Professor   Bryan   Horrigan   BA,   LLB   (Qld),   DPhil   (Oxon)
Dean,   Faculty   of   Law,   Monash   University
Expert   Panel   Member,   Australian   Government’s   Strengthening   Statutory
Unconscionable   Conduct   and   the   Franchising   Code   of   Conduct   Inquiry
‘Good Faith from a Drafting and
Pleadings Point of View’
Commercial Court CPD Seminar
4 June 2014
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• Other   commercial   party’s   proposed   clause:
– ‘The   parties   agree   to   negotiate   and   otherwise   act   in   good   faith,   which   includes   being   honest   and   reasonable   towards   each   other’
• Client’s   preliminary   advice:
– Agreement   to   negotiate   in   good   faith   is   void   for   uncertainty   and   hence   unenforceable
– But   no   harm   agreeing,   because   good   faith   implied   in   all   or   most   commercial   agreements   anyway
– No   further   drafting   improvements   needed
• Negligent   or   non ‐ negligent   advice?
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• Existing   commercial   agreement   says:
– ‘ Entire   Agreement :   This   agreement   contains   the   entire   agreement   of   the   parties   with   respect   to   its   subject   matter.
It   sets   out   the   only   representations   and   conduct   relied   on   by   the   parties,   and   supersedes   all   earlier   representations   and   conduct.’
• Preliminary   advice:
– Implied   terms   of   good   faith   and   related   implied   terms   of   cooperation   etc are   effectively   excluded
• Negligent   or   non ‐ negligent   advice?

• Existing   commercial   agreement
• Long ‐ term   relationship   breakdown
• Parties   headed   towards   dispute
• One   party   is   looking   for   an   opportunity   to   off ‐ load   one   of   the
‘problematic’   parties
• Same   ‘entire   agreement’   clause   as   Scenario   2
• Additional   clause   as   follows:
– ‘Exclusion:   To   the   maximum   extent   allowed   by   law,   the   parties   exclude   all   terms,   conditions,   and   warranties   other   than   those   contained   in   this   agreement.’
• Preliminary   pre ‐ litigation   advice:
– Good   faith   is   effectively   precluded   by   agreement
– Parties   are   legally   free   to   exercise   contractual   rights   even   with   ulterior   motives,   in   the   absence   of   an   express/implied   obligation   of   good   faith
• Negligent   or   non ‐ negligent   advice?

Two   Chief   Justices   on   the   Problem   for
Practitioners   and   Parties
• ‘(F)or   a   number   of   reasons,   some   to   do   with   the   work   of   legislators,   some   to   do   with   judicial   law ‐ making,   and   some   to   do   with   the   temper   and   spirit   of   the   times,   we   can   no   longer   say   that,   in   all   but   exceptional   cases,   the   rights   and   liabilities   of   parties   to   a   written   contract   can   be   discovered   by   reading   the   contract.’   (Gleeson   CJ,   1995)
• ‘Nothing   truer   can   be   said   of   the   duty   of   “good   faith”   in   contract   law.’   (Warren   CJ,   2010)

Relevant   Area   of   Law
• #1A   International   commercial   law   (eg sale   of   goods,   commercial   arbitration,   etc)
• #2A   Transnational   commercial   law   (eg contractual   construction   and   ‘governing   law’   clauses)
• #3A   Contract   law   (express,   implied,   and   excluded   obligations)
• #4A   Franchising   agreements
• #5A   Australian   Consumer   Law   (indicator   of   unconscionable   conduct  ‐ both   B2B   and   B2C   dealings   since   2012)
• #6A   ASIC   Act   (indicator   of   unconscionable   conduct   in   financial   services)
• #7A   State   commercial   leasing   laws   (indicator   of   unconscionable   conduct)
• #8A   Unfair   contract   terms   regime   for   B2C   contracts   under   Australian   Consumer   Law
Practice/Reform   Area
• #1B   Cross ‐ border   business   agreements   in   multiple   industry   sectors
• #2B   Transnational   judicial   development   of   common   law   (eg UK,   Australian,   HK,   and
Singapore   courts   on   contractual   good   faith)
• #3B   Australian   Government’s   Review   of   Contract
Law
• #4B   Wein franchising   inquiry   and   draft   legislation
• #5B   Abbott   Government’s   ‘root   and   branch’   review   of   competition   law   and   policy   – potential   knock ‐ on   effect   for   consumer   regulation   too
• #6B   Knock ‐ on   effect   for   financial   services   regulation
• #7B   Knock ‐ on   effect   for   commercial   leasing   regulation
• #8B   Live   issue   for   B2B   contracts   under   ‘root   and   branch’   review

