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‘GOOD FAITH FROMADRAFTINGAND
PLEADINGS POINT OF VIEW’
COMMERCIAL COURT CPD SEMINAR
4 JUNE 2014
Caroline Kirton QC
Barrister, Mediator & Arbitrator
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Summary
(1)
Terms implied by law and terms implied by fact.
(2)
Duty to co-operate.
(3)
‘Reasonable endeavours’ or ‘best endeavours’.
(4)
What is good faith?
(5)
Circumstances when good faith is implied in
commercial contracts.
(6)
Specific pleading issues.
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(1) Terms Implied by Law and Terms Implied by Fact
•
A term is implied by law when it is imposed on contracting
parties without regard to their intention, unless excluded.
•
A term is implied in fact to give effect to their presumed or
hypothetical intention.
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(2)
The Duty to Co-operate
“It is a general rule applicable to every contract
that each party agrees, by implication, to do all
such things are are necessary on his part to
enable the other party to have the benefit of the
contract”.
Butt v M’Donald (1896) 7 QLJ 68, 70-1 (Griffith CJ);
Secured Income Real Estate (Aust) Ltd v St Martins
Investments Pty Ltd (1979) 144 CLR 597,607 (Mason J).
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(2)
The Duty to Co-operate
The duty of co-operation requires performance only of acts that are
necessary to preserve the benefit of the contract not the benefit of
the party.
The required co-operation is defined by what has been promised
under the contract in question and not on the basis of an absolute
obligation to look after the benefit of the other party.
Australis Media Holdings Pty Ltd v Telstra Corp Ltd 43 (1998)
NSWLR 104 (Mason P, Beazley JA & Stein JA)
“[T]here cannot be a duty to co-operate in bringing about
something which the contract does not require to
happen…A contract may ‘contemplate’ many benefits for
the respective parties, but each can only call on the other
to provide, or co-operate in the providing of, benefits
promised by that party” [124-5].
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(2)
The Duty to Co-operate (Cont.)
Secured Income Real Estate (Australia) Ltd v St Martins
Investment Pty Ltd (1979) 144 CLR 596.
The extent of the implied obligation is governed by the
express terms of the contract. (607-8)
A further limitation is that the the obligation to co-operate is
limited to what can be reasonably required in the
circumstances. (610)
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(3)
‘Reasonable Endeavours’ or ‘Best Endeavours’
Electricity Generation Corporation v Woodside Energy Ltd
[2014] HCA 7 (5 March 2014) (French CJ, Hayne, Crennan and
Kiefel JJ):“First, an obligation expressed thus is not an absolute or
unconditional obligation…
Second, the nature and extent of an obligation imposed in such
terms is necessarily conditioned by what is reasonable in the
circumstances, which can include the circumstances that may
affect an obligee’s business…
Third, some contracts containing an obligation to use or make
reasonable endeavours to achieve a contractual object contain
their own internal standard of what is reasonable, by some
express reference relevant to the business interests of an
obligee” [41].
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(4)
What is Good Faith?
Sir Anthony Mason suggested that the duty of good faith
includes the following:“(1)
(2)
(3)
an obligation on the parties to co-operate in achieving
the contractual objects (loyalty to the promise itself);
compliance with honest standards of conduct; and
compliance with standards of conduct which are
reasonable having regard to the interests of the
parties”.
Sir Anthony Mason, 1993 Cambridge Lecture, “Contract, Good Faith and Equitable
Standards in Fair Dealing”, (2000) 116 Law Quarterly Review 66 at 69.
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(4)
What is Good Faith? (Cont.)
The standard of conduct required by good faith obligations
has been described to include:•
Reasonableness: Renard Constructions (ME) Pty Ltd v
Minister for Public Works (1992) 26 NSWLR 234, 236.
•
A duty to act reasonably in the performance and
enforcement of a contract: Esso Australia Resources
Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA
228, [3] (Warren CJ), citing Electronic Industries Ltd v
David Jones Ltd [1954] HCA 69; (1954) 91 CLR 288, 297.
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(4)
What is Good Faith? (Cont.)
• The duty includes an obligation “not to act capriciously” requiring a
party to act for an improper purpose: Finkelstein J in Garry Rogers
Motors (Aust) Pty Ltd v Subaru Australia Pty Ltd [1999] FCA 903,
[37].
• An implied term of good faith prevents the exercising of the power of
termination “for a purpose extraneous to the contract”: Burger King
Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187; (2001)
69 NSWLR 558.
• An implied duty of good faith is not a duty of utmost good faith.
“A duty of good faith is not a duty of utmost good faith. Further, a duty
of good faith is something less than a fiduciary duty. The existence of
the duty of good faith allows the parties to retain their economic
autonomy or economic liberty”.
Russell v Trustees of the Roman Catholic Church for the
Archdiocese of Sydney [2007] NSWSC 104, [112], Rothman
J.
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(5)
Circumstances when Good Faith Implied in Commercial
Contracts
(i)
Ad hoc implication or implication in fact
BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977)1980 CLR
266.
The implied term must be:• ‘Reasonable and equitable’.
