Foster v Wheeler (1888) LR 38 Ch D 130; Axelsen v O'Brien (1949) 80 CLR 219 and Biotechnology [Australia Pty Ltd v Pace (1988) 15 NSWLR 130] (at 136). But even in such cases, the court may regard the failure to reach agreement on a particular term as such that the agreement should be classified as illusory or unacceptably uncertain: Godecke v Kirwan [(1973) 129 CLR 629] and Whitlock v Brew (1968) 118 CLR 445 at 456. In that event, the court will not enforce the arrangement.

In a small number of cases, by reference to a readily ascertainable external standard, the court may be able to add flesh to a provision which is otherwise unacceptably vague or uncertain or apparently illusory: see, eg, Powell v Jones [1968] SASR 394 at 399; Sweet and Maxwell Ltd v Universal News Services Ltd [1964] 2 QB 699; cf Meehan v Jones (1982) 149 CLR 571 at 589; Jillcy Film Enterprises [v Home Box Office Inc. 593 F Supp 515 (1984)] (at 521); Ridgway Coal Co. [v FMC Corporation 616 F Supp 404 (1985)] (at 408).

Finally, in many cases, the promise to negotiate in good faith will occur in the context of an 'arrangement' (to use a neutral term) which by its nature, purpose, context, other provisions or otherwise makes it clear that 'the promise is too illusory or too vague and uncertain to be enforceable': see McHugh JA in Biotechnology (at 156) and Adams Development Ltd v Marcona Corporation [1975] 1 NZLR 324 at 331.

In the present case, with every respect to Clarke J, I am of the opinion that this contract should be so classified. The review of the considerations which lead me to this conclusion has already been stated. This was not a case where an external arbitrator was nominated to resolve outstanding differences. There were many such differences at the time for the heads of agreement and a number remain even three years later when negotiations were finally broken off. A court would be extremely ill-equipped to fill the remaining blank spaces and to resolve questions which three years of painful negotiation between the solicitors for the parties had failed to remove. A court could not, in this case, appeal to objective standards or to its own experience -- as it might in filling a blank space in a lease of domestic premises or a contract less complex and more familiar than one for a mining development. At stake are commercial decisions involving adjustments which would contemplate binding the parties for years ad deciding issues that lie well beyond the expertise of a court. How mining executives, attending to the interests of their corporation and its shareholders might act in negotiating such a complex transaction is quite unknowable. Therefore, although I agree with Clarke J that some contracts to negotiate in good faith may be enforced by our law, this was not such a contract..."

75. Coal Cliff moves on from Queensland in tentatively suggesting practical tests for assessing whether a particular agreement to negotiate in good faith was or was not enforceable. In Coal Cliff negotiations over the running of a mining development had broken down after protracted negotiations. Among other questions, the Court was asked to decide whether there had been a breach of a contractual duty to negotiate and (if so) what the damages for such breach should be. As Kirby P pointed out, in such situation there were far too many possibilities as to what the parties may or may not have agreed in the course of good faith negotiations, that the Court could not objectively conclude what a reasonable outcome might be. The Court was consequently in no position to enforce the agreement.

76. Consider the very different question arising out of a situation where (say) Party X has not even attempted to negotiate but initiates a claim in Court and Party Y is seeking to hold Party X to his agreement to enter into good faith negotiations as a first attempt towards resolving a dispute. In that simple case, provided there has been consideration for the promise to negotiate in good faith, the Court may be prepared on the basis of Coal Cliff to hold Party X to his word by staying proceedings unless and until good faith negotiations have failed.

77. What Coal Cliff suggests is that there can be no blanket rule which automatically deems all agreements to agree as unenforceable. A nuanced approach is required. The Court's view may have to depend on the terms of the specific arrangement (construed in light of its factual matrix), the type of relief sought by the party wishing to enforce the negotiation arrangement and the subsequent behaviour of the parties following agreement (for example, have there been abortive negotiations?).

78. Next in the chronology of relevant cases is a brief, but often-quoted reference to Courtney in Steyn J's judgment in Paul Smith Ltd v H & S International Holding Inc. [1991] 2 Lloyds Rep 127, at 131 (col.1):-

"The plaintiffs rightly conceded that the provisions that the parties shall strive to settle the matter amicably, and that a dispute shall, in the first place be submitted for conciliation, do not create enforceable legal obligations. See Courtney and Fairbairn v Tolaini Brothers (Hotels) Ltd [1975] 1 WLR 297...."

I do not think that the reference takes the debate on the enforceability of agreements to negotiate much further. The question was conceded and not argued. It also seems that the authorities to which I have just referred were not cited to Steyn J.

