‘Good Faith Obligations in Commercial Contracts’

(Commercial Court CPD Seminar, Monash University Law Chambers, 9.11.16)

By

Professor Bryan Horrigan BA, LLB (Hons) (UQ), DPhil (Oxon)Dean, Faculty of Law, Monash University (from 2013)Former Consultant, Allens > < Linklaters (1994-2012)Expert Panel Member, Australian Government inquiry into the Australian Competition and Consumer Act 2010 (Cth) and the Franchising Code of Conduct (2009-2010)

1. Take-Away Messages

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Transactional Significance

‘[Your client] can do X’v

‘[Your client] can [only] do X provided that [your client] is acting honestly, cooperatively, with fidelity to the mutual bargain, non-arbitrarily, non-capriciously, bona fide for proper contractual purposes, without ulterior motives, and reasonably [whatever ‘reasonably’ means in this context!]’

Q1: How close is the current law to this scenario? Q2: How far can you draft around this stuff? Q3: What avenues of argument are open for negotiation,

arbitration, and litigation?

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Implications for Commercial Bar and Law Firms – Part I

Relevant broadly across commercial practice:– Commercial contracts generally – Franchising contracts: special rules on good faith– Unconscionable business conduct under ACL and ASIC Act (both B2B

and B2C conduct since 2012)

Staying up to date with latest developments:– Recent Australian litigation (eg Woolworths, Paciocco, Palmer cases)– New wave of litigation in other common law countries (ie sources of

novel arguments/applications for translation here)– Recent authoritative judicial and scholarly reconfigurations of the

landscape– Heightened scrutiny and reconfiguration of the landscape exposes

gaps/risks in past drafting, sign-off advice, and pleadings– Crucial for dispute resolution and arbitration/mediation work, as well as

conventional litigation

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Implications for Commercial Bar and Law Firms – Part II

Implications for sign-off opinions and pleadings:– Precedential relevance of non-Victorian cases (ie Farah Constructions issue)– Rethink position on adequacy of boilerplate clauses in addressing good faith:

governing law / ‘choice of law’ clauses (eg NY v Vic v NSW) sole/absolute discretions (eg is ‘implicit good faith’ precluded?) ‘entire agreement’ clauses exclusion clauses (eg only implied terms covered?) Other clauses conditioning contractual rights/powers Overall limit on ‘foolproof’ drafting remedies

– Pleading breach of good faith alternatively in contract and statutory unconscionability

– Cases pleading implied term of GF > cases finding term implied – Cases finding terms implied > cases finding breach of implied term– New avenues of argument based on multiple GF routes and limits of contractual

drafting safeguards

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2014 Victorian Case – Exclusion of Good Faith Implications?

“This … Agreement is the entire agreement between the parties about its subject matter. Any previous understanding, agreement, representation or warranty relating to this subject matter is replaced by this Agreement and has [no] further effect.”

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Relevant principles of commercial construction Inter-relationship with statutory unconscionability Current law on implied terms Post-Barker position on ‘necessity’ as test for implied terms Difference between implied and ‘inferred’ terms Scope of ‘entire agreement’ clauses Enforceability of agreement to negotiate in good faith Helpfulness of extra-judicial and academic insights Paciocco’s lessons on good faith Inter-relationship between reasonableness and good faith in express

composite clauses Reference to relevant/irrelevant considerations in good faith

negotiations How good faith conditions negotiations by reference to proper

contractual purposes, as matters of construction What good faith might require by way of disclosure

Croft J’s Woolworths Judgment – Good Faith Issues

2. Reconfiguring the Law on Contractual Good Faith

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Australian Good faith (GF) Law at a Crossroads – Two Divided Camps

GF not part of contracts unless parties make it so

GF enters contracts mainly through express/implied terms

GF doesn’t satisfy post-Barker ‘necessity’ test

Parties can exclude GF through effective drafting

GF largely a matter of private agreement

GF underlies contracts, in some sense

GF present expressly or by implication/construction (broader than implied terms)

Divergence over GF and ‘necessity’ test

Parties cannot exclude GF fully through drafting

GF more regulated by statutory inroads (ACL, Franchising Code, new AS11000)

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One Academic’s View Cited in UK, Canada, Australia, and Singapore Cases

‘(T)he principle of good faith should be seen not as animplied term, but rather as a principle that governs theimplication of terms [and] the construction of contractsgenerally.’ (emphasis added)

- Prof Elisabeth Peden

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“Good faith is inherent in all common law contract principles, and any attempt to imply an independent term requiring good faith is unnecessary and a retrograde step.”