• It must be necessary to give business efficacy to the contract, so that no
term will be implied if the contract is effective without it.
• It must be so obvious as to go without saying, it must be ‘capable of clear
expression’.
• It must not be contradicted by any express term of the contract.
Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2005]
VSCA 228, [11].
See also: Specialist Diagnostic Services Pty Ltd v Healthscope Ltd & Or
[2010] VSC 443.
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(5)
Circumstances when Good Faith Implied in Commercial
Contracts
(ii)
Implication in Law
It has also been held on many occasions that an implied term of
good faith should be implied as a matter of law as a legal
incident of a commercial contract.
•
•
•
•
•
•
•
•
Vodaphone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15.
Burger King Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187.
Alcatel Australia Ltd v Scarella (1998) 44 NSWLR 349.
Overlook Management BV Foxtel Management Pty Ltd [2002] NSWSC
17 .
Hughes Bros Pty Ltd v The Trustees of the Roman Catholic Church for
the Archdiocese of Sydney (1993) 31 NSWLR 91.
Hughes Aircraft Systems International v Airservices Australia (1997) 76
FCR 151.
Far Horizons Pty Ltd v McDonalds Australia Ltd [2000] VSC 310.
Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] FCA
903.
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(5)
Circumstances when Good Faith Implied in Commercial
Contracts (Cont.)
Implication in Law
(ii)
The term will be implied in law in circumstances where the implication of a
particular term, usually an obligation, is necessary to prevent the enjoyment of
rights conferred by the contract from being ‘rendered nugatory, worthless or
perhaps, [being] seriously, undermined’.
Byrne v Australian Airlines Ltd (1995) 185 CLR 410, 450.
Some judgments have held that there was a generally applicable term of good
faith in all commercial contracts.
Vodaphone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15, [191]
the New South Wales Court of Appeal held that the law had not yet:“…gone so far as to say that commercial contracts are a class of contracts
carrying the implied terms as a legal incident”.
Wenzel v Australian Stock Exchange Ltd (2002) 125 FCR 570, [80].
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(5)
Circumstances when Good Faith Implied in Commercial
Contracts (Cont.)
(iii)
Commercial Purpose Test
Network Ltd v Spek & Ors
[2009] VSC 235, Pagone J
Maitland Main Collieries Pty Ltd v Xstrata Mt Owen Pty Ltd
[2006] NSWSC 1235, Bergin J
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(6)
Specific Pleading Issues
(i)
Inconsistency with Express Term
• A term of good faith will not be implied where it would be inconsistent
with an express term of the contract.
• An implied term would have to be consistent with the express terms
of the agreement.
• Burger King Corp v Hungry Jack’s Pty Ltd [2001] NSWCA 187,
•
•
•
•
[173].
Central Exchange Ltd v Anaconda Nickel Ltd (2002) 26 WAR 33.
Vodaphone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA
15, [191-192].
Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd
[2005] FCA 288 at [64], affirmed (2006) 149 FCR on other grounds.
Solution 1 Pty Ltd v Optus Networks Pty Ltd [2010] NSWSC 1060,
[63].
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(6)
Specific Pleading Issues (Cont.)
(ii)
Legitimate pursuit of self-interest
•
An implied term of good faith will not prevent a party from
furthering its own legitimate interests.
•
As a result the actual terms of the contract and its
commercial setting must consequently affect the
parameters of the good faith obligation in any particular
case.
Telstra Corporation Ltd v Optus Networks Pty Ltd
[2002] FCAFC 296, [116].
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(16)
Specific Pleading Issues (Cont.)
Esso Australia Resourses Pty Ltd v Southern Pacific Petroleum
NL [2005] VSCA 228, Buchannan J:“Esso’s case was…that “cynical resort to the black letter” of the
contractual provision was necessarily a breach of contract…It is
difficult to discern a want of good faith in the exercise of a power
which can serve only the interests of the party upon whom the
power is conferred. The ostensible purpose of the exercise of
such a power will almost invariably be its true purpose. The
power may be contrasted with a power expressed in general terms in
a contract, such as a partnership agreement, which is concerned with
co-operation to produce a result beneficial to all the parties to the
agreement” [23].
“The duty of good faith, unlike the duty imposed upon a fiduciary, is not
a duty to prefer the interests of the other contracting party, but rather to
have due regard to the interests of both parties and the benefits
afforded by the contract” [29].
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(6)
Specific Pleading Issues (Cont.)
(iii)
Pursuit of of extraneous purposes
The pursuit of self-interest is not legitimate if the conduct in
performing the obligations or exercising rights or powers
under a contract is motivated by an extraneous (ie. ulterior,
dishonest or capricious) purpose or motive.
Example:
Burger King Corporation v Hungry Jack’s
Pty Ltd [2001] NSWCA 187; (2001) 69
NSWLR 558.
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(6)
Specific Pleading Issues (Cont.)
(iv)
Franchise Agreements
• Burger King Corporation v Hungry Jack’s Pty Ltd
(2001) 69 NSWLR 558.
