IN THE HIGH COURT OF AUSTRALIA
SYDNEY REGISTRY
No S165 of 2011
ON APPEAL FROM THE NEW SOUTH WALES
COURT OF APPEAL
BETWEEN:
AND:
PAYVIEW LTD
Appellant
ENTERTEL PTY LTD
Respondent
WRITTEN SUBMISSIONS OF THE RESPONDENT
SUMMARY OF FACTS
I.
Entertel Enterprises Pty Ltd (‘the Respondent’) is a company that acquires and on-sells television
channel content, specialising in entertainment channels. On 1 April 2008, the Respondent entered
into a contract with Payview Ltd (‘the Appellant’) to supply to the Appellant two specialised
music channels, ‘Overture’ and ‘Swing TV’ (‘the Add-On Channels’), to be marketed and sold
as add-ons for subscribers to the Appellant’s television services.
II. The contract’s fee structure specified that the Respondent was entitled to a percentage of the
revenue received from subscriptions to the Add-On Channels. Clause 33 stated that ‘this
Agreement constitutes the entire agreement of the parties’. Clause 37 imposed an obligation upon
the Appellant to employ its best endeavours to do all things necessary for the effective sale and
marketing of the Add-On Channels.
III. The Appellant marketed its core package of channels for $60 per month. Customers could choose
further to subscribe to the Add-On Channels, which each cost another $20 per month. By January
2009, it was evident that the number of subscriptions to the Add-On Channels was well below the
Appellant’s projections.
IV. On 1 February 2009, without consulting the Respondent, the Appellant announced that it was
halving the subscription price of each Add-On Channel to $10 per month. This followed an
internal review which had found that, because of the contract’s fee structure, a substantially lower
subscription price would still be profitable for the Appellant. The price reduction immediately
caused the Respondent’s returns to decline.
V. Entertel sought damages for breaches of an implied duty of good faith and of clause 37. It
succeeded in its claims both at trial and on appeal. Payview now appeals to the High Court of
Australia.
BREACH OF THE IMPLIED DUTY OF GOOD FAITH
(to be addressed by Senior Counsel in 22 minutes)
1.1.
Submission One: There was an implied term in the contract requiring the Appellant to
discharge its contractual obligations in good faith. All commercial contracts contain an
implied term requiring parties to discharge their contractual obligations in good faith.1 This
1
GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 128 FCR 1 at [920] (Finn J);
Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151, 192-193 (Finn J);
Commonwealth Bank of Australia v Spira & Others [2002] NSWSC 905, [142]-[143] (Gzell J).
1
duty arises by legal implication,2 and reflects the fact that good faith is necessary in order for
contracts to be workable business documents.3 In the alternative, the duty of good faith applies
in particular to contracts that confer discretionary powers which, if not exercised in good faith,
could seriously undermine the other party’s enjoyment of its contractual rights.4 The contract
at hand falls into that class. The Appellant had sole discretion to set the price of the Add-On
Channels and had the capacity to seriously undermine the Respondent’s revenue stream.
1.2.
Submission Two: The implied duty of good faith was not excluded by clause 33. An
implied duty of good faith will be excluded from a contract only expressly or by necessary
implication.5 An entire contract clause is not in itself sufficient to exclude terms implied by
law.6 Interpreted according to its natural and ordinary meaning,7 clause 33 evinces no express
intention to exclude implied terms in general or good faith in particular.8 Further, in cases of
ambiguity, an exclusion clause should be construed against the interest of the party relying on
that clause.9
1.3.
Submission Three: The Appellant breached the implied duty of good faith. The duty of
good faith requires, at a minimum, that a party act reasonably and fairly.10 This requires a
party exercising a contractual discretion to have regard not only to its own interests, but also to
the legitimate interests of the other party.11 It also requires the party exercising discretion to
attempt to verify the information on which its decisions are based. 12 The Appellant, by
unilaterally halving the prices of the Add-On Channels, acted unreasonably. The Appellant’s
internal review considered only whether the price cut would be ‘profitable for Payview’.13
1.4.
Further and in the alternative, the duty of good faith requires that a party refrain from acting
for a purpose extraneous to the contract,14 and from ‘evasion of the spirit of the bargain’.15 The
purpose of the contract was to generate maximum revenue from the sale of subscriptions to the
2
Burger King Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187, [164] (Sheller JA, Beazley JA and
Stein JA); Garry Rogers Motors Aust Pty Ltd v Subaru [1999] FCA 903, [34]; Commonwealth Development
Bank of Australia Ltd v Cassagrain [2002] NSWSC 965, [210] (Einstein J); Commonwealth Bank of Australia v
Spira (2002) 174 FLR 274, [143].
3
Renard Constructions Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234, 258 (Priestley JA). See
Byrne v Australian Airlines Ltd (1995) 185 CLR 410, 450 (McHugh and Gummow JJ).
4
Burger King Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187, [176-177] (Sheller JA, Beazley JA
and Stein JA).
5
Castlemaine Tooheys v Carlton & United Brewers Ltd (1987) 10 NSWLR 468 (Hope JA); Pacific Brands
Sport & Leisure Pty Ltd v Underworks Pty Ltd [2005] FCA 288, [64] (Finkelstein J).
6
Hart v MacDonald (1910) 10 CLR 417 (Isaacs J).
7
Darlington Futures Ltd v Delco Aust Pty Ltd (1986) 161 CLR 500, 510 (the Court).
8
It is, on this basis, to be distinguished from the exclusion clause in Vodafone Pacific Ltd v Mobile Innovations
Ltd [2004] NSWCA 15.