Carter, Peden, and Tolhurst

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Good Faith Routes

Express terms Implied terms Other forms of implication Specific doctrines and norms in contract law Commercial construction and its techniques 2014 HCA Barker case sets new framework for implied

terms:– Cuts across various good faith routes – 4 categories of implied terms– ‘Necessity’ as the gateway– Threshold general approach to good faith affects specific

approach to the test of necessity

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‘Implicit Good Faith’ – Meaning, Scope, and Excludability?

• ‘When a contract allocates only to one party a power to make decisions under the contract which may have an effect on both parties … a decision-maker’s discretion will be limited, as a matter of necessary implication, by concepts of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality. The concern is that the discretion should not be abused. Reasonableness and unreasonableness are also concepts deployed in this context, but only in a sense analogous to Wednesbury unreasonableness …’

– Rix LJ in Socimer (2008), approved in Braganza (2015)

• Judicial and academic support for ‘implicit good faith’:– Peden/Carter– Clear UK line of authority: from Socimer and Mid-Essex Hospital in EWCA to

Braganza (2015) in UKSC

But query whether ‘implicit good faith’ is an actual term (UK) or a matter of construction (Peden)

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Boundaries of Good Faith – Example (Australia, 2004)

• Exclusion clause: ‘To the full extent permitted by Law and other thanas expressly set out in this Agreement the parties exclude all impliedterms, conditions and warranties.’ (emphasis added)

• Entire agreement clause: ‘This agreement contains the entireagreement of the parties with respect to its subject matter. It sets outthe only conduct relied on by the parties and supersedes all earlierconduct by the parties with respect to its subject matter. ’

• Governing law clause: Contract law of NSW• Other clauses containing absolute discretions• Result:

₋ Trial judge implied good faith despite the exclusion clause₋ Overturned on appeal₋ Caveat re implicit good faith

• Vodafone Pacific v Mobile Innovations [2004] NSWCA 15

3. Good Faith in Commercial Transactions – Comparative and Legislative Developments

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Eg Lord Bingham in Interfoto Picture Library v Stiletto Visual Programmes [1989] 1 QB 433, 439

‘In many civil law systems, and perhaps in most legal systemsoutside the common law world, the law of obligations recognisesand enforces an overriding principle that in making and carryingout contracts parties should act in good faith. This does notsimply mean that they should not deceive each other, a principlewhich any legal system must recognise; its effect is perhaps mostaptly conveyed by such metaphorical colloquialisms as “playingfair”, “coming clean” or “putting one’s cards face upwards on thetable”. It is in essence a principle of fair and open dealing …English law has, characteristically, committed itself to nosuch overriding principle but has developed piecemealsolutions in response to demonstrated problems ofunfairness.’(emphasis added)

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‘Understood in the way I have described, there is in my view nothing novel or foreign to English law in recognising an implied duty of good faith in the performance of contracts. It is consonant with the theme identified by Lord Steyn as running through our law of contract that reasonable expectations must be protected: see First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd's Rep 194, 196; and (1997) 113 LQR 433. Moreover such a concept is, I believe, already reflected in several lines of authority that are well established. One example is the body of cases already mentioned in which duties of cooperation in the performance of the contract have been implied. Another consists of the authorities which show that a power conferred by a contract on one party to make decisions which affect them both must be exercised honestly and in good faith for the purpose for which it was conferred, and must not be exercised arbitrarily, capriciously or unreasonably (in the sense of irrationally): see e.g. Abu Dhabi National Tanker Co v. Product Star Shipping Ltd (The "Product Star") [1993] 1 Lloyd's Rep 397, 404; Socimer International Bank Ltd v Standard Bank London Ltd [2008] 1 Lloyd's Rep 558, 575-7. A further example concerns the situation where the consent of one party is needed to an action of the other and a term is implied that such consent is not to be withheld unreasonably (in a similar sense): see e.g. Gan v Tai Ping (Nos 2 & 3) [2001] Lloyd's Rep IR 667; Eastleigh BC v Town Quay Developments Ltd [2010] 2 P&CR 2. Yet another example, I would suggest, is the line of authorities of which the Interfoto case is one which hold that an onerous or unusual contract term on which a party seeks to rely must be fairly brought to the notice of the other party if it is to be enforced.’ (emphasis added)

