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
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? 3
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 4
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 5
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. 6
Croft J s Woolworths Judgment Good Faith Issues 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 7
2. Reconfiguring the Law on Contractual Good Faith
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) 9
One Academic s View Cited in UK, Canada, Australia, and Singapore Cases (T)he principle of good faith should be seen not as an implied term, but rather as a principle that governs the implication of terms [and] the construction of contracts generally. (emphasis added) - Prof Elisabeth Peden 10
Carter, Peden, and Tolhurst 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. 11
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 12
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) 13
Boundaries of Good Faith Example (Australia, 2004) Exclusion clause: To the full extent permitted by Law and other than as expressly set out in this Agreement the parties exclude all implied terms, conditions and warranties. (emphasis added) Entire agreement clause: This agreement contains the entire agreement of the parties with respect to its subject matter. It sets out the only conduct relied on by the parties and supersedes all earlier conduct 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 14
3. Good Faith in Commercial Transactions Comparative and Legislative Developments
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 systems outside the common law world, the law of obligations recognises and enforces an overriding principle that in making and carrying out contracts parties should act in good faith. This does not simply mean that they should not deceive each other, a principle which any legal system must recognise; its effect is perhaps most aptly conveyed by such metaphorical colloquialisms as playing fair, coming clean or putting one s cards face upwards on the table. It is in essence a principle of fair and open dealing English law has, characteristically, committed itself to no such overriding principle but has developed piecemeal solutions in response to demonstrated problems of unfairness. (emphasis added) 16
New UK Battle between GF Scepticism and GF Evangelism Justice Leggatt in Yam Seng Case [2013] EWHC 111 (QB) 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) 17
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 executive representatives of the Parties for settlement through friendly consultations between the Parties [and arbitration, 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 and undertake genuine and good faith negotiations with a view to resolving the dispute or difference [and failing resolution, then referred to mediation and then arbitration] NSW Court of Appeal, United Group Rail Services v Rail Corporation NSW, referring to Australian and UK cases 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 in later 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 18
Supreme Court of Canada in Bhasin v Hrynew 2014 SCC 71 (Nov 2014) There is a general organising principle of good faith that underlies many facets of contract law. It is appropriate to recognise a new common law duty that applies to all contracts as a manifestation of the general organising principle of good faith: a duty of honest performance, which requires the parties to be honest with each other in relation to the performance of their contractual obligations. (emphasis added) Because the duty of honesty in contractual performance is a general doctrine of contract law that applies to all contracts, like unconscionability, the parties are not free to exclude it. 19
Mineralogy Pty v Sino Iron [2015] FCA 825 Edelman J on GF and Bhasin/Paciocco 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) 20
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. 21
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) 22
Key References J. McCamus, The New General Principle of Good Faith Performance and the New Rule of Honesty in Performance in Canadian Contract Law (2015) 32 Journal of Contract Law 103 H. 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 Common Purpose (2014) 130 Law Quarterly Review 131 J Carter, Good Faith in Contract: Why Australian Law is Incoherent, Presentation to Bar Association of Queensland Annual Conference, 2014 Rt Hon Lady Justice Arden, Coming to Terms with Good Faith, Singapore Academy of Law, 2013 Chief Justice Marilyn Warren, Good Faith: Where Are We At? (2010) 34 Melbourne University Law Review 344 B. 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 Studies 416 J. Allsop, Good Faith and Australian Contract Law: A Practical Issue and a Question of Theory and Principle (2011) 85 Australian Law Journal 341 (plus various recent extra-judicial papers on Fed Ct website) E. Peden, Implicit Good Faith or Do We Still Need an Implied Term of Good Faith? (2009) 25 Journal of Contract Law 50 23