- NSWSC 483
- Supreme Court of New South Wales
- Alcatel Australia Ltd. v. Scarcella & Ors
LONG-TERM CONTRACTS - LEASE CONTRACT - BETWEEN AN AUSTRALIAN COMPANY AND THREE AUSTRALIAN CITIZENS - GOVERNED BY AUSTRALIAN LAW
CONTRACT PERFORMANCE - IMPLIED DUTY OF GOOD FAITH (ART. 1.7 UNIDROIT PRINCIPLES)
The dispute arose between tenants and landlord over a long term rental agreement. Tenants urged the Fire commissioners to have the building declared unsafe and compel compliance with modern standards. Landlords argued that such behaviour was a breach of the implied duty of good faith.
The Court held that the tenants had not breached their duty of good faith in their performance of the contract by calling in municipal authorities to investigate fire safety conditions. In reaching this conclusion, the Court cited with approval the analysis on the principle of good faith carried out by the Australian Federal Court in Hughes Aircraft Systems International v. Airservices Australia (see UNILEX UNIDROIT Principles, C. 1997-6), in which an express reference to Art. 1.7 of the UNIDROIT Principles had been made.
In summary terms, the appellant claimed that because the respondents had pressured the Council into imposing stricter and unreasonable fire requirements, it was not obliged to comply with covenant 2 (f) of the lease. This result flowed from an implied term of good faith or reasonableness in the respondents' performance of their lease obligations or exercise of their lease rights which bound them to co-operate in a reasonable way to ensure that the appellant was not subjected to the expense and impact of an unreasonable fire order.
The appellant relied upon the reasons for judgment of Priestley JA in Renard Constructions (ME) Pty Limited v Minister for Public Works (1992) 26 NSWLR 234 at 255 and following and of Finn J in Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1 at 36 and following. In Renard Constructions, a clause in a building contract empowered the principal to take over the whole or any part of the work or to cancel the contract if the contractor neglected to comply with any direction given by the principal, however minor, accidental or temporary that neglect might be, and regardless of the importance or otherwise of the subject matter. Priestley and Handley JJA held that the power so conferred on the principal must be exercised reasonably. Priestley JA at 255-6 used the terms "implication in fact" and "implication by law". His Honour said that the so-called implication in fact is really implication by the Judge based on the Judge's view of the actual intention of the parties drawn from the surrounding circumstances of the particular contract, its language and its purposes, as they emerge from the language and in the circumstances or, as it has been called, implication ad hoc. The rules governing such implication are found in BP Refinery (Westernport) Pty Limited v Hastings Shire Council, Secured Income Real Estate (Australia) Limited v St Martins Investments Pty Limited (1979) 144 CLR 596 and Codelfa Construction Pty Limited v State Rail Authority of New South Wales (1982) 149 CLR 337. Priestley JA said at 256:
Those rules are that the implied term must be reasonable and equitable; necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; so obvious that `it goes without saying'; capable of clear expression; and must not contradict any express term of the contract; see United States Surgical Corporation v Hospital Products International Pty Limited  2 NSWLR 157 at 196, and in the same case on appeal, Hospital Products International Pty Limited v United States Surgical Corporation (1984) 156 CLR 41 at 66 per Gibbs CJ."
Implication by law is based on imputed intention as opposed to actual intention, and implies a term as a legal incident of a particular class of contract; Castlemaine Tooheys Limited v Carlton & United Breweries Limited (1987) 10 NSWLR 468 at 486-490 per Hope JA, with whom Samuels and Priestley JJA agreed. In Renard Constructions, Priestley JA at 263 implied "reasonableness in performance" in the exercise of the contractual power to take over or cancel the contract. His Honour said at 263-4:
The kind of reasonableness I have been discussing seems to me 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 contract. Although this implication has not yet been accepted to the same extent in Australia as part of judge made Australian contract law, there are many indications that the time may be fast approaching when the idea, long recognised as implicit in many of the orthodox techniques of solving contractual disputes, will gain explicit recognition in the same way it has in Europe and the United States."