New UK Battle between GF ‘Scepticism’ and GF ‘Evangelism’ – Justice Leggatt in Yam Seng Case [2013] EWHC 111 (QB)

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Is an Agreement to Negotiate in Good Faith Enforceable?  ‐ New v Old Law

• UK, 1992: No, as implied term – too vague and uncertain:– Walford v Miles (HL) but agreement to use best endeavours is enforceable, as no guaranteed result and can

be time-limited• Singapore, 2008: No, as express term – too vague and uncertain (but obiter):

– Clause: ‘Any dispute arising out of or in connection with this Agreement … shall be referred to executiverepresentatives of the Parties for settlement through friendly consultations between the Parties [andarbitration, failing time-bound agreement]’

– Singapore High Court, Insigma Technology v Alstom Technology• Australia, 2009: Yes, as express term:

– Clause: ‘(T)he dispute or difference is to be referred to [the Parties’ representatives] who must meet andundertake genuine and good faith negotiations with a view to resolving the dispute or difference [and failingresolution, then referred to mediation and then arbitration]’

– NSW Court of Appeal, United Group Rail Services v Rail Corporation NSW, referring to Australian and UKcases

• Singapore, 2012 and later: Yes, as express term, in rent reviews and other ADR contexts:– Clause: ‘Prior to [end of term] the Lessor and the Lessee shall in good faith endeavour to agree on the

prevailing market rental value [and referred to valuers if disagreement]’– Singapore Court of Appeal, HSBC Institutional Trust Services v Starhill Global Real Estate Investment Trust,

2012, referring to UK and Australian cases, applied to enforceable multi-tiered dispute resolution clauses inlater Singapore cases

• UK, 2014: Yes, as express term and with time limit, in ADR context:– Clause: ‘In the case of any dispute or claim [under the Long Term Contract] … the Parties shall first seek to

resolve the dispute or claim by friendly discussion [before referral to arbitration]’– England and Wales High Court, Emirates Trading Agency v Prime Mineral Exports, 2014, distinguishing

Walford v Miles, referring to Australian and Singapore cases

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Supreme Court of Canada in Bhasin v Hrynew 2014 SCC 71(Nov 2014)

• ‘There is a general organising principle of good faith thatunderlies many facets of contract law.’

• ‘It is appropriate to recognise a new common law dutythat applies to all contracts as a manifestation of thegeneral organising principle of good faith: a duty ofhonest performance, which requires the parties to behonest with each other in relation to the performance oftheir contractual obligations.’ (emphasis added)

• ‘Because the duty of honesty in contractual performanceis a general doctrine of contract law that applies to allcontracts, like unconscionability, the parties are not freeto exclude it.’

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‘To the extent that other decisions have suggested that there exists a universal implication of any particular duty to be discerned from the principle of good faith then those authorities should not be followed: Bhasin v Hrynew [2014] SCC 71 [2014] 3 SCR 495; Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd [2005] FCA 288[64] (Finkelstein J), not addressed on appeal in Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd [2006] FCAFC 40; (2006) 149 FCR 395 … For these reasons, at least where “good faith” is described as an implied obligation, the notion of “good faith” is better understood as a norm underlying, and shaping, a particular duty or duties[:] Paciocco v Australia and New Zealand Banking Group Limited [2015] FCAFC 50 …’ (emphasis added)

Mineralogy Pty v Sino Iron [2015] FCA 825 – Edelman J on GF and Bhasin/Paciocco

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Australian Consumer Law (ACL) Sections on Good Faith

Australian Consumer Law (ACL) Sections 21(1) and 21(4): ‘A person must not, in trade or commerce, in connection with [supply/acquisition of goods/services] engage in conduct that is, in all the circumstances, unconscionable.’

‘It is the intention of the Parliament that:… (c) in considering whether conduct to which a contract relates is unconscionable, a court’s consideration of the contract may include consideration of:

(i) the terms of the contract; and(ii) the manner in which and the extent to which the contract is carried out;

and is not limited to consideration of the circumstances relating to formation of the contract.’

ACL Section 22: ‘Without limiting the matters to which the court may have regard for the purpose of determining whether a person [the supplier/acquirer/customer] has contravened section 21 … the court may have regard to:

… (g) the requirements of any applicable industry code; and(h) the requirements of any other industry code [under particular conditions]; and…(l) the extent to which [the parties] acted in good faith.’

