-  NSWCA 268
- Supreme Court of New South Wales - Court of Appeal
- Macquarie International Health Clinic Pty Ltd v. Sydney South West Area Health Service i
ADMINISTRATIVE CONTRACTS - MEMORANDUM OF UNDERSTANDING - BETWEEN AN AUSTRALIAN COMPANY AND AN AUSTRALIAN GOVERNMENT ENTITY - UNIDROIT PRINCIPLES REFERRED TO AS A MEANS OF INTERPRETING APPLICABLE DOMESTIC LAW (AUSTRALIAN LAW)
HEADS OF AGREEMENT REQUIRING PARTIES "TO ACT WITH UTMOST GOOD FAITH" IN THE PERFORMANCE OF THE CONTRACT - COMMITMENT ENFORCEABLE - REFERENCE TO ART. 1.7 UNIDROIT PRINCIPLES
Plaintiff, an Australian company, entered into a "Heads of agreement" with Defendant, an Australian Government Entity, for the development of a private hospital on land owned by the latter. The parties expressly agreed that the proposed private hospital be located next to and physically linked to a major public hospital. The Heads of agreement required the parties “to act with the utmost good faith in the performance of their respective duties, in the exercise of their respective powers, and in their respective dealings with one another”. The parties entered into other agreements in accordance with the Heads of agreement.
Defendant subsequently undertook an asset strategic plan, which did not propose any linkages between the public hospital to the planned private hospital. The asset strategic plan was not disclosed to Plaintiff.
Plaintiff claimed that Defendant, by not disclosing the asset strategic plan during negotiations for the other agreements, had breached its obligation of good faith as set out in the Heads of agreement.
The NSW Court of Appeal decided that the obligation of good faith in the Heads of agreement was enforceable. The Court held that the obligation of good faith required Defendant to disclose information regarding its planning processes (including its asset strategic plan) when such information would have made a substantial difference to Plaintiff’s reasonable expectations under the Heads of agreement. In this respect Allsop J referred, among others, to Article 1.7 UNIDROIT Principles as a factor confirming an increasing recognition at international level of the principle of good faith and fair dealing.
On 18 September 1989, Heads of Agreement (HOA) were signed by the appellant Macquarie, its ultimate holding company Macquarie Health Corporation Ltd (MHC) and the respondent Area Health, making provision for the development by MHC and/or Macquarie of a 200-bed private hospital and a car park on land included in land of the Royal Prince Alfred Hospital (RPAH) owned by Area Health, and for leases to be granted to Macquarie over the site for the proposed hospital and car park.
From early 1995 through to the end of 1996, MHC was seeking Area Health’s agreement to proceed with a smaller hospital, and on 2 December 1996 the following six agreements were executed by Macquarie (with MHC as guarantor) and Area Health:
A Construction Deed for the design and construction by Macquarie of a car park and private hospital.
A Car Park Lease from Area Health to Macquarie and Area Health as tenants in common in equal shares for a term of 103 years.
A Car Park Sub-Lease under which Area Health let its interest as co-lessee under the Car Park Lease to Macquarie for 28 years.
A Hospital Lease from Area Health to Macquarie for a term of 103 years.
A Car Park Management Agreement under which Macquarie agreed to manage and operate the car park.
A Co-Ownership Deed which regulated the respective rights and obligations of Area Health and Macquarie between themselves as co-owners of the car park.
Under cll 15.4 of the HOA, 10.8 of the Construction Deed, 19.13 of the Car Park Lease and 20.13 of the Hospital Lease, Macquarie and Area Health were obliged to act with the utmost good faith in the performance of their respective duties, in the exercise of their respective powers, and in their respective dealings with one another. Under cl 3.5 of the Construction Deed, if Macquarie failed to comply with the contractual timetable, it obliged to deposit with Area Health a sum equal to the rent for the period of the delay. Under cl 9.1 of the Construction Deed, Macquarie indemnified Area Health against loss arising from Area Health doing anything which Macquarie “must do under this deed but has not done or has not done properly”.