• ACL   Sections   21(1)   and   21(4) :
– ‘A   person   must   not,   in   trade   or   commerce,   in   connection   with   [supply/acquisition   of   goods/services]   engage   in   conduct that   is,   in   all   the   circumstances,   unconscionable.’
– ‘It   is   the   intention   of   the   Parliament   that:
…   (c)   in   considering   whether   conduct   to   which   a   contract   relates   is   unconscionable,   a   court’s   consideration   of   the   contract   may   include   consideration   of:
(i) the   terms   of   the   contract;   and
(ii) the   manner   in   which   and   the   extent   to   which   the   contract   is   carried   out; and   is   not   limited   to   consideration   of   the   circumstances   relating   to   formation   of   the   contract.’
• ACL   Section   22 :   ‘Without   limiting   the   matters   to   which   the   court   may   have   regard   for   the   purpose   of   determining   whether   a   person   [the   supplier/acquirer/customer]   has   contravened   section   21   …   the   court   may   have   regard   to:
…
(g)   the   requirements   of   any   applicable   industry   code;   and
(h)   the   requirements   of   any   other   industry   code   [under   particular   conditions];   and
…
(l)   the   extent   to   which   [the    parties]   acted   in   good   faith.’

Current   Australian   Legal   Position   on   Good   Faith   –
Eight   Propositions   (Part   I)
• P1:   Mixed   results   over   time   on   whether   and   how   good   faith   is   implied   in   commercial   agreements
• P2:   No   general   term   implied   by   operation   of   law that:
– parties   must   act   in   good   faith   when   negotiating   a   contract
– parties   must   exercise   good   faith   in   performing   a   contract
• P3:   An   express   obligation   to   negotiate   in   good   faith   is   not   automatically   void   for   uncertainty
• P4:   Good   faith   terms   can   be   implied   in   specific   categories   of   contracts   (eg employment   contracts,   franchising   contracts,   and   public   sector   tender   contracts,   but   not   yet   commercial   contracts   as   a   class   )   and/or   under   specific   conditions   (eg necessary   for   business   efficacy   or   to   cure   potential   voidability for   uncertainty)
• P5:   Good   faith   does   not   override   parties’   legitimate   commercial   interests
• P6:   Implied   terms   of   good   faith   can   be   excluded,   within   limits   (eg contracts   void   for   illegality   or   against   public   policy)
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Current   Australian   Legal   Position   on   Good   Faith   –
Eight   Propositions   (Part   II)
• P7:   Current   academic/judicial   debate   over:
– What   good   faith   means   (eg honest   disclosure,   non ‐ arbitrariness,   reasonableness   – and   what   kind   of   reasonableness?)
– Correlation/overlap   with   cognate   obligations   (eg cooperation,   reasonable   endeavours,   mutual   fidelity   to   the   bargain)
– Whether   some   notion   of   good   faith   underlies   all   or   much   contract   law   doctrine
– Whether   good   faith   is   an   extra   term   or   a   rule   of   construction   (ie the   method   of   incorporation)
– Whether   existing   judicial   approach   of   implying   good   faith   terms   is   correct
– What   method   for   implying   terms   applies   in   particular   circumstances
– Limits   of   good   faith   obligations   in   contract   (eg legitimate   commercial   expectations)
– Limits   to   excluding   contractual   good   faith   by   drafting   devices
– Relationship   between   good   faith   in   contract   and   lack/breach   of   good   faith   as   an   aspect   of   unconscionable   business   conduct
• P8:   Some   recent   evidence   of   judicial   claw ‐ back   of   previous   judicial   over ‐ reach   in   three   areas:
– dampened   judicial   enthusiasm   for   implying   obligations   of   contractual   good   faith
– Judicial   willingness   to   interpret   ‘reasonableness’   by   reference   to   the   particular   contract   and   not   at   large
– cases   implying   good   faith   >   cases   finding   breach   of   implied   good   faith
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Content/Components   of   Good   Faith   (see
Mason,   Carter,   Peden,   Seddon   etc)
• #1   Honesty :
– Broader   than   just   avoiding   fraud
– Full   informational   disclosure,   at   all   stages?
(commercial ‐ in ‐ confidence   v   precipitously   ‘showing   your   hand’   v   being   at   risk   of   bad   faith   through   inadequate   or   untimely   disclosure,   especially   when   the   business   relationship   is   breaking   down)
– Reputational   and legal   risks   of   attempts   to   exclude
• #2   Motivational   proportionality :
– Non ‐ arbitrary
– Non ‐ capricious
– No   improper   purposes   or   ulterior   motives   (eg convenient   excuses)
– Need   for   sound   commercial   basis   for   action
• #3   Fidelity   to   the   mutual   bargain :
– Cooperation   in   achieving   mutual   benefits
– Non ‐ frustration   of   other   parties’   capacity   to   gain   contractual   benefits
– Problem:   extent   to   which   this   requires   consideration   of   other   parties’   interests
– Mitigator:   good   faith   cannot   override   a   party’s   legitimate   commercial   interests
• #4   Reasonableness :
– Construed   at   large   or   by   reference   to   the   contract?
– Over ‐ reach   by   some   courts   produces   both   unclear   law   and   undue   caution   by   big   business   and   legal   drafters/advisers,   and   hence   fuels   impetus   for   reform