79. The House of Lords most recently considered the correctness of Courtney in Walford v Miles [1992] 1 WLR 174. The defendants there orally agreed to terminate negotiations with a third party for the sale of a company and property and instead to deal exclusively with the plaintiffs for such sale. In breach of that agreement the defendants resumed negotiations with, and eventually sold their company and property to, the third party. The trial judge (among other things) treated the promise not to negotiate as a collateral representation and awarded ￡700 as damages for misrepresentation. The Court of Appeal by a majority allowed the defendants' appeal on the basis that the oral agreement alleged was no more than a contract to negotiate and so unenforceable. But the appeal against damages of ￡700 for misrepresentation was dismissed. The plaintiffs appealed.

80. Lord Ackner (with whom the other Lords agreed) stated (at 181C - 182A):-

"Before your Lordships it was sought to argue that the decision in Courtney's case [1975] 1 WLR 297 was wrong. Although the cases in the United States did not speak with one voice your Lordships' attention was drawn to the decision of the United States' Court of Appeal, Third Circuit, in Channel Home Centers, Division of Grace Retail Corporation v Grossman (1986) 795 F. 2d 291 as being 'the clearest example' of the American cases in the appellants' favour. That case raised the issue whether an agreement to negotiate in good faith, if supported by consideration, is an enforceable contract. I do not find the decision of any assistance. While accepting that an agreement to agree is not an enforceable contract, the Court of Appeal appears to have produced on the basis that an agreement to negotiate in good faith is synonymous with an agreement to use best endeavours and as the latter is enforceable, so is the former. This appears to me, with respect, to be an unsustainable proposition. The reason why an agreement to negotiate, like an agreement to agree, is unenforceable, is simply because it lacks the necessary certainty. The same does not apply to an agreement to use best endeavours. This uncertainty is demonstrated in the instant case by the provision which it is said has to be implied in the agreement for the determination of the negotiations. How can a court be expected to decide whether, subjectively, a proper reason existed for the termination of negotiations? The answer suggested depends upon whether the negotiations have been determined 'in good faith.' However the concept of a duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties when involved in negotiations. Each party to the negotiations is entitled to pursue his (or her) own interest, so long as he avoids making misrepresentations. To advance that interest he must be entitled, if he thinks it appropriate, to threaten to withdraw from further negotiations or to withdraw in fact, in the hope that the opposite party may seek to reopen the negotiations by offering him improved terms. Mr Naughton [QC for the plaintiffs], of course, accepts that the agreement upon which he relies does not contain a duty to complete the negotiations. But that still leaves the vital question -- how is a vendor ever to know that he is entitled to withdraw from further negotiations? How is the court to police such an 'agreement?' A duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with the position of a negotiating party. It is here that the uncertainty lies. In my judgment, while negotiations are in existence either party is entitled to withdraw from those negotiations, at any time and for any reason. There can be thus no obligation to continue to negotiate until there is a 'proper reason' to withdraw. Accordingly a bare agreement to negotiate has no legal content."

81. I have some difficulty with Lord Ackner's reasoning. For example, continental European legal systems have long applied the concept of "good faith" in the adjudication of commercial disputes without apparent problem. Similarly, the English Court in its equitable jurisdiction is constantly concerned to ensure that fiduciaries have not acted in bad faith towards beneficiaries. In light of such legal experience, it is difficult to see why an English or Hong Kong Court should have any real difficulty in assessing whether parties have objectively acted in a spirit of cooperation and good faith. (It is unclear why Lord Ackner should stress the word "subjectively" in his dictum when English civil law normally confines itself to objective evaluations of conduct.)

82. Lord Ackner equates negotiations in good faith with purely adversarial negotiations. Because commercial parties can act in whatever manner they perceive to be in their interest under the latter type of negotiations, it follows (Lord Ackner reasons) that there can be no objective criteria by which good or bad faith in the conduct of commercial negotiations can be determined. But the validity of that conclusion assumes that "negotiation in good faith" is the same as conventional adversarial negotiations and that in neither type of negotiation does the law impose an obligation of fairness on a party or an obligation to take account of the other side's reasonable concerns. I am not sure that the 2 concepts are synonymous.

83. Lord Ackner distinguishes between an agreement to negotiate in good faith and an agreement to use best endeavours to agree. He suggests that his conclusion on agreements to negotiate "does not apply to an agreement to use best endeavours". But then how does one distinguish between:-

(1) an agreement to negotiate in good faith towards final agreement; and,

(2) an agreement to use best endeavours to agree?

Why is the Court able to assess whether "best endeavours" have been used to reach a final agreement, but not whether negotiations have been conducted "in good faith" towards final agreement? I doubt that there is any conceptual difficulty (as opposed to the usual problems of proof or evidence which would exist in any case) with the objective assessment of either category of negotiations. At heart, the Court must pose the same question which it regularly asks, namely, whether applying an objective standard the parties have acted reasonably in all the circumstances in carrying out a mutually agreed activity.