Section 1-203 of the United States Uniform Commercial Code provides:
"Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement."
Section 1-201 (19) defines "good faith" as "honesty in fact in the conduct or transaction concerned". Section 2-103 (1) (b) 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." Section 205 of the Restatement of Contracts, 2nd, provides:
"Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement."
Priestley JA referred to the published lecture of Steyn J, The Role of Good Faith and Fair Dealing in Contract Law: A Hair-Shirt Philosophy? (1991) Denning Law Journal 131.
Handley JA at 279-80 said that he agreed generally with "much of what Priestley JA has written" on the issue and pointed to three other matters which supported the existence of some restraint on the exercise of power apart from the normal requirement of honesty; the contractor's opportunity to show cause, the necessary satisfaction of the principal and the comprehensive provision for arbitration. His Honour cited Hillas & Co Limited v Arcos Limited (1932) 38 Com Cas 23 at 43-44 where Lord Wright referred to "..... the legal implication in contracts of what is reasonable, which runs throughout the whole of modern English law in relation to business contracts" and Minster Trust Limited v Traps Tractors Limited  1 WLR 963 at 973 where Devlin J said:
"....... there may be a question (again depending upon the implication to be drawn from the contract) whether the dissatisfaction must be reasonable, or whether it can be capricious or unreasonable so long as it is conceived in good faith ...... The tendency in modern cases seems to be to require the dissatisfaction to be reasonable."
His Honour also referred to Stadhard v Lee  3 B & S 364; 122 ER 138 at 371-2; 141 and Amann Aviation Pty Limited v Commonwealth of Australia (1990) 22 FCR 527 at 532, 542-4 and in the High Court, now (1991) 174 CLR 64. In Hughes Bros Pty Limited v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (1993) 31
NSWLR 91 Kirby P and Priestley JA applied Renard Constructions. Kirby P said at 93 that he was bound by the decision.
In Hughes Aircraft, Finn J at 36 referred to the judgment of Gummow J in Service Station Association Limited v Berg Bennett & Associates Pty Limited (1993) 45 FCR 84 at 96 where his Honour, after considering the acceptance by North American jurisprudence of an implied duty of good faith and fair dealing, observed:
"Anglo Australian contract law as to the implication of terms is heretofore developed differently, 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 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 forfeiture 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."
Finn J was prepared to take that leap encouraged by the reasoning of Priestley JA. At 37 his Honour said:
"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 & D Friedmann (eds), `Good Faith and Fault in Contract Law', Clarendon Press, Oxford, 1995; for a convenient collection of some of the voluminous literature in the United States debating the meaning of the implied duty, see Farnsworth on Contracts, Vol 2, Little, Brown & Co, Boston 1990, para 7.17 (a); for an English view see eg Right Hon Lord Justice Staughton, `Good Faith and Fairness in Commercial Contract Law' (1994) 7 Jo Contract Law 193; and see Livingstone v Roskilly (1992) 3 NZLR 230 at 237-8. Its status in civil law is well recognised: see eg H K Lucke, `Good Faith and Contractual Performance' in P D Finn (ed) `Essays on Contract', Law Book Company, Sydney 1987; J F O'Connor `Good Faith in English Law', Dartmouth, 1990, Ch 8. It has been propounded as a fundamental principle to be honoured in international commercial contracts: see eg UNIDROIT, `Principles of International Commercial Contracts', International Institute for the Unification of Private Law, Rome 1994, Art 1.7. Its more open recognition in our contract law is now warranted: compare 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 the contract laws apparent orthodoxies: see eg Lucke above pp 177 and following.
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. It may well be that, on analysis, that standard would be found to advance little the standard that presently may be exacted from contracted parties by other means: compare the standard applied in Conoco v Inman Oil Co 774 F 2d 895 (1985) at 908. But setting the appropriate standard of fair dealing is, in my view, another matter altogether from acceptance of the duty itself."
