Data

Date:: 23-04-2002
Country:: Australia
Number:: FUL 100 of 2001
Court:: Supreme Court of Western Australia - Court of Appeal
Parties:: Central Exchange Ltd v Anaconda Nickel Ltd

Keywords

SETTLEMENT AGREEMENT - BETWEEN TWO AUSTRALIAN COMPANIES - SUBJECT TO AUSTRALIAN LAW - WHETHER THERE SHOULD BE IMPLIED BY LAW INTO THE AGREEMENT A TERM THAT PARTIES MUST ACT IN GOOD FAITH — CONSIDERATION OF WHETHER CONCEPT OF GOOD FAITH FORMS PART OF GENERAL LAW OF CONTRACT OF AUSTRALIA – REFERENCE TO ARTICLE 1.7 OF THE UNIDROIT PRINCIPLES.

Abstract

This was an appeal against a decision dismissing appellant's claims for declaratory relief and pre-trial discovery.

The action concerned the effect of a deed of sale and option concerning three mining leases and two prospecting licenses. Pursuant to the settlement deed, the respondent was to pay appellant $16.25 million within a certain time of the earlier of four events, one being the commissioning of a treatment plant. The appellant received information which led it to believe that the respondent had commissioned the treatment plant. The respondent denied this and refused to provide information subsequently sought by the appellant.

The appellant sought a declaration from the Court that there was an implied term in the deed that the respondent would deal with the appellant in good faith, which required the respondent to give the appellant the information sought.

The Court dismissed the application. The leading judgment (Steytler J) referred to the “considerable discussion” recently on whether the concept of good faith is part of the general law of contract in Australia. In discussing the authorities, he cited Finn J’s view in Hughes Aircraft Systems International v Airservices Australia, including his reference to Art 1.7 of the UNIDROIT Principles. However, ultimately Steytler J did not decide this question, although he declared that, for the purposes of the case at hand, he was prepared to proceed by assuming that good faith was to be implied.

Fulltext

Steytler J

…

The implied term that the respondent will deal with the appellant in good faith (Grounds 1.1 and 1.2)

[45] As to grounds 1.1 and 1.2, the question whether the concept of good faith is part of the general law of contract has, in more recent times, been the subject of considerable discussion.

[46] In Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234, Priestley JA, with whom Handley JA was in general agreement, expressed the opinion (at 268) that people generally, including Judges, had "grown used to the courts applying standards of fairness to contract which are wholly consistent with the existence in all contracts of a duty upon the parties of good faith and fair dealing in its performance". He said (ibid) that, in his view, "this is in these days the expected standard, and anything less is contrary to prevailing community expectations."

[47] In Service Station Association Ltd v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84, this suggestion met with a lack of enthusiasm on the part of Gummow J. His Honour there said (at 96 - 97) that:"Anglo-Australian contract law as to the implication of terms has heretofore developed differently [to the law in the United States of America] with greater emphasis upon specifics, rather than the identification of a genus expressed in wide terms. Equity has intervened in matters of contractual formation by the remedy of rescission, upon the grounds mentioned earlier. It has restrained freedom of contract by inventing and protecting the equity of redemption, and by relieving against forfeitures and penalties. To some extent equity has regulated the quality of contractual performance by the various defences available to suits for specific performance and for injunctive relief. In some, but not all, of this, notions of good conscience play a part. But it requires a leap of faith to translate these well-established doctrines and remedies into a new term as to the quality of contractual performance, implied by law."

[48] As has been pointed our by Sir Anthony Mason (A F Mason: "Contract, Good Faith and Equitable Standards in Fair Dealing" (2000) 116 LQR 66, at 68), Gummow J's comments may be seen as the exhibition of a preference for precise rules rather than for the expression of overarching principles which call for the application of general concepts or standards.