84. I turn to 3 cases decided after Walford where the enforceability of mediation clauses was specifically considered. These are Halifax Financial Services Ltd v Intuitive Systems Ltd [1999] 1 All ER (Comm) 303; Kenon Engineering Limited v Nippon Kokan Koji Kabushiki Kaisha, HCA No.3492 of 2002, HCA No.3973 of 2002 and HCCT No.21 of 2003, 2 July 2003; and Cable & Wireless Plc v IBM United Kingdom [2003] BLR 89.

85. Halifax concerned a contract for the supply of software design services. Clause 33 of the agreement provided for the resolution of disputes by the following process:-

(3) Upon notice from one party, the parties would meet in good faith within 10 days and try to resolve their differences without recourse to litigation.

(4) If the meeting failed, the parties could enter into structured negotiations with the help of a conciliator.

(5) If the structured negotiations failed, the parties could pursue litigation or (subject to agreement) arbitration.

The plaintiff commenced proceedings. The defendant applied to strike out the claim. Alternatively, the defendant sought a stay under the Court's inherent jurisdiction to enable the parties to pursue the process stipulated by Clause 33.

86. McKinnon J held as follows (at 310-11):-

"In that case [Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] AC 334], the parties had agreed to submit he dispute to a panel of experts whose unanimous decision was binding on the parties unless referred to formal arbitration. Although the expert determination was expressly not an arbitration, it came close to it (see [1993] 1 All ER 664 at 677, [1993] AC 334 at 352). It is clear that the Channel Tunnel case was concerned with 'an agreed method of resolving disputes' and cases where the parties had 'promised to take their complaints to the experts and if necessary to the arbitrators' (see [1993] 1 All ER 664 at 670, 677-678, [1993] AC 334 at 343, 352, 353). Mr Quest [for the plaintiff] submitted that the Channel Tunnel principle did not extend and should not be applied to clauses such as cl 33 requiring negotiation in good faith. They were of a fundamentally different nature. He submitted that a distinction could properly be drawn between procedures which are determinative and those which are not. Determinative procedures included arbitration clauses, binding expert valuations, and third-party certifications. In each case, the parties had agreed that certain issues would be finally and conclusively resolved by a third party and the courts, therefore, refused to resolve those same disputes themselves. Non-determinative procedures included negotiation, mediation, expert appraisal and non-binding rulings from a mediator. There, it was hoped that the procedure would assist the parties themselves in resolving their dispute, and the contract might provide the appropriate machinery, but there was no obligation to resolve the dispute in that way. Mr Quest submitted that the courts had consistently declined to compel parties to engage in cooperative processes, particularly 'good faith' negotiation, because of the practical and legal impossibility of monitoring and enforcing the process (see Courtney & Fairbairn Ltd v Tolaini Bros. (Hotels) Ltd [1975] 1 All ER 716, [1975] 1 WLR 297, Walford v Miles [1992] 1 All ER 453, [1992] 2 AC 128, and Paul Smith Ltd v H & S International Holdings Inc [1991] 2 Lloyds Rep 127).

I accept Mr Quest's submissions. Clause 33 in no sense amounts to an arbitration agreement. The contrary is not suggested. It is not in any sense close to being 'nearly an immediately effective agreement to arbitrate'. Clause 33 does no more than make provision for the parties to negotiate, hopefully towards an agreement. Only if the negotiations fail does any question of arbitration arise and only then if the parties at that stage agree to arbitration. The parties have, in fact, in no sense bound themselves to any method of determining any dispute between them....

In addition to the powers of which I have spoken , the court, as part of its role in supervising litigation, has an additional more general discretion to adjourn proceedings to encourage settlement between the parties. This reflects a desire for the resolution of disputes to be conducted in an efficient way. An example of the use of this additional discretion is to be found in the Commercial Court Guide Pt 21 set out in The Supreme Court Practice 1999, vol.1, para 72/A24. It is to be noted, however, that the usual practice in the Commercial Court is to consider alternative dispute resolution at the summons for directions, when the issues between the parties have been identified but the parties have not been put to the expense of preparing witness statements and expert reports.

It seems to me that the reasons why the court should not exercise any discretion whether to stay these proceedings or to adjourn them for alternative dispute resolution are the same. The plaintiff has not rushed to litigation or refused to consider a negotiated settlement.

There have already been months of negotiations and correspondence between the parties. At the end of the process, it was sufficiently clear, as I see it, that there was no point in holding further meetings. Even then, before formally issuing proceedings, the plaintiff provided a draft copy of the statement of claim to the defendant. The defendant has had that draft statement of claim since about 22 June 1998. The defendant has chosen not to serve a defence. As I see it, forced negotiations between the parties would be futile at the moment. The only real effect would be to increase the expense and further delay the service of a defence and the proper identification of the issues between the parties.