Under clause 2.2 of the Car Park Lease, on 14 February 1999, Macquarie was obliged to pay to Area Health an amount which varied according to whether the car park had been completed at that date. Clause 1.5 of the Car Park Lease and cl 1.5 of the Hospital Lease stated that the provisions of the HOA “merge in the grant of this lease”. Clause 16 of the Car Park Lease and cl 17 of the Hospital Lease stipulated the contractual procedures governing termination, including provision of notices as well as steps open to Macquarie to prevent termination.
A crucial aspect of the project was the co-location of RPAH and the proposed private hospital requiring a physical link between RPAH and the private hospital, which required placement of the private hospital to the west of King George V Hospital (which is part of RPAH and located west of a road called Missenden Road).
In mid-1994, Area Health appointed consultants to undertake an asset strategic plan for RPAH. A draft plan of 29 November 1994 did not propose any development of RPAH to the west of Missenden Road or any linkages to the proposed private hospital. Redevelopment of RPAH continued to be discussed and pursued by Area Health and the Department of Health in 1995, based on the asset strategic plan. These plans were not disclosed to Macquarie prior to February 1995.
From about March 1996, Mayne Nickless Ltd trading as Health Care of Australia (HCoA) began developing a project for a Sydney University private hospital (SUPH), on a site adjoining RPAH. On 15 August 1996, Dr Horvath (CEO of Area Health) was informed of SUPH, and on 16 August 1995, Area Health sought legal advice concerning the scope of cl 3.1(r) of the HOA which prohibited Area Health, within five years of the date of first admission of Macquarie’s private hospital, from recommending, supporting or approving another private hospital which Macquarie reasonably believed would materially adversely affect the revenue derived from its hospital.
A dispute arose as to Macquarie complying with the contractual timetable, and by 15 September 1999, Area Health served on Macquarie notices of default under the Leases and the Construction Deed. On 17 March 2000, Area Health served notices of termination of the Leases and Construction Deed, and took possession of the land. The notices of default specified the same events of default, the two presently relevant being:
Failure to comply with cl 2.2 of the Car Park Lease by not paying Area Health the amount of $1,440,000.
Failure to comply with cl 3.5 of the Construction Deed by not depositing a sum equal to rent at a rate of $33,000 per month for a specified period.
Section 7 of the Conveyancing Act 1919 (the Act) defines “rent” to include yearly or other rent, toll, duty, royalty, or other reservation by the acre, the ton, or otherwise; and defines “fine” to include a premium or foregift, and any payment, consideration, or benefit in the nature of a fine, premium, or foregift.
Under s 129 of the Act, a right of re-entry or forfeiture under any proviso or stipulation in a lease, for breach of any covenant in the lease, shall not be enforceable unless and until the lessor serves a notice specifying the particular breach, requiring remedy (or claiming monetary compensation where the breach is not remediable), and the lessee fails within a reasonable time to remedy the breach (or pay the money). Under sub-s (8), s 129 does not affect the law relating to re-entry or forfeiture or relief in case of non-payment of rent.
Macquarie sued Area Health for recovery of possession of the land, and in the alternative for relief against forfeiture and/or damages; and Area Health cross-claimed for certain debts and for damages. The primary judge gave judgment for Area Health on Macquarie’s claim, and judgment for Area Health on Area Health’s cross-claim.
Macquarie appealed from the whole of the primary judge’s decisions and Area Health cross-appealed from specific parts of both decisions.
The place of good faith in the law of contract in Australia has been debated in recent years. One significant aspect of that debate has been the place of good faith in the implication of terms in contracts (whether as a matter of fact or law and whether in contracts generally or in those of a commercial character) and in the construction and interpretation of written agreements.
It is unnecessary to discuss many of these issues, because the parties have clearly expressed themselves. The “utmost good faith” was agreed in their various legal instruments to be the standard of mutual behaviour expected in how the parties acted towards each other:
(a) in the performance of their respective duties;
(b) in the exercise of their respective powers; and
(c) in their respective dealings with each other.
These clauses should not be read narrowly. By the encompassing reference to “in their respective dealings” in contracts preliminary to or concerned with dealings over an anticipated century of a commercial relationship, the parties can be seen to have been laying down a high standard of contractual fair dealing that they expected of each other.
