Week 11 – Contracts
Implied Terms
& Duty of Good Faith
Identifying Implied Terms
 Implied Terms
 Terms can be implied
 By law
 In fact
 By custom
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Implied Terms
 Terms implied by Law
 By Statute
 By precedent
 Two primary issues when new implied term
adopted:
 The term must be applicable to a definable class
of contractual relationship
 The term must be suitable – the courts have
applied the criteria of ‘necessity’
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Implied Terms
 By Law - Definable class of contract egs:
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employment contracts
bailment contracts
insurance contracts
contracts for the sale of goods
contracts for work and materials.
leases
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Implied Terms
 By Law – Necessity
 Liverpool City Council v Irwin – [such facilities
as lifts and stairways] are essentials of the
tenancy without which life in the dwellings, as
a tenant, is not possible. – Term implied that
landlord responsible for maintaining them.
 Helicopter Sales v Rotor-Work - term implied
by law into contracts for work and materials
was excluded from this contract.
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Implied Terms
 Terms Implied in Fact
 Criteria differ for formal and informal
contracts
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Implied Terms
 Implied in Fact – Formal Contracts
 Term must be reasonable and equitable
 Term must be necessary to give business
efficacy to the contract, so that no term will be
implied if the contract is effective without it
 Term must be so obvious that ‘it goes without
saying’
 Term must be capable of clear expression
 Term must not contradict any express term
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Implied Terms
 Implied in Fact – Formal Contracts
 Reasonable and equitable
 Not enough that a term is reasonable.
 If a term would impose a significant detriment on
one party and benefit the other, then it would not
be deemed equitable to imply the term - BP v
Shire of Hastings
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Implied Terms
 Implied in Fact – Formal Contracts
 Business efficacy
 Leading Aust case - Codelfa v SRA of NSW
 The courts will be slow to imply a term
 The more detailed and comprehensive the express
contract the less grounds to imply terms.
 The fact that an assumption was a matter of common
contemplation between the parties is not enough to
justify the implication of a term.
 Where the contract is a ‘contract of adhesion’ it will be
more difficult to imply a term.
 The court can not add a clause just because it thinks it
would be reasonable or fair or prudent.
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Implied Terms
 Implied in Fact – Formal Contracts
 Obviousness
 Prima facie that which in any contract is left to be implied and
need not be expressed is something so obvious it goes
without saying; so that, if, while the parties were making their
bargain, an officious bystander were to suggest some
express provision for it in their agreement, they would testily
suppress him with a common ‘Oh, of course!’ – Shirlaw v
Southern Foundries
 This is not a case in which an obvious provision was
overlooked by the parties and omitted from the contract.
Rather, it was a case in which the parties made a common
assumption which masked the need to explore what
provisions should be made to cover the event which
occurred. – Codelfa (Mason J)
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Implied Terms
 Implied in Fact – Formal Contracts
 Clarity
 In ordinary circumstances negotiation about the
matter might have yielded any one of a number of
alternative provisions, each being regarded as a
reasonable solution. - Codelfa (Mason J)
 Consistency – BP Refinery
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Implied Terms
 Implied in Fact – Informal Contracts
 In a case where it is apparent that the parties have not
attempted to spell out the full terms of their contract, the
court should imply a term by reference to the imputed
intention of the parties if, but only if, it can be seen that
the implication of the particular term is necessary for
the reasonable or effective operation of a contract of
that nature in the circumstances of the case. – Hawkins
v Clayton (Deane J)
 Obviousness also a criteria? - Byrne v Australian
Airlines
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Implied Terms
 Implied by Custom
 The existence of a custom or usage is a question of fact.
 custom must be so well known and acquiesced in that
everyone making a contract in that situation can reasonably
be presumed to have imported that term into their contract
 Can not be inconsistent or contrary to any express terms
 A person may be bound by the custom even if he or she had
no knowledge of it.
 Con-Stan Industries of Australia v Norwich Winterthur
Insurance
 Custom must be notorious, uniform, reasonable and certain –
Nelson v Dahl
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Duty of Good Faith
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Developing area of law
Controversial
Precise content is uncertain and unsettled
Classification or categorisation is uncertain
and unsettled
 Highlights tensions in the law of contract
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Duty of Good Faith
 Focus on the way parties perform the contract
 Focus on how a party exercises its powers under
the contract
 Not focussed on procedural unfairness in
formation of a contract (cf unconscionability)
 Not focussed on substantive unfairness in the
terms of a contract
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Duty of Good Faith
 Nature and origins?
 ‘already inherent in contract doctrine, rules and
principles’
 Principle of construction of contracts
 Implied term
 Implied by law
 Implied in fact
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Duty of Good Faith
 Content of Duty
 Cooperation
 Fairness
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Duty of Good Faith
 Cooperation
 It is a general rule applicable to every contract
that each party agrees, by implication, to do all
such things as are necessary on his part to
enable the other party to have the benefit of
the contract
 ‘loyalty to the promise itself
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Duty of Good Faith
 Fairness
 Exercise of contractual power should be
undertaken honestly and reasonably
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Duty of Good Faith
 not to take advantage of a party’s own wrong
 not to hinder or prevent the fulfillment of the other
party’s purpose
 to do all such things as are necessary to allow the
other party to have the benefit of the contract
 not to prevent the other party from performing the
contract
 to act honestly
 to have regard to the legitimate interests of the
other party
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Duty of Good Faith
 Renard Construction v Minister for Public Works
 Right to terminate conditional upon serving notice
to Renard
 ‘show cause’ notice
 ‘to the satisfaction of the principal’
 Notice given and responded to
 Termination of agreement
 Decision made based on misinformation
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Duty of Good Faith
 Renard Construction v Minister for Public
Works
 There was an implied duty to act in good
faith
 That duty was breached because the
power to terminate was not exercised in a
reasonable way
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Duty of Good Faith
 Burger King v Hungry Jack’s
 Contract required HJ to open 4 new restaurants a
year
 Subject to operational, financial and legal
approval from BK
 BK decided to operate directly in Aust.
 Withheld approvals
 Freeze on 3rd party franchisees
 HJ unable to meet the 4 new restaurant
requirement
 BK terminated the agreement
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Duty of Good Faith
 Burger King v Hungry Jack’s
 Acting in pursuit of extraneous purposes can
be a breach of duty of good faith
 BK had ulterior motive
 Breached the duty when withheld approval
 Breached the duty when froze new franchises
 Breached the duty when terminating.
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Duty of Good Faith
 Limitations
 A party is precluded from cynical resort to the
black letter. But no party is fixed with the duty to
subordinate self-interest entirely which is the lot of
the fiduciary…The duty is not a duty to prefer the
interests of the other contracting party. It is,
rather, a duty to recognise and to have due regard
to the legitimate interests of both the parites in the
enjoyment of the fruits of the contract as
delineated by its terms.
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Duty of Good Faith
 Limitations
 Not required to subordinate own interests to
those of the other party
 Must preserve the benefit of the contract, not
the benefit of the other party
 Only a duty to act reasonably
 Secured Income v St Martins
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