NFC 11 Legal Symposium
9 October 2011
Good Faith – Common Law Position
Penny Ward, Partner, Baker & McKenzie, Sydney
Cristina Cecere, Senior Associate, Piper & Alderman, Adelaide
Implying Contractual Terms
Terms may be implied as a matter of fact where necessary to give business efficacy to a contract, where it is so
obvious that it "goes without saying", in circumstances, where it is fair and equitable to do so, and where they do not
contradict any express term of the contract: BP Refinery (Westernpoint) Pty Ltd v President, Councillors and
Ratepayers of the Shire of Hastings (1977) 16 ALR 363.
Terms implied by law are much more difficult to establish, as such terms apply to all contracts falling within a
particular category unless clearly excluded. Examples are: landlord and tenant, employer and employee. It has been
suggested that this should be extended to certain commercial contracts. It is unclear whether the franchise
relationship has been recognised as a separate category.
The relationship with express terms
No implied term can override or rewrite the express terms of a contract: Alcatel Australia Ltd v Scarcella (1998) 44
NSWLR 349.
An implied term can be excluded, either expressly or by necessary implication but the exclusion needs to be clear:
Vodafone Pacific Ltd v Mobile Innovations [2004] NSWCA 157.
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Which terms will be implied?
A duty of co-operation. In McKay v Dick (1881) 6 App Cas 251, Lord Blackburn stated:
"As a general rule …. where in a written contract it appears that both parties have agreed that something shall be
done, which cannot effectively be done unless both concur in doing it, the construction of the contract is that each
agrees to do all that is reasonably necessary to be done on his part for the carrying out of that thing, though there
may be no express words to that effect."
A duty of good faith?
The development of the duty of good faith in Australia
Leading cases:
Renard Constructions (ME) Pty Limited v Minister for Public Works (1992) 26 NSWLR 234
Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349
Council of the City of Sydney v Goldspar Australia Pty Ltd (2006) 230 ALR 437
Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd (2005) Aust Contract Reports 90-213)
Insight Oceania Pty Ltd v Phillips Electronics Australia Ltd [2008] NSW 710])
Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA 228
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The content of an implied term of good faith
arbitrary, capricious or reckless action breaches the duty of good faith: Council of the City of Sydney v Goldspar
Australia Pty Ltd (2006) 230 ALR 437; Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd [2005] FCA
288; Garry Rogers Motors Aust Pty Ltd v Subaru (Aust) Pty Ltd (1999) ATPR 41-703
depriving the other party of the benefit of the contract or withholding performance breacheshe duty: Pacific Brands
Sport & Leisure Pty Ltd v Underworks Pty Ltd [2005] FCA 288
failing to have reasonable regard to the other party's interests may indicate a lack of good faith: Overlook
Management BV v Foxtel Management (2002) ACR 90-143
it may not be an independent term, but a fetter upon the exercise of discretions and powers under the contract: Pacific
Brands Sport & Leisure Pty Ltd v Underworks Ltd [2005] FCA 288
failing to act reasonably in general is not universally considered to be in breach of the duty: Hungry Jack's v BKC
Corporation [1999] NSW SC 1029 and Vodafone Pacific Ltd v Mobile Innovations [2004] NSWCA 15 thought so.
Council of the City of Sydney v Goldspar Australia Pty Ltd (2006) 230 ALR 437 thought not.
a party acting reasonably is unlikely to breach the duty of good faith: Garry Rogers Motors (Aust) Pty Ltd v Subaru
(Aust) Pty Ltd [1999] FCA 903
it does not require a party to subordinate its contractual rights or act selflessly, so long as this does not seriously
undermine benefits conferred on the other party by the express terms of the contract: Overlook v Foxtel [2002]
NSWSC 17
it does not prevent a party relying on its contractual rights: Hunter Valley Skydiving Centre Pty Ltd v Central Coast
Aero Club Ltd [2008] NSWSC 539
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Practical Implications? Possible indicators of bad faith include:
•
Ulterior motive
•
Too short a
period to
comply
•
Different
standards for
self and others
•
Alleged
conduct
unclear/ in
doubt
•
Engineered
termination
•
No real harm from the
conduct
Focus is on own
interests (outside of
the contract)
•
Differing standards among
franchisees
•
Undermining
relationships
•
Withholding information
•
Provoking
withdrawal
•
Failing to give reasons
The Leading Franchising Cases
Case
Hungry Jack's Pty Ltd v Burger King
Corporation [1999] NSWSC 1029
Facts
Hungry Jacks has non exclusive
agreement since 1970s
Development Agreement
requiring Hungry Jack's to
develop at least 4 restaurants
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Judgment
Rolfe J agreed, held that Burger
King breached an implied term of
good faith and reasonableness
by, inter alia, deliberately
withholding approvals thereby
preventing Hungry Jack’s from
Practical Implications/Lessons
Learnt
using contractual powers for
purposes extraneous to the
contract will be a breach of the
implied duty of good faith.