[49] However, in Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151, Finn J preferred the view of Priestley JA. He said, in that respect (at 192 - 193):"Fair dealing is a major (if not openly articulated) organising idea in Australian law. It is unnecessary to enlarge upon that here. More germane to the present question, the implied duty is, as is well known, an accepted idea in the contract law of the United States and, probably, of Canada: see E A Farnsworth, 'Good Faith in Contract Performance' in J Beatson and D Friedmann (eds) 'Good Faith and Fault in Contract Law' (1995); for a convenient collection of some of the voluminous literature in the US debating the meaning of the implied duty see Farnsworth on Contracts, vol 2, para7.17a (1990); for an English view see for example, Rt Hon Lord Justice Staughton, 'Good Faith and Fairness in Commercial Contract Law' (1994) 7 Journal of Contract Law 193; and see Livingstone v Roskilly [1992] 3 NZLR 230 at 237 - 238. Its status in civil law is well recognised: see, for example, H K Lücke, 'Good Faith and Contractual Performance' in P D Finn (ed), Essays on Contract (1987); J F O'Connor, Good Faith in English Law, Ch 8 (Dartmouth, 1990). It has been propounded as a fundamental principle to be honoured in international commercial contracts: see, for example, Unidroit, Principles of International Commercial Contracts, Article 1.7 (International Institute for the Unification of Private Law, Rome, 1994). Its more open recognition in our own contract law is now warranted: cf Sir Anthony Mason, 'Contract and its Relationship with Equitable Standards and the Doctrine of Good Faith', The Cambridge Lectures, 1993 (8 July 1993); notwithstanding the significant adjustments this would occasion to some of contract law's apparent orthodoxies: see, for example, Lücke, p177ff.I should add that, unlike Gummow J, I consider a virtue of the implied duty to be that it expresses in a generalisation of universal application, the standard of conduct to which all contracting parties are to be expected to adhere throughout the lives of their contracts."

[50] Then, in Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349, the New South Wales Court of Appeal followed its earlier decision in Renard Constructions. Sheller JA (with whom Powell JA and Beazley JA were in agreement) said (at 369) that the decisions in Renard Constructions and a later case, Hughes Bros Pty Ltd v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (1993) 31 NSWLR 91 (in which Renard Constructions had been applied), meant that in New South Wales a duty of good faith, both in performing obligations and exercising rights, may by implication be imposed upon parties as part of a contract.

[51] More recently, in Burger King Corp v Hungry Jack's Pty Ltd [2001] NSWCA 187, the Court of Appeal in New South Wales (Sheller, Beazley and Stein JJA) referred, with apparent approval, to Renard Constructions and Alcatel before saying (para159) that a review of the cases since Alcatel indicates that courts in various Australian jurisdictions have, for the most part, proceeded upon an assumption that there may be implied, as a legal incident of a commercial contract, terms of good faith and reasonableness. Their Honours referred, in that respect, to Far Horizons Pty Ltd v McDonalds Australia Ltd [2000] VSC 310, para120; Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd (1999) ATPR 41 - 703; [1999] FCA 903 at 43,014; Saxby Bridge Mortgages Pty Ltd v Saxby Bridge Pty Ltd [2000] NSWSC 433; and Asia Television Ltd v Yau's Entertainment Pty Ltd (2000) 48 IPR 283. They said (para164) that there also appeared to be increasing acceptance (Saxby Bridge aside) of the proposition (which they thought to be correct) that, if terms of good faith and reasonableness are to be implied, they are to be implied as a matter of law.

[52] The preference for implication as a matter of law is, no doubt, due to the difficulty of complying with the criteria for an implication in fact enunciated in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 or, where the contract is informal or incomplete, in Byrne v Australian Airlines Ltd (1995) 185 CLR 410. However, if a term of the kind discussed is implied by law, it must be borne in mind that, as has been pointed out by McHugh and Gummow JJ in Byrne, at 450, many of the terms now said to be implied by law in various categories of case reflect the concern of the Courts that, in the absence of a term of that kind, the enjoyment of the rights conferred by contract "would or could be rendered nugatory, worthless, or, perhaps, be seriously undermined". Hence, they said, the reference in the decisions to "necessity".

[53] Another way of arriving at a similar result has been suggested by Dr Elisabeth Peden: "Incorporating Terms of Good Faith in Contract Law in Australia (2001) 23 Sydney Law Review 222". She argues (at 223) that to imply a term requiring good faith is usually artificial and seems to blur the distinction between the purpose of implication in law and rules of construction. She suggests (at 230) that if the Courts want the notion of good faith to apply in all situations, they should construe all contracts "on the basis that there is an expectancy of good faith in all terms, unless there is something explicit to suggest otherwise".

