Week 11 – Contracts

Implied Terms

& Duty of Good Faith

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Identifying Implied Terms

Implied Terms Terms can be implied

By law In fact By custom

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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’

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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

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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.

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Implied Terms

Terms Implied in Fact Criteria differ for formal and informal

contracts

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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

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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

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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.

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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)

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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

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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

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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

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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

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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

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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

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Duty of Good Faith

Content of Duty Cooperation Fairness

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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

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Duty of Good Faith

Fairness Exercise of contractual power should be

undertaken honestly and reasonably

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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

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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

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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

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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

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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.

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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.

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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