using discretionary powers under
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Case
Facts
per year in WA, SA and QLD
In order to develop these
restaurants, Hungry Jacks
required Burger King's approval
at "its sole discretion
approvals not granted and
Burger King purported to
terminate agreement for breach
of the above requirement and
other issues relating to non
approved advertising and
improper use of trademarks
Hungry Jack’s commenced
proceedings, claiming inter alia,
that there was an implied
obligation on Burger King to act
in good faith in the exercise of its
contractual powers
Burger King Corporation v Hungry
Jack's Pty Ltd [2001] NSWCA 187
Appeal from Rolfe J decision above.
Judgment
opening the required number of
restaurants and then purporting
to terminate. Found that it did so
to expand its own business
Practical Implications/Lessons
Learnt
an agreement to deliberately
procure a situation whereby the
agreement can be terminated (to
your commercial benefit) will be
a breach of the duty.
Confirmed decision of Alcatel
Australia v Scarcella (1998) 44
NSWLR 349 per Sheller JA:
“…a duty of good faith, both in
performing obligations and
exercising rights, may by
implication be imposed upon
parties as part of a contract.”
Hungry Jack’s awarded
damages for delay in opening
company owned restaurants and
for the loss of opportunity re
securing new franchisee stores
court reviewed the authority on
the meaning of good faith and
reasonableness, noting that
these terms are treated
interchangeably.
As above
where a contract allows one
party to end another party's
valuable rights under that
contract for the slightest breach
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Case
Facts
Judgment
Practical Implications/Lessons
Learnt
and it contains subjective,
evaluative notions by which the
former party is able to determine
if there has been a breach, then
a term of good faith will be
implied.
such a term does not mean a
party cannot have regard only to
its own legitimate interests in
exercising a power. However, it
must not do so for a purpose
extraneous to the contract.
in this case, there was a
requirement of reasonableness
and good faith implied into the
approval clause in question such
that the power could not be used
for a purpose foreign to that for
which it was granted.
for substantially the same
reasons as reached by the trial
judge, Court held that the
franchisor had breached this
requirement.
Automasters Australia Pty Ltd v
Bruness Pty Ltd & Anor [2002]
WASC 286
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requirement on franchisee
(Bruness) to strictly comply with
operational standards and
Hasluck J:
'the decided cases indicate that
a party will not be acting in good
faith if it acts capriciously or in an
Examples of breach of an implied
duty of good faith:
terminating a franchise
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Case
Facts
franchisor’s manual
manner in which franchisee
entered its invoices on the data
entry system provided by
franchisor was audited by
franchisor, claim that failure to
produce correct invoices was a
breach of franchise agreement
franchisor purported to terminate
the agreement following issue of
a 14 day default notice
franchisee remains in premises,
continues to trade but not as
Automasters franchisee
Judgment
oppressive, unfair or intimidatory
manner. The court will have
regard to the reasonableness of
the conduct in question. The
term … imports a duty to have
due regard to the legitimate
interests of both parties in the
enjoyment of the fruits of the
contract'.
Practical Implications/Lessons
Learnt
agreement on the basis of
uncertain information;
denying the franchisee's request
for information relevant to the
situation in question;
ultimately terminating for
extraneous motives
held that the franchisor breached
the duty
Held that the alleged breaches
did not justify termination of the
franchise agreement
franchisor issues proceedings,
claiming damages under the
agreement and orders
restraining use of trademarks
and business name
franchisee counterclaims relying
on of the express obligation of
good faith in the franchise
agreement:
“The Franchisor will use its best
endeavours to promote the
performance and success of the
Franchise Business and will deal
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Case
Facts
Judgment
Practical Implications/Lessons
Learnt
at all times with the Franchisee
in absolute good faith.”