[54] Most recently, the High Court, in Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5, has left the issue open. Gleeson CJ and Gaudron, McHugh, Gummow and Hayne JJ, while recognising the importance of the issues concerning the existence and content of an implied obligation or duty of good faith and fair dealing in contractual performance and the exercise of contractual rights and powers, considered that case to be an inappropriate occasion in which to consider them (para40). Kirby J, while also finding it unnecessary to explore the question further (para88), offered the comment (para87) that, in Australia, such an implied term appears to "conflict with fundamental notions of caveat emptor that are inherent (statute and equitable intervention apart) in common law conceptions of economic freedom". He also said (ibid) that it appears to be inconsistent with the law as it has developed in this country in respect of the introduction of implied terms into written contracts which the parties have omitted to include. Callinan J, too, found it unnecessary to answer the questions, as he put them (para155), "whether both in performing obligations and exercising rights under a contract, all parties owe to one another a duty of good faith; and, the extent to which, if such were to be the law, a duty of good faith might deny a party an opportunistic or commercial exercise of an otherwise lawful commercial right."

[55] If a term of good faith is to be implied into the Settlement Deed (and, like Parker J, I am prepared to proceed, for present purposes, upon the assumption that it is, without deciding that question), then it is necessary to give that term some content. That is not without its difficulty.

[56] The United States Uniform Commercial Code ("the UCC") provides, by S1-203, that "Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement". S1-201(19) of the UCC defines "good faith" as "honesty in fact in the conduct or transaction concerned". S2-103(1)(b) of the UCC defines "good faith", in the case of a merchant, as "honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade". S205 of the Restatement of Contract, Second ("the Restatement"), provides that every contract "imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement". A comment accompanying this section suggests that the phrase "good faith" is used in a variety of contexts and that its meaning will depend somewhat upon the context. The phrase is also said to raise the notion of "faithfulness to an agreed common purpose and consistency with the justified expectations of the other party" and to exclude conduct involving "bad faith", because conduct of that kind violates community standards of decency, fairness and reasonableness.

[57] Eileen Webb: "The Scope of the Implied Duty of Good Faith - Lessons From Commercial and Retail Leasing Cases" (2001) 9 APL G1, at 4, suggests that academic viewpoints in the United States differ as to the meaning of good faith and that views range from whatever is not bad faith (R S Summers, "Good Faith in General Contract Law and the Sales Provisions of the Uniform Commercial Code", (1968) 54 Virginia Law Review 195; R S Summers, "The General Duty of Good Faith: Its Recognition and Conceptualisation", (1982) 67 Cornell Law Review 810 at 820) to acting within a contemplated range of motives (S J Burton, "Breach of Contract and the Common Law Duty to Perform in Good Faith", (1980) 94 Harvard Law Review 369) or behaving reasonably or honestly in the performance of a contract (E A Farnsworth, Contracts, second ed, 1990).

[58] Sir Anthony Mason, above, (at 69), has said that it is by no means clear what "good faith" means in the context of the UCC and the Restatement. However, he said, it is probable that the concept embraces no less than three related notions, as follows:
"(1) an obligation on the parties to cooperate 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 are reasonable having regard to the interests of the parties."

[59] Priestley JA, in Renard Constructions, above, at 263, after discussing an implied obligation of reasonableness, said that the kind of reasonableness which he had been discussing seemed to him "to have much in common with the notions of good faith which are regarded in many of the civil law systems of Europe and in all States in the United States as necessarily implied in many kinds of contracts". He also said, at 265, that:
"... [T]here is a close association of ideas between the terms unreasonableness, lack of good faith, and unconscionability. Although they may not be always co-extensive in their connotations, partly as a result of the varying senses in which each expression is used in different contexts, there can be no doubt that in many of their uses there is a great deal of overlap in their content, particularly in the kind of situation being discussed in the present case."

[60] In Alcatel, above, at 363 - 369, Sheller JA reviewed a number of the authorities, including those which equate the notions of "reasonableness" and "good faith". He also referred, with apparent approval (at 367), to Sir Anthony Mason's comment, in his 1993 Cambridge lecture (which formed the basis for the Law Quarterly Review article referred to above), to the effect that the concept of good faith embraced no less than the three related notions to which I have referred above.