With great respect, there is much to be said for a generalisation of universal application, an ideal which the High Court has pursued and sometimes achieved in other areas of the law, such as the reach of the duty of care in the law of negligence and the principles of estoppel. But equally the determination of the appropriate standard of fair dealing in the particular contractual context is difficult, though probably no more difficult than identifying general standards set by such legislation as the Trade Practices Act 1975 (misleading and deceptive conduct and unconscionable conduct) and the Contracts Review Act 1980 (unjust and hence, unconscionable, contracts).
Finn J went on to deal with the question whether in that case the type of contract or the relationship of the parties or both might require the implication as a matter of law. In this part of his reasons for judgment his Honour touched, at 38, upon the requirement of "necessity" explained by McHugh and Gummow JJ in Byrne v Australian Airlines Limited (1995) 185 CLR 410 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, unless such a term be implied, the enjoyment of the rights conferred by the contract would or could be rendered nugatory, worthless, or, perhaps, be seriously undermined. Hence, the reference in the decisions to `necessity' ...... This notion of `necessity' has been crucial in the modern cases in which the courts have implied for the first time a new term as a matter of law."
In Gateway Realty Limited v Arton Holdings Limited (No 3) (1991) 106 NSR (2d) 180 Kelly J at 192 held in apparently general terms that contracting parties are obliged to exercise their rights under an agreement honestly, fairly and in good faith. "In most cases, bad faith can be said to occur when one party, without reasonable justification, acts in relation to the contracts in a manner where the result would be to substantially nullify the bargained objective or benefit contracted for by the other, or to cause significant harm to the other, contrary to the original purpose and expectation of the parties"; 197.
In Livingstone v Roskilly (1992) 3 NZLR 230 at 237 Thomas J stated that, in general, the concept that "the parties to a contract must act in good faith in making and carrying out the contract" is part of the law of New Zealand. In his 1993 Cambridge Lecture, to which Finn J referred, Sir Anthony Mason commented that this may be going too far and doubted that the House of Lords would endorse it; see Walford v Miles  2 AC 128 at 136-8.
On the other hand, in Dorrough v Bank of Melbourne (1995) (unreported) Federal Court of Australia, 27 September 1995, Cooper J said, that in the light of a number of authorities to which he referred:
"..... it is not open to this Court to hold that a contract of insurance (except by virtue of the provisions of s13 of the Insurance Contracts Act 1994 (C'th) nor here relevant) contains an implied term that the parties will deal fairly and in good faith. Nor is there in this jurisdiction any general principle by which a duty of good faith is implied in every contract".
In GSA Group Limited v Siebe (unreported) Supreme Court of New South Wales, 24 April 1993, Rogers CJ CommD was not persuaded to accept that commercial interest should be required to act in good faith towards each other.
"......why should commercial entities each with strong bargaining power, not be permitted to drive the best bargain they can, provided that they act within the law? "The courts should not be too eager to interfere in the commercial conduct of the parties, especially where the parties are all wealthy, experienced, commercial entities able to attend to their own interests."
His Honour referred to the increasing expectation in consumer contracts that the stronger party in the transaction will behave fairly, an expectation fostered or enforced by legislation such as the Credit Act 1984 (NSW) and the Contracts Review Act 1980 (NSW). However the Chief Judge accepted:
"It is likely that, ultimately, Australian courts will embrace the American and civil law concept of the obligation that each contracting party should show good faith in the performance of contractual obligations. However the present case is not one where, even if such an obligation is implied, in the usual course of events, it should be implied, or even if implied would have the effect sought by the plaintiffs."
English writing at the time while on occasion receptive to the principle of good faith performance, did not advocate a generalized duty of good faith; see the lecture of Steyn J referred to by Priestley JA in Renard Constructions.