Luce Optical v Budget Specs
(Franchising) [2005] FCA 1486
franchisee sought an interim
injunction restraining its
franchisor from acting on a
notice of termination that it had
given to the franchisee
franchisor purported to rely an a
number of instances of
misconduct revealed by an audit
of the franchise.
franchisee argued (amongst
other things) that the franchise
agreement contained an implied
duty of good faith and that the
franchisor, in exercising its
power to audit the franchisee,
had done so oppressively,
capriciously, in an arbitrary way
and for an improper purpose,
and had therefore breached this
duty and could not rely on the
stated grounds of termination.
Greenwood J referred to certain
cases on the issue of good faith,
and accepted for interlocutory
purposes, that a duty to act "in
good faith, fairly and reasonably,
was implied into the franchise
agreement and that a party
having a legal right shall not be
entitled to exercise it in such a
way that the use of the right or
power amounts to
unconscionable conduct.
Even if a franchisor has a contractual
right to audit a franchisee, ensure
that right is undertaken reasonably
so as not to offend obligation of good
faith.
He accepted, for interlocutory
purposes, that such a duty arises
and considered that there was a
serious question as to whether it
was breached in the
circumstances of the audit.
The injunction was granted
pending the hearing.
Court focus was on whether
there were grounds for
termination, rather than on a
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Case
Facts
Judgment
Practical Implications/Lessons
Learnt
breach of good faith
Visionmax v Budget Specs
(Franchising) [2005] FCA 1487
Meridian Retail Pty Ltd v Australian
Unity Retail Network [2006] VSC 223
This franchisee was in a substantially
similar position to the franchisee in
the case above. Matters were heard
together and decided together
franchisee sought relief including
a permanent injunction
restraining its franchisor from
acting on a notice of termination
deed that it had given to the
franchisee
franchisor purported to rely on a
clause that allowed it to
terminate the agreement if a
'significant change' occurs. The
franchisee argued that the
franchisor engineered the
'significant change' that it
purported to rely upon in an
attempt to force out the
franchisee and resume control of
the retail network and, in doing
so, breached an implied duty of
good faith.
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As above
As above.
Dodds-Streeton J reviewed the
authorities on the implied duty of
good faith but found it unnecessary
to determine whether a term
requiring good faith was implied in
this case or how it would be applied
because there was no such breach
in this case
A discretionary termination clause in
a franchise agreement is not being
exercised in bad faith if exercised for
reasonable grounds relating to the
viability of the franchise network.
Court found that the franchisor:
had not terminated the
agreement in bad faith as part of
a plan to eliminate the
franchisees to resume control of
the network;
had formed a view, on
reasonable grounds, that the
franchise network in question
had become non-existent or
unviable, which entitled the
franchisor to serve the
termination notice.
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Case
J F Keir Pty Ltd v Priority
Management Systems Pty Ltd [2007]
NSWSC 789
Facts
franchisee brought an action
against its franchisor for wrongful
termination;
franchisor purported to rely on a
contractual clause enabling
termination for breach of the
franchise agreement, citing
several examples of breach by
the franchisee
franchisee argued, inter alia, that
this power was subject to an
implied duty of good faith and
that the franchisor had breached
this duty.
undefended action
NSWSC again confirmed that a
franchise agreement was subject
to an implied duty of good faith
and fair dealing
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Judgment
Court accepted that the duty of
good faith requires a party to,
amongst other things, act
reasonably and honestly
(assessed objectively), to not act
for some ulterior motive, to
recognise and have regard to the
legitimate interests of both
parties in the enjoyment of the
fruits of the contract, and to
avoid action rendering the
plaintiff's interests under the
agreement nugatory, worthless,
or seriously undermined.
Practical Implications/Lessons
Learnt
Making changes in policies not
permitted by your franchise
agreement could be considered in
breach of implied duty of good faith
Purporting to terminate an
agreement for reasons extraneous to
the contract will also constitute
breach.
Court held that the agreement in
question contained an implied
duty of good faith.
Court found:
–
the breaches relied upon by
the franchisor had not
occurred
–
the franchisor did not hold a
bona fide belief that breach
had occurred
–
that the franchisor was
purporting to terminate for
reasons extraneous to the
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Case
Facts
Judgment
Practical Implications/Lessons
Learnt
contract.