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Significant and Recent Cases on Good Faith•UK:

–Socimer International Bank v Standard Bank London [2008] EWCA Civ 116 (on ‘implicit good faith’) –Yam Seng v International Trade Corp [2013] EWHC 111 (QB) (on good faith generally and implied duty of honesty in providing information)–Hamsard 3147 Ltd v Boots UK Ltd [2013] EWCH 3251 (Pat) (no general obligation of good faith in commercial contracts)–Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland [2013] EWCA Civ 200 (express good faith obligation)–Bristol Groundschool v Intelligent Data Capture [2014] EWHC 2145 (Ch) (implied good faith obligation accepted post-Yam Seng for relational contract)–TSG Building Services v South Anglia Housing [2013] EWHC 1151 (TCC) (general express good faith clause not construed to apply to specific termination clause rights, and no implied good faith obligation affecting termination)–Emirates Trading Agency v Prime Mineral Exports [2014] EWHC 2104 (Comm) (enforceable express obligation to negotiate in good faith)–Acer Investment Management v Mansion Group [2014] EWHC 3011 (QB) (no implied good faith obligation)–Greenclose Ltd v National Westminster Bank [2014] EWHC 1156 (Ch) (‘implicit good faith’ will not condition an unqualified option to extend or not) –Myers v Kestrel Acquisitions [2015] EWHC 916 (Ch) (no implied good faith obligation) –MSC Mediterranean Shipping Co v Cottonex Anstalt [2015] EWHC 283 (Comm) (good faith conditioning choice to terminate for repudiatory breach)–Portsmouth City Council v Ensign Highways Ltd [2015] EWHC 1969 (TCC)–Braganza v BP Shipping [2015] UKSC 17

• Canada:–Bhasin v Hrynew 2014 SCC 71 (general organising principle of good faith and specific implied obligation of honest contractual performance)

• Australia:–Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA 228–United Group Rail Services v Rail Corporation NSW [2009] NSWCA 177 (enforceable express obligation to negotiate in good faith to resolve disputes)–Paciocco v ANZ Banking Group [2015] FCAFC 50 (on good faith as an organising principle)–Mineralogy v Sino Iron Pty Ltd (No 6) [2015] FCA 825–North East Solution Pty Ltd v Masters Home Improvement Australia and Woolworths [2016] VSC 1

• Singapore:–Ng Giap Hon v Westcomb Securities [2009] SGCA 19 (on implied good faith)–HSBC Institutional Trust Services (Singapore) v Toshin Development Singapore [2012] SGCA 48 (enforceable express obligation

to negotiate in good faith to resolve disputes)

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Key References

J. McCamus, ‘The New General “Principle” of Good Faith Performance and the New “Rule” of Honestyin Performance in Canadian Contract Law’ (2015) 32 Journal of Contract Law 103H. Collins, ‘Implied Terms: The Foundation in Good Faith and Fair Dealing’, Current Legal Problems(2014)H. Hoskins, ‘Contractual Obligations to Negotiate in Good Faith: Faithfulness to the Agreed CommonPurpose’ (2014) 130 Law Quarterly Review 131J Carter, ‘Good Faith in Contract: Why Australian Law is Incoherent’, Presentation to Bar Association ofQueensland Annual Conference, 2014Rt Hon Lady Justice Arden, ‘Coming to Terms with Good Faith’, Singapore Academy of Law, 2013Chief Justice Marilyn Warren, ‘Good Faith: Where Are We At?’ (2010) 34 Melbourne University LawReview 344B. Horrigan, ‘Good faith in Commercial Agreements – From Elusive Concept to Transactional Practice(An Update)’, Qld Bar Association Conference, February 2016 (published online in Hearsay)C. Liew, ‘A Leap of Good Faith in Singapore Contract Law’ [2012] Singapore Journal of Legal Studies416J. Allsop, ‘Good Faith and Australian Contract Law: A Practical Issue and a Question of Theory andPrinciple’ (2011) 85 Australian Law Journal 341 (plus various recent extra-judicial papers on Fed Ctwebsite)E. Peden, ‘“Implicit Good Faith – or Do We Still Need an Implied Term of Good Faith?’ (2009) 25Journal of Contract Law 50