Chapter 18 Negotiation and mediation


As part of the overall dispute resolution approach, most contracts require the parties to meet in an attempt to resolve the dispute.

Many construction contracts require the parties to negotiate. This may require named persons or senior executives to negotiate.

Some clauses contain an obligation to negotiate in ‘good faith‘ or engage in ‘bona fide’ negotiations. The law concerning the requirements of ‘good faith’ is not settled. The case of Aiton Australia Pty Ltd v Transfield Pty Ltd [1999] NSWSC 996 provides some indication of the requirements.


Aiton Australia Pty Ltd v Transfield Pty Ltd [1999] NSWSC 996

  • Transfield (the contractor) applied for a stay of court proceedings on the basis that the contract process for formal negotiation had not been followed. In particular, Transfield said that Aiton had not complied with the requirement ‘to make diligent and good faith efforts to resolve all disputes’ before commencing court proceedings.
  • The court said that Transfield had not complied with the spirit and intent or the requirements of the formal registration process when Aiton had sought to invoke the provisions of the relevant clause.
  • However, the court also held that the good faith obligation in this particular case was uncertain and thus unenforceable, and in those circumstances it did not stay the court proceedings.
  • Parties are entitled to withdraw from negotiations, if appropriate, without breaching the obligation of negotiating in good faith. It is an inherent element of negotiation that each party is entitled to act in his or her own interest.
  • A duty of good faith in negotiation does not require that agreement be reached between the parties.
  • A duty of good faith requires a party to subject itself to the process of negotiation or mediation with an open mind, with a willingness to consider options for resolution.
Without prejudice

Statements made in negotiations to settle a dispute are privileged. This ‘without prejudice’ privilege is held by both sides to the dispute. Both must consent for the privilege to be waived. As a matter of prudence however, both oral and written statements made in the course of negotiation should be noted as being ‘without prejudice’ in case it is later argued that those statements were ‘open statements.’


Mediation involves the disputing parties entering into negotiations facilitated by a neutral and impartial third party. The mediator has no power to impose a binding decision on the parties. Unless the parties reach agreement, there is no outcome of the mediation.  A good mediator will assist the parties by pointing out the strengths and weakness of each parties’ position, usually without the other party being present but sometimes in open forum.

Mediation may occur as a result of the requirements of the construction contract, the agreement of the parties, or as a result of an order of a court in the litigation process. The parties agree, either in the mediation agreement or as part of the process, on the steps to be taken in the mediation and to participate in the mediation in good faith. Parties generally agree to exchange position papers before the mediation session. Each party usually pays its own costs of the mediation, and the parties share the costs of the mediator and the mediation venue.

Generally speaking mediations used to be carried out with both parties primarily sitting in separate rooms for the majority of the time, with the mediator going between each to discuss positions and share offers. However, current best practice is moving towards both parties being in the same room with the mediator for the majority of the process to encourage openness.

Most contracts do not provide for mediation as it will be ordered by the court (if the parties commence proceedings) at an appropriate time in the proceedings. Additionally being a consensual process the parties can agree to implement mediation at anytime.