In his 1993 Cambridge Lecture, Sir Anthony Mason said that he thought it probable that the "concept of good faith" embraced no less than three related notions:
(1) an obligation on the parties to co-operate in achieving the contractual objects (loyalty to the promise itself);
(2) compliance with honest standards of conduct; and
(3) compliance with standards of contract which are reasonable having regard to the interests of the parties.
The movement away from the classical concept in contract law was towards one which focused on the reasonable expectations of the parties. In particular areas of the law this was not new. The common law imposed a duty of good faith in insurance contracts based on what the insured knows and the insurer does not and cannot. Another aspect of this was the rule that an insurer settling claims under a limited liability policy must act in good faith towards the insured and must have regard to his or her interests both in the defense of actions against the insured and in their settlement; Distillers Co Biochemicals (Aust) Pty Limited v Ajax Insurance Co Limited (1974) 130 CLR 1 at 31 and Fredrikson v Insurance Corporation of British Columbia (1990) 69 DLR (4th) at 431.
In contracts for the sale of land the vendor is under a duty to disclose material matters relating to the title which are known to the vendor but which the purchaser has no means of discovering; Carlish v Salt  1 Ch 335; Beyfus v Lodge  Ch 350 at 359; In re Scott & Alvarez's Contract  2 Ch 603 at 612. Other examples of cases where a party is required to take account of the interests of another party are:
* the mortgagee's exercise of a power of sale;
* majority shareholders acting honestly and having regard to the interests of the company; Peters American Delicacy Co Limited v Heath (1938) 61 CLR 457;
* the directors of an insolvent company or one verging on insolvency in disposing of assets to the detriment of creditors; Walker v Wimborne (1976) 137 CLR 1 at 7;
* the doctor who advises a patient in relation to proposed treatment; Rogers v Whitaker (1992) 175 CLR 479 (compare Sidaway v Governors of Bethlem Royal Hospital  AC 871);
* the application of the principles of equity governing fiduciaries;
* undue influence and unconscionable conduct in estoppel, including promissory estoppel; and
* the duty to refrain from making misrepresentations.
Moreover, the common law imposes a duty on the parties to a contract to co-operate in achieving the objects of the contract. See Mackay v Dick (1881) 6 App Cas 251 at 263; Secured Income Real Estate (Australia) Limited v St Martins Investments Pty Limited (1979) 144 CLR 596 at 607; Perri v Coolangatta Investments Pty Limited (1982) 149 CLR 537; Meehan v Jones (1982) 149 CLR 571. Sir Anthony Mason said that such cases come close to a recognition of the good faith doctrine described as "loyalty to the promise itself". But such an obligation cannot override the express provisions of the contract.
If a contract confers power on a contracting party in terms wider than necessary for the protection of the legitimate interests of that party, the courts may interpret the power as not extending to the action proposed by the party in whom the power is vested or, alternatively, conclude that the powers are being exercised in a capricious or arbitrary manner or for an extraneous purpose, which is another was of saying the same thing. Thus, a vendor may not be allowed to exercise a contractual power where it would be unconscionable in the circumstances to do so; Pierce Bell Sales Pty Limited v Frazer (1973) 130 CLR 575 at 587.
Sir Anthony Mason was of the view that due partly to the absence of good faith doctrine regulating contract performance it had become the subject of statutory regulation such as is found in the Contracts Review Act 1980 and the Trade Practices Act 1975. But see also Commercial Bank of Australia v Amadio (1983) 151 CLR 447; Taylor v Johnson (1983) 151 CLR 422 and Legione v Hateley (1982) 152 CLR 406. Part of this development is the fiduciary principle. However, that principle cannot be superimposed upon the contract in such a way as to alter the operation which that contract was intended to have according to its true construction; Hospital Products Limited v United States Surgical Corporation & Ors (1984) 156 CLR 41 at 97 and Kelly v Cooper  AC 205 at 215.