The content of the clauses is to be understood and ascertained by construing the language of the parties in the context in which the clauses appear. They are contractual terms to be construed, like any other. Here, the commercial and contractual relationship was envisaged to be (in the transaction documents) for a century. This was also envisaged in the Heads of Agreement, although that contract was preliminary to the formation of others. The performance of the agreements required planning by both parties, consultation among the parties and the expenditure of very large amounts of money upon planning and building work and the operation of a significant hospital in proximity to, and in connection with, a large hospital of the other party. The parties can be seen, by the clauses providing for the utmost good faith, to have required honesty and fair dealing of a high standard to govern their contractual behaviour.
The phrase “good faith”, or here, “utmost good faith”, takes its content from the particular contract and context in which it is found. It is, however, a phrase with ready available content as an English phrase and a legal expression. In a fiduciary or trust context, the phrase takes its content from the necessary trust, vulnerability and reliance central to such relationships and otherwise from the well-known incidents of such relationships.
Here, there was no question of a trust, fiduciary duty, partnership or joint venture. Rather, there was a long-term commercial relationship envisaged, during which time the parties had bound themselves to act in a way that exhibited the expressed standard: the utmost good faith.
The notion of good faith in the performance of contracts is one established by a number of cases in this Court and is well-known to the law in both common law and civilian systems. It was part of the law merchant. It finds its place in international conventions. I repeat what I said in United Group Rail Services Ltd v Rail Corporation New South Wales  NSWCA 177; 74 NSWLR 618 at 634 :
“ ... [G]ood faith is not a concept foreign to the common law, the law merchant or businessmen and women. It has been an underlying concept in the law merchant for centuries: L Trakman, The Law Merchant: The Evolution of Commercial Law (Rothman 1983) at p 1; W Mitchell, An Essay on the Early History of the Law Merchant (CUP 1904) at pp 102 ff. It is recognised as part of the law of performance of contracts in numerous sophisticated commercial jurisdictions: for example Uniform Commercial Code §1-201 and § 1-203 (1977); Wigand v Bachmann-Bechtel Brewing Co 118 NE 618 at 619 (1918); E A Farnsworth, Farnsworth on Contracts (Aspen 3rd Ed 2004) Vol 1 at pp 391-417 § 3.26b; International Institute for the Unification of Private Law, UNIDROIT Principles of International Commercial Contracts 2004, Rome, Art 1.7 (www.unidroit.org [Ed. 3 May 2010]); R Zimmerman and S Whittaker (Eds) Good Faith in European Contract Law (CUP 2000). It has been recognised by this Court to be part of the law of performance of contracts: Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 263-270; Hughes Bros Pty Ltd v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (1993) 31 NSWLR 91; Burger King Corporation v Hungry Jack’s Pty Ltd at 565-574 -; and Alcatel Australia Ltd v Scarcella at 363-369. ...”
The usual content of the obligation of good faith that can be extracted from Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234, Hughes Bros Pty Ltd v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (1993) 31 NSWLR 91, Burger King Corporation v Hungry Jack’s Pty Ltd  NSWCA 187; 69 NSWLR 558; Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349 and United Group Rail Services Limited v Rail Corporation New South is as follows:
(a) obligations to act honestly and with a fidelity to the bargain;
(b) obligations not to act dishonestly and not to act to undermine the bargain entered or the substance of the contractual benefit bargained for;
(c) an obligation to act reasonably and with fair dealing having regard to the interests of the parties (which will, inevitably, at times conflict) and to the provisions, aims and purposes of the contract, objectively ascertained.
None of these obligations requires the interests of a party to be subordinated to those of the other. It is good faith or fair dealing between arm’s length commercial parties by reference to the bargain and its terms that is called for.
It is important to recognise that these obligations must be assessed and interpreted in the light of the bargain itself and its contractual terms. Those terms, however, must be assessed and interpreted in the light of the presence of the obligation of good faith, here pursuant to an express clause.