My firm conclusions are that the court has jurisdiction to hear the plaintiff's claim and the statement of claim discloses a reasonable cause of action and is not plainly and obviously vexatious and frivolous. Further, to the extent that there is any discretion to stay the proceedings (which I doubt) or to adjourn the proceedings pending negotiations, I am quite clear that such discretion should not be exercised in favour of the defendant."

87. McKinnon J treated Walford as authority against the enforcement of agreements to engage in good faith negotiations. But he does not appear to have been referred to Queensland or Coal Cliff. Nor does the judgment mention Lord Ackner's suggestion in Walford that an obligation to use best endeavours to negotiate or agree may be enforceable. Further, in suggesting that with non-determinative procedures there was "no obligation to resolve the dispute in that way," McKinnon J fails to put weight, in my view, on the parties agreement to use their "good faith" in negotiations to achieve a final resolution of their differences. The obligation to use "good faith" appears to me to import some obligation to resolve a dispute through the agreed means. While even with the best will in the world good faith negotiations cannot be guaranteed finally to determine the parties' differences, that does not mean that there is "no obligation" whatsoever such that the likelihood of resolution can be written off as negligible.

88. On the facts of Halifax, I agree with McKinnon J's refusal to exercise any discretion. There is no point in forcing parties to negotiate when they have genuinely tried and failed to reach settlement. But, for the reasons mentioned in the previous paragraph, I am uncomfortable with his reasoning that to the effect that the Court will not enforce "non-determinative" procedures in all instances. I do not believe that the authorities (including Walford) go so far as to support such wide proposition.

89. In Kenon Clause 21.1 provided for any dispute to be "settled by the Mediation Procedure under the laws of Hong Kong - SAR of PRC" with "[t]he award rendered by the mediation procedure shall be final and binding". Negotiations failed. Kenon proposed mediation. Mediators were appointed. Kenon then demanded various sums and threatened legal proceedings. The parties could not agree on the terms of mediation, the extent of matters to be mediated and the time frame for mediation. Kenon issued a writ. Nippon issued a notice to arbitrate.

90. Deputy High Court Judge Muttrie first had to determine whether Clause 21.1 was an arbitration agreement. He held that it was not. He then had to decide whether the Court should exercise its inherent jurisdiction to stay the action to mediation in accordance with Clause 21.1. On a stay he held (at §34):-

"I do not see how this can be done, even if I have power to do it, because it is not clear what that agreement is. It is not an arbitration agreement, so there cannot be a stay to arbitration. If it is a mediation agreement, it is not clear what 'mediation procedure' is referred to. There is in any event no point in staying the proceedings to mediation because the parties can choose not to mediate at any time."

91. The judge was primarily concerned with the question whether Clause 21.1 was an arbitration agreement which was Nippon's main contention. In light of the judge's finding that Clause 21.1 was not an arbitration agreement and given that the parties had tried negotiation but failed and that the parties had proceeded along the road to mediation (even appointing 2 mediators) but could not resolve procedural differences, it is not surprising that the judge refused a stay. However, as a guide to the enforceability of agreements to mediate as a question of law, Kenon is (I think) limited. For example, the judge's attention was apparently not drawn to Queensland or Coal Cliff. Indeed, there is no mention in Kenon of Courtney or Walford, so that it is unclear whether in deciding against a stay the judge (apart from the specific facts before him) had those cases in mind as opposed to only a general view that parties can always opt out of an agreed mediation. Further, had the then recent case of Cable & Wireless (discussed below) been mentioned to the judge, he may have formed a different view on opting out of mediation agreements. I say "may have formed" because in any event there would have remained the obscurity as to what the parties intended by the expression "Mediation Procedures under the laws of Hong Kong - SAR".

92. In Cable & Wireless the defendant agreed to provide information technology services to the plaintiff. Clause 41 of the agreement provided that disputes should be resolved by negotiation and if that were unsuccessful the parties should attempt in good faith to resolve their differences through Alternative Dispute Resolution ("ADR") as recommended by the Centre for Dispute Resolution ("CEDR"). A dispute arose and the plaintiff commenced litigation in Court. The defendant sought a stay to enable the parties first to refer the dispute to ADR pursuant to Clause 41.

93. Referring to Courtney, Colman J stated (at 94-96):-

"There is an obvious lack of certainty in a mere undertaking to negotiate a contract or settlement agreement, just as there is in an agreement to strive to settle a dispute amicably, as in Paul Smith Ltd v H & S International Holdings Inc., supra. That is because a court would have insufficient objective criteria to decide whether one or both parties were in compliance or breach of such a provision. No doubt, therefore, if in the present case the words of clause 41.2 had simply provided that the parties should 'attempt in good faith to resolve the dispute or claim', that would not have been enforceable.

