‘GOOD FAITH FROMADRAFTINGAND PLEADINGS POINT OF VIEW’

COMMERCIALCOURTCPD SEMINAR 4 JUNE 2014

Caroline Kirton QCBarrister, 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 contractthat 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) an obligation on the parties to co-operate in achieving the contractual objects (loyalty to the promise itself);

(2) compliance with honest standards of conduct; and

(3) compliance with standards of conduct which arereasonable having regard to the interests of theparties”.

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] VSCA228, [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 KingCorporation 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 dutyof good faith is something less than a fiduciary duty. The existence ofthe duty of good faith allows the parties to retain their economicautonomy 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.)

(ii) Implication in LawThe 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)(i)

Specific Pleading IssuesInconsistency 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)

(ii)

Specific Pleading Issues (Cont.)

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)(iii)

Specific Pleading Issues (Cont.)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) 69NSWLR 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)

(v)

Specific Pleading Issues (Cont.)

Partnership AgreementsTote 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 goodfaith 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) Specific Pleading Issues (Cont.)(vi) 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 out-manoeuvres 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)

(vii)

Specific Pleading Issues (Cont.)

‘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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(6)(viii)

Specific Pleading Issues (Cont.) 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)(ix)

implied terms, conditions and warranties” [95].

Specific Pleading Issues (Cont.)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

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(6) Specific Pleading Issues (Cont.)

otherwise have been made by law” [922].

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 conductby 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

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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 LtdWASCA 165 (23 August 2012).

• Kosho Pty Ltd v Trilogy Funds Management Ltd [2013] QSC 135 (29 May 2013).

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