• Commercial   clients :
– Contract   says   unconditionally   ‘I   can   do   X’   but   risks   being   read   as   ‘I   can   do   X   if I’m   not   acting   dishonestly,   arbitrarily,   uncooperatively,   unreasonably   etc’   – legitimate   fear
– Capacity   to   lock   down   everything   by   private   agreement   – illusory   hope
– Clarity   around   contractual   rights   and   obligations   – genuine   commercial   concern
– Reservation   of   right   to   act   unreasonably   or   in   bad   faith   – commercially   untenable
– Preclusion   of   honesty   as   a   basic   contractual   obligation   – commercially   untenable
– Exclusion   of   good   faith   to   the   limits   of   the   law   – commercially   realistic,   if   at   genuine   arm’s   length
– Capacity   to   limit   ‘reasonableness’   to   ‘reasonable   under   the   contract’   – possible
– Evidence ‐ based   demonstration   of   legitimate   commercial   interests   being   served   – desirable
• Transactional   advice :
– Three ‐ pronged   approach   to   advice:
 Good   faith   as   an   express,   implied,   or   excluded   contractual   obligation
 Absence/breach   of   good   faith   as   an   indicator   of   unconscionable   conduct
 Factor   in   choice   of   governing   law   (eg NSW   v   Victoria,   NY   etc)
– Limits   to   drafting   around   norms   of   conduct

• ‘Generally   speaking,   recent   decisions   at   first   instance   and   by   intermediate   courts   of   appeal
(particularly   the   New   South   Wales   Court   of
Appeal)   have   recognised   that   an   obligation   of   good   faith   in   the   performance   and   execution   of   contractual   obligations   and   powers   “may   be   implied   as   a   matter   of   law as   a   legal   incident   of   a   commercial   contract”.
Alternatively,   other   decisions   at   first   instance,   and   by   the   Victorian
Court   of   Appeal,   have   approached   the   issue   as   one   of   implication   in   fact.’   (Warren   CJ,   2010)

• Negotiating   and   drafting   options   for   clients :
– Negotiating   stances   on   good   faith
– Sophisticated   drafting   approaches   and   multiple   combinations   of   clauses
– Nuances   of   good   faith   conditioning   other   contractual   terms
• Pleading   implications :
– Framing   alternatively   as   a   contractual   term   v   matter   of   construction
– Framing   alternatively   as   contractual   matter   versus   matter   of   unconscionable   conduct
– Weaknesses   of   particular   drafting   devices
• Judicial   implications :
– Precedential   constraint   from   High   Court   in   Farah   Constructions on   previous   case   law   on   good   faith   and   statutory   unconscionability
– Developing   greater   consensus   and   guidance   on   meaning,   limits,   tests,   and exclusion   of   good   faith
– Cognate   interpretation   of   good   faith’s   meaning   under   contract   and statutory   unconscionability
– Two ‐ pronged   analysis   of   ‘good   faith’   deficiency   under   both   contract   and   statutory   unconscionability

