2 Implied terms
The implied duty of co-operation
In a famous passage, Chief Justice Griffith stated in Butt v. M'Donald:
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.
This passage, which has been endorsed by the High Court, appears to impose a wide, uncertain obligation on contacting parties to have regard to each other's interests. It is therefore frequently relied upon by parties seeking to avoid the literal impact of their contracts, and was considered in three appellate judgments last year.
The Victorian Court of Appeal gave careful consideration to this implied term in Adaz Nominees Pty Ltd v Castleway Pty Ltd, and also considered a related implied term that a party will not hinder or prevent the fulfilment of the purpose of the express promises in the contract. The court emphasised that the purpose of the implied term was to ensure that each party receives the benefit of its contract, rather than being a wider obligation to act in another party's interests. It also emphasised that the test of 'necessity' does not only explain the existence of terms implied by law but also 'the circumstance which must be 'demonstrated' for them to be operative', and that such necessity can be demonstrated if the enjoyment of rights conferred by the contract would otherwise 'be rendered nugatory, worthless, or, perhaps, seriously undermined'. The court held that the contract did contain such an implied term and that it had been breached, after rejecting an argument based on a term implied in fact.
In reaching its conclusion, the Victorian Court of Appeal mentioned that the implied duty to co-operate is conditioned by reasonableness, following the decision of the Queensland Court of Appeal in Wellington & ors v Huaxin Energy (Aust) Pty Ltd. In that case, the Queensland court also considered the leading authorities on the implied term (or rule of construction) of co-operation. The court emphasised that the duty to co-operate is '… not one to do all things necessary (in effect “to do whatever it takes”) to enable the other party to have the benefit of the contract, rather the scope of the implied duty is conditioned by the concept of reasonableness'. The court found that the relevant conduct pleaded by the appellants went beyond what was reasonably required by the implied term of co-operation. Reliance on the implied term of co-operation was also unsuccessful in Macquarie International Health Clinic Pty Ltd v Sydney Local Health District.
...the purpose of the implied term was to ensure that party receives the benefit of its contract, rather than being a wider obligation to act in another party's interests.
Implications of terms by fact
The implication of terms by fact was considered by the Queensland Court of Appeal in Glencore Coal Queensland Pty Limited v Aurizon Network Pty Ltd  QCA 182. In that case, parties to a contract purported to serve notices that enabled them to stop paying for segments of a rail network, despite the fact that they were still using them. The trial judge found that, although the contractual requirements for serving a notice were satisfied, serving the notice breached an implied (in fact) obligation of good faith. The Court of Appeal dismissed the appeal, but for different reasons from the trial judge. It held, as a matter of construction, that a notice could only be served if the segments were no longer required. In the alternative, the court would have implied a term (in fact) preventing service of a notice in relation to segments that were still required. Although it was not strictly necessary to consider the question, the court indicated that it would have been reluctant to find there was a breach of an implied duty of good faith.
16 (1896) 7 QLJ 68, at pp 70-71.
17 Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd  HCA 51; (1979) 144 CLR 596, which referred to the implied obligation to allow the other party to have the benefit of fundamental obligations under the contract
18 There is an academic debate whether this obligation is a term implied in law or should more properly be regarded as a rule of construction; a difference described by the High Court in Commonwealth Bank of Australia v Barker (2014) 253 CLR 169 at 187  as involving 'taxonomical distinctions which do not necessarily yield practical differences'.
19  VSCA 201.
20 Citing Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126 at .
21  QCA 114.
22  NSWCA 161.
Adaz Nominees Pty Ltd v Castleway Pty Ltd  VSCA 201
Principles of construction of commercial contracts – principles in relation to terms implied by law
In this case, the Victorian Court of Appeal considered the implied term that each party is obliged to do all things necessary to enable the other party to have the benefit of the contract and not hinder or prevent the fulfilment of express promises.
The court held that a substantial charitable donation that significantly impacted the remuneration payable to the other party to a contract was a breach of an implied term to do all things necessary to enable the other party to have the benefit of the contract. This had the effect of seriously undermining the value of the contract.
This case is significant because it highlights the existence and operation of an implied term in commercial contracts to do everything necessary to enable the other party to have the benefit of a contract and not to hinder or prevent the fulfilment of the purpose of express promises made in the contract. Although such an implied term will always be informed by the contract's express terms, it will be implied where deemed necessary to ensure the enjoyment of rights conferred by the contract.
In 2010, Castleway Pty Ltd entered into a property development and services agreement (the PDSA) with a group of companies associated with the Rado family, known as the 'TPC Group.' The PDSA appointed Castleway as the 'Manager', to provide property and development services to the TPC Group. Castleway's remuneration comprised a 'Service Fee', being a scaled percentage of the TPC Group's profit, and 'Commission', which was based on the number of projects introduced by Castleway to the TPC Group.
The PDSA was terminated on 29 June 2017. Immediately before the termination, Adaz Nominees Pty Ltd (one of the companies comprising the TPC Group) made a charitable donation of $20 million. This resulted in a significant $8 million reduction in the service fee that Castleway would be entitled to in relation to the 2016–17 financial year.
In proceedings before Justice Robson in the Supreme Court of Victoria, Castleway claimed that the making of the donation was the result of a conspiracy to injure Castleway, and a breach of directors' duties.
Justice Robson rejected the breach of duty and conspiracy claims as to the $20 million donation. His Honour considered whether there was an implied term in the PDSA that requires a party to do all things necessary on its part to enable the other party to have the benefit of the contract, and to act reasonably and in good faith so as not to frustrate or prevent the contract's purpose being fulfilled. His Honour also considered, in the alternative, whether such a term could be implied under the principles in the decision of BP Refinery v Hastings (1977) 180 CLR 266. In the end, Justice Robson held that, for the purpose of calculating the service fee, the PDSA did not permit expenses to be deducted from the TPC Group's profit that were not incurred in the normal course of business.