–
franchisor in breach of its
duty of good faith
(Note – judgment decided on the
basis that franchisor did not have
right to terminate not re good faith
issues)
AMC Commercial Cleaning v Coade
[2010] NSWSC 832
AMC NSW appointed master
franchisee for NSW and ACT
also empowered to enter into
sub-master franchise
agreements with sub-master
franchisees in NSW and ACT
AMC NSW claimed that AMC
National (franchisor) had, by
certain of its acts, breached the
franchise agreement between
the parties and had acted in
breach of an implied term of
good faith, issued proceedings
against Coade, sole director of
franchise company
examples of offending conduct:
failing to refer internet inquiry
leads; failing to render invoices
within a reasonable time; failing
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Rein J summarised the legal
principles governing content of
duty of good faith:
“The franchisor is required to act
reasonably and honestly (to an
objective standard), not to act for
an ulterior motive, to recognise
and have regard to the legitimate
interest of both parties in the
enjoyment of the fruits of the
contract and to avoid rendering
the franchisee’s interest under
the agreement nugatory or
worthless or seriously
undermining it.”
some of the breaches were
found to be of little consequence
and the franchisor also admitted
a number of them
using contractual powers for
purposes extraneous to the
contract will be a breach of the
implied duty if such a duty exists
in this case, a variety of conduct
was deployed by the franchisor
in its dealings with the franchisee
to 'create and atmosphere of
crisis' which would provoke the
franchisee to sell
eg, issuing false notices of
default, withholding approval for
the franchisee's requests for
approval of franchises, and
endeavouring to undermine the
franchisee's relationship with
suppliers.
Rein J held that the franchisor,
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Case
Facts
to establish/maintain a trust
account; failing to account to
AMC NSW for bank
charges/interest on trust monies;
making threats to franchisee
about its future; arbitrarily
increasing fees; unilaterally
increasing fees
franchisee brought an action
against its franchisor alleging,
inter alia, breach of an implied
term of good faith
Judgment
Practical Implications/Lessons
Learnt
through Mr Coade, had
“conducted itself in a manner
entirely inconsistent with the
obligations of a franchisor and
breached the implied duty of
good faith owed to AMC NSW”
findings were made on the basis
that the sole director of the
franchisor had attempted to
destroy the franchisee’s
business with the intention of
provoking a sale of that business
that would enable the franchisor
to take over
AMC NSW succeeded and
ultimately obtained indemnity
costs (damages assessment
undertaken by an Associate
Judge)
Australian Competition and
Consumer Commission v Seal-AFridge Pty Ltd and Another [2010]
FCA 525
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ACCC action
Franchisees were granted right
to conduct business in a defined
geographical area, of replacing
fridge seals under the same
Seal-a-Fridge
The franchisor had acted
unconscionably in demanding and
obtaining from certain of its
franchisees payment of increased
weekly franchise fees. Part of the
court's reasoning was that the
franchisor had acted in bad faith by
misrepresenting to the franchisees
Unauthorised changes to franchising
agreements will be in breach of the
implied duty of good faith.
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Case
Facts
ACCC claimed, inter alia,
unconscionable conduct under
51AC of the Trade Practices Act
1974 (Cth)
examples of behaviour –
increased weekly franchise fees
not authorised by the franchise
agreement; refusal of access to
"13" number unless increased
fees were paid; franchisees
required to vary their
agreements
Judgment
Practical Implications/Lessons
Learnt
that charges to it by Telstra had
increased which justified the demand
for increased weekly fees.
The franchisor had not acted
unconscionably in withholding
consent to assignment of a
franchisee's interest. Part of the
court's reasoning was that, though
the franchisor based its position on
an erroneous construction of the
contract, this construction was not so
unreasonable or impossible so as to
have been held in bad faith.
good faith examined as one of
the factors to which the court
may have regard in determining
whether a party has engaged in
unconscionable conduct
franchisor and the second
respondent appeared
unrepresented
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Case
AMC Commercial Cleaning v Coade
[2011] NSWSC 932
Facts
Judgment
Same parties as the 2010 matter
In this case, AMC National
purported to terminate MFA on
the basis that AMC NSW had,
inter alia, engaged in fraud
Issues before MacDougall J:
–
–
–
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had the grounds for
termination been made out?
if so, was the exercise of the
power to terminate
constrained by obligations of
good faith?
Court found although there was
a requirement of good faith in the
MFA, the franchisor had not
breached it
Practical Implications/Lessons
Learnt
A franchisor using contractual
powers reasonably and for the
purpose for which they were granted
will not breach implied duty of good
faith/fair dealing/reasonableness.
onus was on franchisee, not
franchisor, to show that the
termination was
“unconscientious”
franchisee had participated in a
fraudulent scheme
termination was in
circumstances reasonable, not
exercised for a capricious or
ulterior motive
if grounds for termination
had been made out and no
constraint by good faith,
should AMC NSW have
relief against forfeiture?
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