9
Darlington Futures Ltd v Delco Aust Pty Ltd (1986) 161 CLR 500, 510 (the Court).
10
Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2010] NSWCA 268,
[16] (Allsop P); Burger King Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187, [169] (Sheller JA,
Beazley JA and Stein JA); Renard Constructions Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234,
263-265 (Priestley JA); Far Horizons Pty Ltd v McDonalds Australia Ltd [2000] VSC 310, [120] (Byrne J);
Alcatel Australia Ltd v Scarcella and others (1998) 44 NSW 349, 369 (Sheller JA, Powell and Beazley JJA
agreeing).
11
Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2010] NSWCA 268,
[147] (Hodgson JA, Macfarlan JA agreeing); Overlook v Foxtel [2002] NSWSC 17, [67] (Barrett J).
12
Renard Constructions Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 (Priestley JA).
13
Paragraph 10 of the facts as agreed between the parties.
14
Burger King Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187, [185]; Alcatel Australia Ltd v
Scarcella and others (1998) 44 NSW 349, 368 (Sheller JA, Powell and Beazley JJA agreeing); Far Horizons Pty
Ltd v McDonalds Australia Ltd [2000] VSC 310, [120] (Byrne J); Pacific Brands Sport & Leisure Pty Ltd v
Underworks Pty Ltd [2005] FCA 288 at [65] (Finkelstein J).
15
Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2010] NSWCA 268,
[15] (Allsop P); South Sydney District Rugby League Football Club Ltd v News Ltd [2000] FCA 1541, [426]
(Finn J). See also Butt v M’Donald (1896) 7 QLJ 68 at 70-71 (Griffith CJ).
2
Add-On Channels. The Appellant’s halving of the price of these subscriptions pursued an
increase in the total number of subscribers at the expense of revenue.
BREACH OF CLAUSE 37
(to be addressed by Junior Counsel in 18 minutes)
2.1
Submission Four: The Appellant breached clause 37 by effecting a price cut, the
immediate effect of which was to majorly reduce the revenue stream from subscriptions
to the Add-On Channels. The Appellant’s promise to use its best endeavours obliged the
Appellant, insofar as it was reasonable16 and did not conflict with any overriding duties17 or
expose the company to ruin,18 to do all it could to pursue the interests that the Respondent had
in the effective marketing and sale of the Add-On Channels as if those interests were the
Appellant’s own.19 The Respondent’s interest was not in increasing the number of subscribers
per se, but in maximising the total revenue generated by subscriptions. The Appellant did not
act reasonably in pursuit of this interest, and therefore breached clause 37.
2.2
Further and in the alternative, clause 37 obliged the Appellant not to act contrary to the
contract’s purposes, 20 one of which was to ensure a revenue stream from the Add-On
Channels. Since the Appellant acted contrary to this purpose, it breached clause 37.
2.3
Submission Five: Further and in the alternative, the Appellant breached clause 37 by
failing to consult the Respondent before halving the price of the Add-On Channels. This
is for three reasons. First, clause 37 obliged the Appellant, on an ongoing basis,21 to do all that
was reasonable in the circumstances to fulfil the object of the clause.22 The object of the clause
was the doing of what was necessary for the effective marketing and sale of the Add-On
Channels. Second, what was reasonable in the circumstances is to be determined objectively;
it is immaterial whether the Appellant formed a subjective view that it was using its best
endeavours.23 Third, the obligation to do all that was reasonable included an obligation to
exhaust all reasonable avenues that might have afforded the Appellant sufficient information
to determine what was in fact necessary for the effective marketing and sale of the Add-On
Channels;24 these avenues, in the circumstances, included consultation of the Respondent.
REMEDIES SOUGHT
3.1.
In consequence of the contractual breaches outlined above, the Respondent is entitled to
compensatory damages in the quantum awarded by Fox J. The Respondent seeks that the
appeal be dismissed with costs.
16
Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, 64 (Gibbs CJ), 91-2 (Mason J);
Transfield Pty Ltd v Arlo International Ltd (1980) 144 CLR 83, 101 (Mason J).
17
Rackham v Peek Foods Ltd [1990] BCLC 895, 916 (Templeman J).
18
Terrell v Mabie Todd & Co Ltd [1952] 2 TLR 574, 575 (Sellers J)
19
IBM United Kingdom Ltd v Rockware Glass Ltd [1980] FSR 335 at 343 (Buckley LJ); Hawkins v Pender Bros
Pty Ltd [1990] 1 Qd R 135, 150 (Shepherdson J); Sheffield District Railway Company v Great Central Railway
Company (1911) 27 TLR 451, 452 (Lawrence J). The obligation is an ongoing one: Centennial Coal Company
Ltd v Xstrata Coal Pty Ltd (2009) 76 NSWLR 129.
20
Shepherd v Felt and Textiles of Australia (1931) 45 CLR 359, 378 (Dixon J).
21
Centennial Coal Company Ltd v Xstrata Coal Pty Ltd (2009) 76 NSWLR 129.
22
Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, 64 (Gibbs CJ); Transfield Pty Ltd v
Arlo International Ltd (1980) 144 CLR 83, 101 (Mason J); Sheffield District Railway Company v Great Central
Railway Company (1911) 27 TLR 451, 452 (Lawrence J); Paltara Pty Ltd v Dempster (1991) 6 WAR 85, 100101 (Kennedy J).
23
Flower v Allan (1863) 159 ER 285, 287 (Bramwell B); Paltara Pty Ltd v Dempster (1991) 6 WAR 85, 89
(Malcolm CJ).
24
Yewbelle Ltd v London Green Developments Ltd [2008] 1 P & CR 17, [105] (Lloyd LJ).
3