• ‘Intermediate   appellate   courts   and   trial   judges   in
Australia   should   not   depart   from   decisions   in   intermediate   appellate   courts   in   another   jurisdiction   on   the   interpretation   of
Commonwealth   legislation   or   uniform   national   legislation unless   they   are   convinced   that   the   interpretation   is   plainly   wrong.
Since   there   is   a   common   law   of   Australia   rather   than   of   each
Australian   jurisdiction,   the   same   principle   applies   in   relation   to   non ‐ statutory   law.’   (High   Court   majority   judgment)
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Drafting   Perspectives   on   Good   Faith
• ‘(M)y   present   feeling   is   that   an   attempt   contractually   to   exclude   the   duty   to   act   honestly   would   fail   [and]   what   foolhardy   entity   would   be   prepared   to   contract   on   that   basis   anyway   [but]   the   possibility   of   contractually   excluding   an   obligation   to   act   reasonably   in   [the]   objective   sense   is   much   more   arguably   open.’   (Australian   state   supreme   court   CJ   (de   Jersey   CJ))
• ‘Commercial   parties   are   now   faced   with   the   question   of   whether   they   dare   to   suggest   in   negotiations   that   they   are   not   prepared   to   perform   in   ‘good   faith’   as   that   may   require   reasonableness   on   their   part.
Alternatively,   should   they   expressly   state   that   they   will   not   behave   reasonably,   or   will   that   be   a   “deal ‐ breaker”?’   (Prof   Peden)
• ‘Whether   you   characterise   the   question   as   one   of   ‘good   faith’   or   of   the   court   believing   that   it   has   more   wisdom   than   the   parties   to   determine   what   is   reasonable,   the   practitioner   has   a   problem   …   A   clear   clause   will   embarrass   the   judiciary   into   submission.’   (Canadian   practitioner,   1985)
• ‘I   find   arresting   the   suggestion   that   an   “entire   agreement”   clause   is   of   itself   sufficient   to   constitute   an   express   exclusion   of   an   implied   duty   of   good   faith   and   fair   dealing.’
(Prominent   Australian   academic/judge   (Paul   Finn),   2003)
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Drafting   Example  ‐ Vodafone Case   Clause
This   agreement   contains   the   entire   agreement   of   the   parties   with   respect   to   its   subject   matter.
It   sets   out   the   only   conduct   relied   on   by   the   parties   and   supersedes   all   earlier   conduct   by   the   parties   with   respect   to   its   subject   matter.
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• Think   through   the   updated   judicial/academic   debates :
– Inadequacy   of   zero ‐ sum   approach   to   obligations   being   ‘in’   or   ‘out’
• Think   through   the   changing   regulatory/judicial   landscape :
– Good   faith   as   an   underlying   norm   of   contract   (Allsop CJ)
– Non ‐ excludability   of   good   faith   under   proposed   franchising   reforms
– Knock ‐ on   effect   of   pervasive   drafting   practices   (eg ‘sole   discretion’,   unilateral   variation’,   and   exclusion   clauses)   for   current   ‘root   and   branch’   debate   about   (i)   statutory   unconscionability and   (ii)   potential   ‘unfair   contract   terms’   regime   for   B2B   contracts
• Think   through   the   client’s   real   needs/options :
– Eg industry   expectations   (eg mining   JVs,   franchises,   government   agreements)
– Eg leaving   your   client’s   options   open   v   excluding/limiting   implied   terms
• Think   through   the   potential   ‘downsides’ :
– Eg market/regulator/peer/business   chain/customer   reputational   risk
– Eg no   100%   foolproof   contractual   safeguard   (see   below)

• Think   through   what’s   legally   necessary   and feasible :
– No   ‘magic   clause’   to   avoid   limits   within   contract   (eg voidness   for   uncertainty/public   policy   and   inherent/underlying   ‘good   faith’   construction)   or outside   contract   (eg statutory   unconscionability and   codes   of   conduct)
– Four   basic   client   options:
 #1   Remain   silent   on   implied   terms   (generally)   and   good   faith   (in   particular)   – leave   it   to   courts   down   the   track
 #2   Impose   general   and defined/undefined   GF   obligation   on   some/all   parties
 #3   Carefully   define/confine   GF   throughout   the   contract’s   various   parts   (eg exercise   of   discretions)   and   stages   (ie from   negotiation   to   dispute   resolution)
 #4   Exclude   GF   (and   related   obligations)   to   the   extent   lawfully   possible
• Think   through   the   right   combination   of   clauses   and   their   cumulative   operation :
– (i)   ‘entire   agreement’   clause   + (ii)   ‘sole   discretion’   clause   +   (iii)   ‘negation   of   all   implied   terms’/exclusion   clause   (ie covering   terms   ‘in’   or   ‘out’   of   the   contract)   +   (iv)   ‘no   other/additional   obligations’   clause   (ie obligations   beyond   contractual   terms   – tough   to   draft)   +   (v)   ‘no   other   dilution   of   client’s   position   by   operation   of   law,   to   the   extent   it   can   be   lawfully   prevented’   clause   (ie to   maximise   exclusionary   effect   of   terms   and   other   obligations   – impossible   to   guarantee   against   judicial   ‘reading   down’)   +   (vi)   flow ‐ on   effect   of   mixed   silent/express   treatment   of   GF   throughout   agreement   (ie diluting   effect)

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