[61] Renard Constructions, and Sir Anthony Mason's comments, have since been referred to with apparent approval in Burger King, above, para169 - para171. The Court there also referred to the judgment of Finkelstein J in Garry Rogers Motors, above, at 43,014, in which his Honour considered that an implied term of good faith imposed an obligation on a party "not to act capriciously", although Finkelstein J added that such a term would not restrict a party acting so as to promote its own "legitimate interests" (as to which cf the comments of Einstein J, in Aiton Australia Pty Ltd v Transfield Pty Ltd (1999) 153 FLR 236; [1999] NSWSC 996 at 268, in the context of a contract to negotiate or mediate in good faith). He said that, "provided the party exercising the power acts reasonably in all the circumstances, the duty to act fairly and in good faith will ordinarily be satisfied".

[62] Kelly J, of the Supreme Court of Nova Scotia, has said, in Gateway Realty Ltd v Arton Holdings Ltd (No 3) (1991) 106 Nova Scotia Rep (2d) 180 at 197, that a party will breach an obligation to exercise rights under an agreement honestly, fairly and in good faith if that party, without reasonable justification, acts in relation to the contract in a manner which substantially nullifies the bargained for benefits or defeats the legitimate expectations of the other party.

[63] While the content of the phrase "good faith", in this context, remains still to be worked out, it seems, from the aforegoing review of the case law, that it is, as yet, questionable just how much an implied term of that kind would add to the well-established doctrines referred to by Gummow J in Berg Bennett, above, taken together with the implied term that each party will do what is necessary on its part to enable the other to have the benefit of the contract, accepted in such cases as Butt v M'Donald (1896) 7 QLJ 68 at 70 - 71 and St Martins Investments, above, at 607. That said, an implied term of that kind would undoubtedly bring with it a degree of flexibility, because of its general nature, that is not present in what Sir Anthony Mason, above, at 94, has described, perhaps a little unfairly, as "rigid rules". That degree of flexibility may well result in further development and growth of the concept, if it should gain general acceptance.

[64] One thing that is clear, however, is that principles of good faith "do not block use of terms that actually appear in the contract" (Kham & Nate's Shoes No 2 Inc v First Bank of Whiting (1990) 908 F 2d 1351, at 1357, referred to in Burger King, above, para173). In Burger King, the Court (ibid) also referred with apparent approval to the following extract from the judgment of the Court in Metropolitan Life Insurance Co v RJR Nabisco Inc (1989) 716 F Supp 1504 at 1507:
"In other words, the implied covenant will only aid and further the explicit terms of the agreement and will never impose an obligation 'which would be inconsistent with other terms of the contractual relationship'. ... Viewed another way, the implied covenant of good faith is breached only when one party seeks to prevent the contract's performance or to withhold its benefits. ... As a result, it thus ensures that parties to a contract perform the substantive, bargained for terms of their agreement."

[65] If these various propositions are applied to this case, it seems to me that there are insuperable obstacles in the path of the appellant's submission that it is an incident of an implied term of the kind contended for that the respondent should provide to the appellant the information and documents sought by it.

[66] The parties have, so far as is relevant, comprehensively agreed upon their respective rights and obligations. As Parker J has said (para29):
"The contract recorded in the Deed is a detailed agreement reached with full legal advice, itself being in settlement of a serious earlier dispute that had led to litigation. The subject matter involves a very substantial, high profile, mining venture. The parties are significant public companies. Relevantly, the contract provides for the payment of the Agreed Amount to the ... [appellant] when, at any Review Date, cl4.1(b) is satisfied. The initial Review Date is the earlier of any one of four possible events, ie 12 months after satisfaction of the banker's acceptance test, 3 years from the commissioning of the treatment plant, 3 years after the date when 250,000 tonnes of ore has been mined and treated, and the sale by the ... [respondent] of the whole of its interest for not less than $350,000,000."

[67] Parker J has also mentioned that only one of the four events to which he referred is, by its nature, likely to occur without the knowledge of the appellant, that being the notification to the respondent, by the financiers to the project, that the Bankers Acceptance Test has been satisfied. The other three events, the commissioning of the plant, the mining and treating of 250,000 tonnes of ore and the sale, by the respondent, of the whole of its interest in the project for an amount not less than $350,000,000 are all events of which the appellant should be expected to become aware. While it may be that there might be some dispute, for example, as regards the question whether or not the treatment plant has been commissioned (as has happened), even limited inquiries would be sufficient to enable the appellant to find out whether or not commissioning of the plant might have taken place. If it should come to the appellant's attention that commissioning might have taken place but, upon inquiry to the respondent, the appellant should be told that the plant had not in fact been commissioned (as seems also to have happened), it would be a relatively simple matter for the appellant to inquire upon what basis the respondent contended that this was so and, in the event of a dispute, whether as a result of a failure by the respondent to provide sufficient information in support of its denial or otherwise, the provisions of cl4.4 would have operation. Similar considerations hold true in respect of events (iii) and (iv).