However, the clause went on to prescribe the means by which such attempt should be made, namely 'through an (ADR) procedure as recommended to the parties by (CEDR)'. The engagement can therefore be analysed as requiring not merely an attempt in good faith to achieve resolution of a dispute but also the participation of the parties in a procedure to be recommended by CEDR. Resort to CEDR and participation in its recommended procedure are, in my judgment, engagements of sufficient certainty for a court readily to ascertain whether they have been complied with. Thus, if one party simply fails to cooperate in the appointment of a mediator in accordance with CEDR's model procedure or to send documents to such mediator as is appointed or to attend upon the mediator when he is called for a first meeting, there will clearly be an ascertainable breach of the agreement in clause 41.2.

This may seem a somewhat slender basis for distinguishing this type of reference from a mere promise to negotiate. However, the English Courts should nowadays not be astute to accentuate uncertainty (and therefore unenforceability) in the field of dispute resolution references. There is now available a clearly recognised and well-developed process of dispute resolution involving sophisticated mediation techniques provided by trained mediators in accordance with procedures designed to achieve settlement by the means most suitable for the dispute in question....

Before leaving this point of construction I would wish to add that contractual references to ADR which did not include provision for an identifiable procedure would not necessarily fail to be enforceable by reason of uncertainty. An important consideration would be whether, as is the case with the standard form of ADR orders in this court, the duty to mediate was expressed in qualified terms -- 'shall take such serious steps as they may be advised'. The wording of each reference will have to be examined with these considerations in mind. In principle, however, where there is an unqualified reference to ADR, a sufficiently certain and definable minimum duty of participation should not be hard to find."

94. I broadly agree with Colman J's views. He did not believe that his conclusion was out of line with Courtney. Neither do I. Nor do I think that Colman J's reasoning contradicts Walford (which Colman J does not mention in his judgment), especially given Lord Ackner's remarks in relation to best endeavour negotiations. On the enforcement of agreements to negotiate or mediate as a matter of principle, I prefer the legal approach set out in Cable & Wireless to that in Halifax. Indeed, although it is strictly unnecessary for me to (and I expressly do not) come to any firm conclusion on the point, I would be prepared to go one step further than Cable & Wireless. This is because it seems to me that there is a potential difficulty in Cable & Wireless.

95. Colman J suggests that a duty to negotiate in good faith is always unenforceable for uncertainty. In contrast he believes that an agreement to negotiate on the basis of clearly identified procedures such as CEDR mediation rules is reasonably certain to be enforced by the Court. He expresses the obiter view that even "an unqualified reference to ADR" entails a "sufficiently certain and definable duty" to be enforceable. He concedes that the distinction between a duty to negotiate "in good faith" and a duty to negotiate in accordance with a defined procedure (or a procedure capable of definition) may be "slender".

96. My difficulty precisely lies in distinguishing between the 2 processes of negotiation differentiated by Colman J. What is the practical distinction between negotiation pursuant to an identified mediation procedure on the one hand and either negotiation "in good faith" or negotiation in accordance with such mediation procedure as the parties acting in good faith might reasonably agree on the other hand? If the Court can enforce the former (for example, a mediation process as agreed in Cable & Wireless), it should be able in principle to enforce either of the latter 2 processes. A negotiation procedure might not be identified, but if the parties are under a duty to act reasonably or in good faith, the exercise of identifying and arriving at a reasonable mediation procedure should be no more or less difficult than that involved in (say) determining a procedure where the parties simply agree "to arbitrate all disputes".

97. There will inevitably be situations such as that in Coal Cliff where the Court is unable to enforce an agreement to negotiate or mediate. It may be difficult to award damages by reference to a final commercial position which a plaintiff alleges that the parties ought to have attained in some complex undertaking if the parties had negotiated or mediated in good faith. It may be easier for the Court to order a brief stay in favour of a defendant for the purposes of an agreed mediation. As already mentioned, each situation may have to be assessed as to enforceability on a case-by-case basis depending, not just on the terms and factual background of the agreement, but possibly also on the remedy sought and the subsequent conduct (for example, where negotiations have been tried and failed) of the parties.

98. My survey of cases suggests that, even accepting Courtney and Walford as correct, there is probably no hard and fast rule that agreements to negotiate or mediate in good faith are per se unenforceable. The Court must instead look at each situation and ask whether it is possible to frame objective criteria against which a party's reasonable compliance or non-compliance with a particular obligation can be assessed. Or, to put it in another way, is the Court able to frame objective criteria whereby it can decide whether or not there has been a breach of a particular agreement? If it is not possible, then the contract cannot be enforced. Otherwise, the agreement should be sustained and as much as possible the parties required to adhere to their bargain.