• Far Horizons Pty Ltd v McDonalds Australia Ltd [2000]
VSC 310.
• Bamco Villa Pty Ltd v Montedeen Pty Ltd [2001] VSC
192.
• Recent decisions:• RPR Maintenance Pty Ltd v Marmax Investments Pty
Ltd [2014] FCA 409.
• Video Ezy International Pty Ltd v Sedena Pty Ltd
[2014] NSWSC 143.
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(6)
Specific Pleading Issues (Cont.)
Partnership Agreements
(v)
Tote Tasmania Pty Ltd v Garrott [2008] TASSC 86, Tennant J,
Buchannan JA and Mandie J:“Whether a power conferred upon a party to a contract is fettered by
a duty of good faith depends upon the terms in which the power is
expressed…there are at least three types of contractual types of
powers which suggest different results. One is a provision conferring
a power in an agreement, such as a partnership agreement, which
is concerned with co-operation between the parties to produce a
result which benefits all the parties to the contract. In such a
contract, a court might readily imply an obligation to act in good
faith in that the party upon whom the power is conferred must
have regard to the interest of all the parties to the agreement”.
See also Esso Australia Resources Pty Ltd v Southern Pacific
Petroleum NL [2005] VSCA 228, 23.
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(6)
(vi)
Specific Pleading Issues (Cont.)
Unbalanced relationship between the parties
Esso Australia Resourses Pty Ltd v Southern Pacific
Petroleum NL [2005] VSCA 228 Warren CJ:“Ultimately, the interests of certainly in commercial activity should
be interfered with only when the relationship between the
parties is unbalanced and one party is at a substantial
disadvantage, or is particularly vulnerable in the prevailing
context. Where commercial leviathans are contractually
engaged, it is difficult to see that a duty of good faith will arise,
leaving aside duties that might arise in a fiduciary relationship. If
one party to a contract is more shrewd, more cunning and outmanoeuvres the other contracting party who did not suffer a
disadvantage and who is not vulnerable, it is difficult to see why
the latter should have greater protection than that provided by the
law of contract” [4].
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(6)
Specific Pleading Issues (Cont.)
(vii)
‘Clean hands’
Esso Australia Resources Pty Ltd v Southern Pacific
Petroleum NL [2005] VSCA 228 Warren CJ:“Thus, if both parties to the subject contract breached such
a duty, neither should be able to rely on an alleged breach
of duty of good faith. In essence, the concept of “clean
hands” comes into play” [2].
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Specific Pleading Issues (Cont.)
(6)
(viii) Express Contractual Terms
Such provisions have been enforced in a number of cases.
• Optus Networks Pty Ltd v Telstra Corp Ltd [2001] FCA
1798.
• Automasters Australia Pty Ltd v Bruness Pty Ltd
[2002] WASC 286.
• Placer (Granny Smith) Pty Ltd v Thiess Contractors
Pty Ltd [2003] HCA 10.
• United Group Rail Services Ltd v Rail Corporation
(NSW) [2009] NSWCA 177.
• Maquarie International Health Clinic Pty Ltd v Sydney
South West Area Health Service [2010] NSWCA 268.
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(6)
Specific Pleading Issues (Cont.)
(ix)
Excluding Good Faith
In Vodafone Pacific Ltd v Mobile Innovation Ltd [2004] NSWCA 15 the
New South Wales Court of Appeal held that an effective ‘negation of
implied terms clause’ could be used to exclude implied terms such as
good faith, even those implied by law.
The Court of Appeal (Giles JA) said that:“…there may be exclusion by express provision or inconsistency
with the terms of the contract on their proper construction (and
into the construction of the contract comes the surrounding
circumstances…” [88].
The contract contained the following ‘negation of implied terms’ clause:“To the full extent permitted by Law and other than as
expressly set out in this Agreement the parties exclude all
implied terms, conditions and warranties” [95].
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(6)
Specific Pleading Issues (Cont.)
The situation was different in relation to the ‘entire agreement clause’.
The term in Vodafone Pacific Ltd v Mobile Innovation Ltd was as
follows:"This agreement contains the entire agreement of the parties
with respect to its subject matter. It sets out the only conduct
relied upon by the parties and supersedes all earlier conduct
by the parties with respect to the subject matter” [96].
GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd
[2003] FCA 50, Finn J:“I consider the law in this country to be that an “entire agreement”
clause does not preclude implications ad hoc: see Etna v Arif…I
find it 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 where that implication would
otherwise have been made by law” [922].
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Specific Pleading Issues (Cont.)
(x)
Alternate causes of action
•
Although a duty of good faith has been implied in a significant number of
cases, more often than not a breach of the duty has not been found to have
occurred.
•
It is therefore important to ensure that proper consideration is given to
alternate causes of action, such as unconscionable conduct under s.21 of the
Australian Consumer Law or causes of action in equity. Recent examples:-
Trans Petroleum (Australia) Pty Ltd v White Gum Petroleum Pty Ltd
WASCA 165 (23 August 2012).
• Kosho Pty Ltd v Trilogy Funds Management Ltd [2013] QSC 135 (29 May
2013).
•