Steyn J in the lecture to which I have referred said that the first imperative of good faith and fair dealing is that contracts ought to be upheld. In Kirke La Schelle Co v Paul Armstrong Co 188 NE 163 (1993) the New York Court of Appeals said at 167:
"......in every contract there is an implied covenant that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract, which means that in every contract there exists an implied covenant of good faith and fair dealing."
See also Wood v Lucy Duff-Gordon 222 NY 88 per Cardozo J. In Royal Brunei Airlines SdnBhd v Tan  2 AC 378 at 381 the proper role of equity in commercial transactions and the desirability of the infusion of minimum standards of fairness, good faith and good conscience into our law, were described simply as "topical questions". Gleeson CJ, in an article entitled "Individualised Justice - The Holy Grail" 1995 69 ALJ 421 at 428, remarked that "for a number of reasons, some to do with the work of legislatures, some to do with judicial law making, and some to do with the temper and spirit of the times, we can no longer say that, in all but exceptional cases, the rights and liabilities of parties to a written contract can be discovered by reading the contract."
The decisions in Renard Constructions and Hughes Bros mean 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. There is no reason why such a duty should not be implied as part of this lease. But it remains to decide whether the implication of that duty has any consequence in the resolution of the dispute the subject of this appeal.
The trial Judge voiced his concern at a tenant's being left at the mercy of the landlord acting in a capricious manner but recognized that a claim for indemnity to meet unreasonable requirements of a fire order might to that extent fail. This may or may not be correct. But the appellant has not demonstrated that the requirements of the fire order were unreasonable.
The legislature has prescribed a procedure for challenging a fire order in the Land and Environment Court. That procedure has not been adopted, a problem to which the appellant directed grounds 5 and 9 of the appeal. The application to the Equity Division for an order authorising the appellant to make application to the Land and Environment Court for an order that the name of the appellant as applicant be substituted for the names of the respondents as applicants was doomed to failure. The fate of such an application was entirely a matter for the Land and Environment Court. The authority sought could not affect the matter and was entirely futile. In any event, there was evidence that the other party would oppose it.
Unchallenged, the law requires that the Council fire order be complied with. There is no evidence to suggest that the order was unreasonable in a way which might have led, on an appropriate application of administrative law, to its being struck down. The evidence was that its terms fell within the recommendations of Mr McMonnies, a qualified fire engineer with twenty years experience. His report was not challenged either by cross-examination or the evidence of some other expert. No doubt, for this reason, late in the day counsel for the appellant sought to bring Mr McMonnies before Windeyer J on a subpoena. As a matter of discretion, Windeyer J refused to issue a subpoena. No reason is shown to suggest that this exercise of discretion miscarried. While it might be thought that the events leading up to the imposition of the fire order were unusual that is a long way from saying that the Council, acting at the behest of the respondents in imposing requirements which fell within Mr McMonnies' recommendations, acted so unreasonably that the fire order was bad.
The result is that, in my opinion, the grounds of appeal relied on whether expressed as a requirement of an implied term in the contract or as allegations of unconscionable conduct by the respondents fail. In a commercial context it cannot be said, in my opinion, that a property owner acts unconscionably or in breach of an implied term of good faith in a lease of the property by taking steps to ensure that the requirements for fire safety advised by an expert fire engineer should be put in place. It was the duty of the Council to ensure that adequate provision for fire safety was made in the building (s317D of the Local Government Act 1919) and the contractual duty of the appellant to observe and perform the requirements of the Council, if lawful, and to do and execute or cause to be done and executed such works as were required by the Council. The respondents had a legitimate interest in ensuring that the building was properly protected. If the respondents felt that the Council requirements were insufficient, as it had been advised, I can see no reason why they should not press for more stringent requirements.
In my opinion, the appeal fails and accordingly, the second appeal should be dismissed with costs.
Both appeals are dismissed with costs.
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