99. In the present case, it is apparent from the constant references to sincerity, cooperation and good faith in the correspondence from both sides leading up to the March Agreement, that the parties envisaged the March Agreement as giving rise to an implied obligation of cooperation and good faith. The parties would negotiate and mediate not just for the purposes of obtaining a tactical advantage, but with due regard for what is fair and reasonable in all the circumstances.

100. It seems to me that the position here is not altogether different from that in Cable & Wireless. Although no specific mediation procedure has been identified by the March Agreement, the parties came under a duty to act reasonably to ensure that mediation took place in the event that good faith negotiations broke down. A minimum step that one might expect would be (say) the appointment of a mediator or mediators who could then guide the parties towards an procedure which was appropriate to their needs and which might best resolve their differences within a reasonable time frame. I do not see the failure to identify a procedure or a time frame as fatal to the enforceability of the obligation to mediate. Here as in Cable & Wireless, it is possible objectively to assess whether or not a party has acted in accordance with the agreement by taking or failing to take certain obvious minimum steps within a reasonable time in the circumstances. Nor, given an agreement to mediate in good faith, do I see that a party can simply opt out of mediation as it sees fit.

101. Mr Kotewall has drawn my attention to the recommendations of the Final Report of the Chief Justice's Working Party on Civil Justice Reform (March 2004) ("the Final Report"). Recommendation 143 states:-

"In accordance with Proposal 67⁴, subject to the adoption (after due consultation) of appropriate rules, the court should have power, after taking into account all relevant circumstances, to make adverse costs orders in cases where mediation as been unreasonably refused after a party has served a notice requesting mediation on the other party or parties; or after mediation has been recommended by the court on the application of a party or of its own motion."

The Final Report refers to the success of mediation in bring about the speedy and cost-effective resolution of disputes. It observes (at §788):-

"To take one example from the United Kingdom, The Centre for Effective Dispute Resolution reported that in 2002/2003, some 516 commercial cases were mediated (an overall 22% increase over 2001/2002) with a settlement rate of 78%, the major proportion of such cases settling on the day of the mediation, and with 95% of all cases conducted in one day (388 cases). As to subject-matter, the five largest categories of dispute were sale/supply of goods (18%), finance (15%), professional negligence (15%), construction and engineering (9%) and property (9%). The value of the disputes was reported to have remained the same as for the previous year in which 26% of case values were in excess of ￡1 million, with the others evenly split across a median value of ￡150,000. The 22% growth in mediation cases involved values ranging from ￡50,000 to ￡1 million."

It quotes (at §791) the CEDR as pointing out:-

"The power of mediation can be witnessed by its success - despite the fact that most negotiations which come to mediation are in total deadlock, CEDR achieves a settlement in around 80 per cent of cases. In those that do not settle, mediation is still seen as successful as it helps to reduce the issues in conflict thereby paving the way for renewed negotiations. Mediation has a proven track record in a number of business sectors. It has also proved successful in family mediation."

The foregoing matters in the Final Report fortify the view which I have reached on the enforceability of the March Agreement in respect of good faith negotiation and mediation.

102. Where in order to save the time and expense of litigation parties agree to mediate in good faith, it seems odd and contrary to commonsense expectation for the law to say that, if one side deliberately flaunts the agreement by not participating in mediation at all, the bargain cannot be enforced and the time and expense which both parties sought to minimise by agreeing to mediation cannot be avoided. The party flaunting the agreement should be required to make a genuine effort to mediate and see whether time and expense can be saved in the way which both parties hoped and agreed.

103. It would be equally strange for the Court to say that in all cases an agreement to mediate freely arrived at between the parties after arm's length negotiation is unenforceable, while the Court reserves to itself a power to penalise a party in costs for failing to mediate when reasonable so to do. In the first case, the Court refuses to enforce an agreement to mediate on the ground that it cannot objectively determine whether a party has acted reasonably. In the second case, the Court imposes a cost because it believes that a party has acted unreasonably in failing to mediate and, had the party embarked on good faith mediation, there was a reasonable prospect of time and cost being saved and a final resolution of the parties' differences being attained. The practical distinctions between the 2 positions are so fine, that I doubt whether the Court can maintain both positions without contradiction.

104. Accordingly, I conclude that the part of the March Agreement which provided for negotiation and mediation was neither unenforceable nor uncertain.

