Week 11 – Contracts

1. Week 11 – Contracts Implied Terms & Duty of Good Faith

2. Identifying Implied Terms • Implied Terms • Terms can be implied • By law • In fact • By custom

3. 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’

4. Implied Terms • By Law - Definable class of contract egs: • employment contracts • bailment contracts • insurance contracts • contracts for the sale of goods • contracts for work and materials. • leases

5. 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.

6. Implied Terms • Terms Implied in Fact • Criteria differ for formal and informal contracts

7. 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

8. 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

9. 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.

10. 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)

11. 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

12. 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

13. 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

14. Duty of Good Faith • 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

15. 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

16. 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

17. Duty of Good Faith • Content of Duty • Cooperation • Fairness

18. 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

19. Duty of Good Faith • Fairness • Exercise of contractual power should be undertaken honestly and reasonably

20. 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

21. 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

22. 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

23. 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

24. 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.

25. 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.

26. 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