Whilst the cases in this Court have tended to equate or incorporate reasonableness with or into fair dealing and good faith, that is not without its controversy: E Peden, Good Faith in the Performance of Contracts (LexisNexis Butterworths 2003) Ch 7 esp pp 162ff and see E A Farnsworth, Farnsworth on Contracts (Aspen 3rd Ed 2004) Vol 2 at §7.17b p 400. Nevertheless, in these contracts, with express clauses of this width that have a necessary place in the working out and performance of the contracts, in some cases over many years, an objective element of reasonableness in fair dealing is appropriate, taking its place with honesty and fidelity to the bargain in the furtherance of the contractual objects and purposes of the parties, objectively ascertained.
Further, in contracts such as these in a context such as this, the obligation of utmost good faith necessarily requires for its fulfilment a degree of co-operation between the parties in a reasonable way in the furtherance of their contractual objectives. It is both appropriate and necessary to assess such matters with a degree of objectivity as well as considering a party’s honesty. Depending on the facts as they arise, the necessary co-operation may require, as here, a party to disclose information to the other, listen to the other and negotiate in good faith about the working out of the contract in its living performance.
The standard of fair dealing or reasonableness is to be applied recognising the different interests of the parties and the lack of necessity for parties to subordinate their own interests to those of the counterparty. That a normative standard is introduced is clear. That is what the commercial parties chose by their words. The normative standard of good faith will not call for the same acts from all contracting parties in all cases. The legal norm should not be confused with the factual question of its fulfilment or breach. The contractual and factual context is vital to understand what, in any case, is required to be done or not done to satisfy the normative standard. Here, the standard exists as an express term in a particular contract, which, to be satisfied, called for certain conduct of one party in the circumstances that arose.
The law of insurance has had a well-known and well-understood usage of the phrase ”utmost good faith” for over two centuries. It is an obligation that binds both insurer and insured. It is an obligation that has assisted in the efficient working of insurance markets in a practical way. In particular, the commercial working of the relationship between insurer and insured requires the (pre-contractual) disclosure of material information in order that the risk can be assessed and priced on a sound footing and with appropriate despatch. Care should be taken not to transpose the meaning of the phrase in that commercial context to other contexts, whether as a matter of law or mere equivalence. Nevertheless, it is an example of positive disclosure of information being the step necessary to satisfy the normative legal standard. Of course, in statutes such as the Marine Insurance Act 1909 (Cth) disclosure is part of the expression and exemplification of the duty of the utmost good faith (see the Marine Insurance Act, s 24), not merely the fact sufficient to discharge the obligation.
It is unnecessary to deal with the jurisprudence on the subject in other jurisdictions, beyond saying that the above expression of the matter is consistent with the content ascribed to the phrase, “good faith” in persuasive cases in influential jurisdictions in the United States: for example, refraining from acting with subterfuge and evasion: Daitch Crystal Dairies Inc v Neisloss 190 NYS 2d 737 (Appeal Div 1959); Harbor Insurance Co v Continental Bank Corp  USCA7 69; 922 F.2d 357 (7th Cir 1990); refraining from opportunistic conduct such as by taking advantage of a disadvantageous position of the other party who has performed first: Industrial Representatives, Inc v CP Clare Corp  USCA7 9; 74 F.3d 128 (7th Cir 1996); refraining from hindering or preventing the occurrence of conditions of the party’s own duty or the performance of the other party’s duty: see the discussion in Farnsworth on Contracts at § 7.17 p 362 and § 8.6 and 8.15; co-operating to achieve the contractual goals: Larson v Larson 636 NE 2d 1365 (Mass App Ct 1994); AMPAT/Midwest v Illinois Tool Works Inc  USCA7 125; 896 F.2d 1035 (7th Cir 1990). See generally, Farnsworth on Contracts at § 7.17-7.17b. The above are but a few examples. It is unnecessary, for present purposes, to go further than recognising that the elements of the phrase that can be drawn from the cases in this Court conform with accepted jurisprudence in common law jurisdictions in the United States where the obligation is recognised.
It follows that in my opinion Macquarie is entitled to an order for possession of Lots 11 and 12, and also, at its election, to an inquiry as to damages or an account from Area Health of car parking fees; while on its cross-claim, Area Health is entitled to $21,260 plus interest, $300,393.18 plus interest and $9,645 plus interest (being items required to satisfy the conditions of the car park approval), and also $22,795.60 plus interest and $35,113.56 plus interest, to which no separate challenge was made.