B. 3 Whether there has been repudiation of the March Agreement

105. Mr Thomas submits that Vigour "stonewalled" the carrying out of the March Agreement. The July Meeting was the only meeting that ever took place between Mr Lim and Mr Kim. Hyundai respectfully wrote to Vigour to arrange further meetings and to move on to mediation. Vigour failed to reply promptly to Hyundai's suggestions. Whenever it did reply, Vigour was unhelpful, essentially contenting itself with a laconic assertion that Hyundai was acting contrary to the March Agreement. This went on for months. It was not until 16 October 2003 that Vigour claimed that the March Agreement had not been put in effect because Mr Kim was not a senior enough managing director within the terms of the March Agreement. That (Mr Thomas said) was a bad, quibbling point which had never been raised hitherto. It had no substance. Vigour was clearly not acting in good faith. Its conduct in failing to implement mediation under the March Agreement as soon as possible at Hyundai's invitation amounted to a repudiatory breach. Hyundai accepted that breach by the October letter.

106. Mr Kotewall contends that Vigour's letters clearly indicated that the first step under the March Agreement (namely, negotiation between "managing directors of the ultimate shareholder group of the highest level") had not yet taken place. It was premature even to embark on mediation. He submits that there has consequently been no breach.

107. In my judgment, Mr Thomas is right. I have summarised the correspondence between Hyundai and Vigour in Section I of this Judgment. Vigour's replies seem to me to have been uncooperative, even obstructive. Hyundai on the other hand made every effort to ascertain Vigour's views and accommodate them. I do not see how Vigour's correspondence prior to 16 October 2003 can be read as even remotely indicating that, as far as Vigour was concerned, there had not been a meeting of "managing directors of the ultimate shareholder group of the highest level". In any event, as I concluded above, Mr Kim fits that description as a matter of construction of the March Agreement. So it cannot be said that the first step envisaged in the March Agreement had not been implemented.

108. In failing to reply in any helpful way to Hyundai's letters and advance the negotiations or mediation in a timely fashion, Vigour in my view committed a repudiatory breach of the March Agreement. Hyundai gave Vigour ample warning that, in the absence of any positive action by Vigour to carry out the terms of the March Agreement, Hyundai would have no alternative but to consider the March Agreement as terminated and pursue its remedy by arbitration pursuant to the Notices. Vigour took no positive initiative. Instead it suddenly complained, in my judgment wrongly, that Hyundai had failed to negotiate by an appropriate officer. Hyundai then unambiguously accepted Vigour's repudiation by the October Letter.

109. What effect did the acceptance of Vigour's repudiation have? Where a party accepts a repudiation and thereby terminates a contract, the agreement is not void ab initio. All obligations of the parties under the agreement which remain unperformed under the contract are discharged. In terms of the agreement not to arbitrate, I have already concluded that on a proper construction of the March Agreement the submission to arbitrate under Clause 86 continued. Hyundai had merely promised not to exercise such right pending the continuation of the March Agreement. With the discharge of the March Agreement, it must be that Hyundai was released from its promise to forebear from pursuing arbitration, including arbitration under the March and November Notices. Hyundai as a result became entitled to revive the March and November Notices and pursue its claims through that route.

110. My conclusion should not be taken as in any way deciding the validity of the claims raised by Hyundai in the March or November Notices. Vigour has contended that the Notices are out of time under Clause 86. That question (among others) is something that may have to be determined by the arbitrator. All I am deciding is that, having been terminated upon acceptance of Vigour's repudiation, the March Agreement no longer bars Hyundai from pursuing arbitration under Clause 86, whatever the merits of the March and November Notices.

B. 4 Estoppel by convention

111. Mr Kotewall says that the parties acted upon the mutual assumption that the March Agreement was valid and enforceable. In reliance on that assumption, Vigour suffered detriment by not calling upon the Bond and protecting its financial interest. It follows (Mr Kotewall submits) that, whether or not the March Agreement was enforceable, Hyundai is now estopped from denying the document's effectiveness under the doctrine of estoppel by convention.

112. In light of my views the question of estoppel does not arise. I have held that the March Agreement was neither illegal nor unenforceable. There is thus no need to determine whether Hyundai is estopped from claiming that the March Agreement was illegal or unenforceable.

113. Nevertheless, I should briefly state that, if I had concluded differently on the validity of the terms of the March Agreement, I would have held that there could not have been an estoppel by convention as Mr Kotewall contends.

114. If a contract is illegal because it is contrary to public policy or unenforceable because it is too uncertain, I do not see how estoppel by convention can turn that contract into something that is legal or certain. An assumption of legality among the parties cannot have the result that the Court must enforce what it believes to be against the law. By the same token if a term is unenforceable because the Court can form no objective criteria to assess whether or not there has been compliance with the term, an assumption of certainty among the parties cannot lend definition to what cannot be defined.