[68] As to the notification to the respondent by the financiers to the project that the Bankers Acceptance Test has been satisfied, cl4.3 of the Settlement Deed requires the respondent to give notice to the appellant of the terms of that test immediately after they are agreed and also as soon as the financiers to the project have notified the respondent that the test has been satisfied. Moreover, by cl4.3(b), the respondent is to use its best endeavours to ensure that the Bankers Acceptance Test is satisfied in accordance with its terms at the earliest practicable date.

[69] As Parker J has pointed out, there are also express obligations upon the respondent, under cl4.2(a) of the Settlement Deed, to procure its auditors to determine the "Average LME Nickel Settlement Price" for the 12-month period ending on a Review Date, and also the Trigger Price, and to give notice of those figures to the respondent, providing information as to how those figures were arrived at and saying whether the Agreed Amount as at the Review Date is payable pursuant to cl4.1(b). Moreover, if no notice is issued by the respondent's auditors, notwithstanding the obligation to do so, then the appellant may, pursuant to cl4.2(b), procure its own auditors to issue such a notice. A mechanism for resolving disputes the subject of any such notice is provided for by cl4.2(c).

[70] Then, importantly, there are the provisions of cl4.4. That clause, as will be apparent, provides for the resolution of any dispute whether any of the events referred to in the definition of "Review Date" has occurred. A dispute of that kind may be referred to an independent expert if, after negotiating in good faith within seven business days after notice of dispute is given, the parties cannot agree on the disputed matter. If a dispute is so referred (and this can be done by either party), the respondent is obliged to give to the expert reasonable access to its records, insofar as they are relevant to the dispute, so long as the expert first undertakes to maintain their confidentiality.

[71] In these circumstances, it seems to me to be very difficult to contend that the appellant's contractual benefits under the Settlement Deed will be withheld, or that performance under that deed will be prevented, or that the appellant's contractual entitlements will otherwise be rendered illusory unless the appellant is provided with the documents and information necessary to enable it to determine for itself whether an entitlement to the Agreed Amount has arisen or whether an event has occurred which might in time prove to be relevant to an entitlement to the Agreed Amount. The Settlement Deed spells out in what circumstances the appellant is to have its contractual benefit, and the circumstances in which the respondent is to perform, and it takes into account, specifically, the prospect of a dispute of the kind which has arisen, or which might arise, and provides a mechanism for its resolution which deals expressly with the provision of relevant information.

[72] Counsel for the appellant contended, in this last respect, that there can be no negotiations in good faith between the parties, for the purposes of cl4.4, in the absence of full information. However, I do not accept that that is so. I have already said that three of the four events referred to in the Deed are events of which the appellant should be expected to become aware and that there are detailed provisions requiring notification in respect of the fourth event. While it may be true, as Parker J recognised, that the appellant's negotiating position might be made more difficult by virtue of the absence of information (and there has, as yet, been no attempt to negotiate), this cannot lead to the consequence that a requirement of the kind contended for must be implied, when regard is had for what the parties have expressly agreed upon. Like Parker J, it seems to me that a requirement of the kind contended for would, in the context of this agreement, impose an unwarranted and unreasonable obligation on the respondent and would not demonstrate a want of appropriate cooperation in achieving the contractual objects or a failure to comply with honest standards of conduct or with standards of conduct which are reasonable having regard to the interests of both parties.

[73] Consequently, like Parker J, I am not persuaded that, if a term of good faith is to be implied by law into the Settlement Deed, it would be an incident of that term that the respondent should provide to the appellant the information and documents which it seeks.

...}}

Source

Central Exchange Ltd v Anaconda Nickel Ltd
[2002] WASCA 94
Unreported Judgment Number: BC200201935
www.lexisnexis.com}}