115. Both parties referred to the "The AMAZONIA" [1990] 1 Lloyds Rep 236 in support of their contentions. In that case a charterparty expressly provided that the Australian Sea-Carriage of Goods Act 1924 ("the 1924 Act") would govern its terms and provisions. The charterparty included a clause providing for London Arbitration. The same clause stipulated that the charter was to be construed by English law. The parties had appointed an English arbitrator on the assumption that the arbitration clause was valid. However, under the 1924 Act the arbitration clause was invalid. The Court of Appeal held that the provision implementing the 1924 Act overrode the arbitration clause. Nonetheless, since the parties had acted on a shared assumption that the arbitration clause was valid, the plaintiffs were estopped from avoiding the arbitration clause. Such estoppel was not defeated by illegality under the 1924 Act.

116. The case is different from the present. Staughton LJ stated (at 247 (cols.1-2)):-

"Is the estoppel defeated by illegality under Australian law?

This issue was described by the Judge as uncharted territory, although he thought it analogous to the situation where a contract is said to be unenforceable by reason of illegality under foreign law. It seems to me tha the analogy is, in general, appropriate, and that an estoppel by convention will be effective or not, in the case of illegality under foreign law, in the same circumstances as a contract in the like terms.

....

.... The convention was that there was a valid arbitration agreement between the parties. In a case of estoppel by convention where a foreign element is involved, one has in my judgment to look for something which can conveniently be called the proper law of the estoppel. If the communings of the parties in this case had taken place in Australia, between their Australian lawyers, one might perhaps have concluded that the proper law of the estoppel was Australian law, just as one might have concluded that a contract made in that way was governed by Australian law. As it is, I have no doubt that the estoppel is governed by English law.

Seeing that none of the other grounds for holding a contract to be invalidated by foreign illegality ... apply in this case, I do not hold that the estoppel is defeated by illegality in Australian law."

117. Here the "communings" between the parties over the March Agreement took place in Hong Kong. The proper law of the estoppel would be Hong Kong law. Insofar as the "convention" was that the March Agreement was legal (when in fact it was illegal) and certain (when it was in fact uncertain and unenforceable), the question whether the "convention" could be enforced would be a matter of Hong Kong law. Insofar as (on the present hypothesis) the March Agreement was illegal, so would the convention be under Hong Kong law. Insofar as the March Agreement was unenforceable, so would be the convention which would simply mirror the terms of the March Agreement. There would therefore have been no substance in the claim of an estoppel by convention if I had concluded that the March Agreement was illegal, unenforceable and uncertain.

III. Conclusion

118. I make the following declarations:-

(1) That the March Agreement does not bar recourse to the Courts by the parties.

(2) That the submission to arbitration under Clause 86 of the Contracts was unaffected by the entry of the parties into the March Agreement.

(3) That Vigour repudiated the March Agreement and Hyundai accepted Vigour's repudiation by the October Letter, thereby terminating the March Agreement.

(4) That in consequence of the termination of the March Agreement, Hyundai is entitled to pursue arbitration under the March and November Notices or commence other arbitration proceedings, to the extent that such Notices or other arbitration proceedings are allowed by the Contracts (including Clause 86).

(5) That no estoppel by convention arises on the facts of this case.

The parties are to have liberty to apply in respect of the wording of the foregoing declarations and as to any other declarations which one or other party might deem appropriate in light of this Judgment.

119. The Interim Injunction is discharged as from the date of the Judgment herein.

120. I make the following directions on an Order Nisi basis:-

(1) Vigour is to have 14 days from the date of this Judgment to amend its Counterclaim, if it so wishes, in light of this Judgment.

(2) Hyundai is to have 28 days thereafter to file a Defence to Counterclaim.

(3) Vigour is to have 14 days thereafter to file a Reply (if any).

(4) The Originating Summons is then to be restored before me for directions as to its further disposition.

(5) The Order dated 20 February 2004 requiring Hyundai to file a Defence to Counterclaim within 28 days of the Counterclaim, having been already varied by me on 19 March 2003, is further varied so as to conform with the foregoing directions.

121. Hyundai has substantially succeeded. I make an Order Nisi that Vigour is to pay Hyundai's costs of the Originating Summons up to the date of the Judgment herein, including any costs of the previous hearings before me which have not already been awarded, with costs to be taxed if not agreed. I do not order that costs be "in any event" since the hearing of the Originating Summons on 19 March 2004 appears to me to have been the relevant event and I do not think it would be appropriate for Hyundai to await final disposal of outstanding matters in this Originating Summons before proceeding to taxation.

1 Hyundai's sentence read: "As regards the next step we respectfully note from the previous meeting that Mr Li might have certain concern that Mediation may not be able to bring about the desired result for a full and final settlement."

2 Vigour filed a Statement of Counterclaim on 10 March 2004.

3 This principle is sometimes referred to by the maxim "ut res magis valeat quam pereat".

4 Proposal 67 stated: "Rules should be adopted making it clear that where ADR is voluntary, an unreasonable refusal of ADR or uncooperativeness during the ADR process places the party guilty of the unreasonable conduct at risk of a costs sanction."