The matter was appealed to the Victorian Court of Appeal.
Justices Whelan and Riordan, who comprised the majority, agreed that the donation should be disregarded for the purpose of calculating the service fee.
In doing so, the majority rejected Justice Robson's finding that the PDSA contained an implied term that only expenses incurred in the course of the TPC Group's 'normal business activities' can be included in calculating the service fee payable to Castleway. There was no ambiguity in the express terms of the PDSA: all tax deductible expenses, including donations, must be taken into account in calculating the TPC Group's profit. To imply a term confining the relevant expenses to 'normal business activities' would contradict the express terms of the PDSA.
The majority did, however, consider there to be an implied term in the PDSA that a party allow the other party to have the benefit of the agreement. A number of authorities recognising such an implied term were discussed, with the court noting that the principle of 'necessity' was the rationale for such an implied term to be operative. This implied term is deemed necessary where, absent the implication, the enjoyment of the rights conferred by the contract would be nugatory, worthless or seriously undermined, or the contract would be deprived of its substance.
On this basis, the law will imply, in appropriate circumstances, a positive obligation to take action to enable another party to have the benefit of, and a negative covenant not to hinder or prevent, the fulfilment of the purpose of the express promises made in the contract. Such a term will be informed by the contract itself and cannot be used as a basis for imposing something commercially disadvantageous for which the contract does not provide.
In this regard, the court found the $20 million donation by Adaz Nominees to be a breach of this implied term. The donation was unprecedented and extraordinary. It was an action that necessarily had the effect of substantially reducing the TPC Group's profit, thereby preventing Castleway from having the benefit of the PDSA, and hindering the fulfilment of an express promise by depriving Castleway of a significant part of its remuneration. The donation seriously undermined and drastically devalued the benefit for which Castleway had contracted.
It follows that the implied term was breached because the conduct of Adaz Nominees prevented Castleway from deriving the intended benefit from the PDSA. The TPC Group was liable for a breach of contract.
Wellington & Ors v Huaxin Energy (Aust) Pty Ltd (formerly Cuesta Coal Limited) & Anor  QCA 114
Implied terms; implied duty of cooperation
In this case, the Queensland Court of Appeal considered the scope of the implied duty of cooperation and, specifically, whether this duty required the respondents to conduct certain exploratory works in relation to an exploration permit for coal.
The court held that there was no breach of contract, as the appellants failed to establish that the implied duty of cooperation required the respondents to conduct further exploratory work to enable the appellants to have the benefit of the contract.
This case is significant as it provides guidance on the scope of the implied duty of cooperation. While it is widely accepted that an implied duty of cooperation is in every contract, the court reinforced that this duty is qualified by the concept of 'reasonableness'. That is, the parties are only required to do what is reasonably necessary to enable the other party to have the benefit of the contract.
On or around 1 July 2009, Mr Wellington applied for an exploration permit for coal (EPC) over 45,000 hectares of land in the Galilee Basin, Queensland. The permit (referred to as EPC 1802) was granted in October 2010. Between applying for the permit and it being granted, the appellants, Mr Wellington, Mrs Wellington and Mr Fox, contracted with the respondents, Blackwood Exploration Pty Ltd and Blackwood Coal Pty Ltd (which was later replaced by Cuesta Coal Limited), for the sale of EPC 1802.
While there were various iterations of the contract of sale, under the final contract the respondents made a number of payments to the appellants, including a $50,000 cash component and two tranches of payments. The dispute in this case arose in relation to the third tranche of payment, which was payable conditional on EPC 1802 receiving a 'Measured Mineral Resource', which is a particular grade that refers to the level of confidence in the quality and quantity of an area's mineral resources.
Between January 2012 and October 2013, the second respondent conducted exploratory work that enabled an 'Inferred Mineral Resource' to be estimated on EPC 1802. Relevantly, an Inferred Mineral Resource means that the quality and quantity of the mineral resource had been estimated based on limited geographical evidence and sampling. Regarding this grading system, an Inferred Mineral Resource suggests that, with further exploration, the resource could be upgraded to an Indicated Mineral Resource or a Measured Mineral Resource.
After the Inferred Mineral Resource on EPC 1802 was announced, no further exploratory work was conducted to further upgrade the mineral resource and no further payment was made.
The appellants commenced proceedings, claiming that the second respondent should have conducted further exploratory work, such as drilling or sampling, to upgrade the mineral resource to a Measured Mineral Resource.
At first instance
The appellants pleaded that there was an implied duty on the first respondent to cooperate so that the appellants could have obtained the benefit of the upgrade, which was the third tranche of payments. Specifically, the appellants alleged the implication of an implied duty of cooperation as a matter of law and an implied exploration term as a matter of business efficacy. The appellants contended that the content of these implied terms required the second respondent to conduct further exploratory work and that its failure to do so constituted a breach of the final contract. The respondents denied these contentions.
At trial, the primary judge held that the implied duty to cooperate was not made out, and His Honour also rejected the existence of the alleged implied exploration term. The appellants appealed His Honour's decision.
Implied duty to cooperate
On appeal, the court upheld the primary judge's conclusion that the appellants failed to establish that the implied duty to cooperate required the respondents to conduct exploratory work as particularised by the appellants. The court confirmed that the source of the implied duty to cooperate does not require one to do all things necessary but, rather, is conditioned on what is considered reasonable.
The court noted a number of difficulties with the appellants' characterisation of the implied duty of cooperation, including that:
- first, the appellants did not qualify the scope of the implied duty by what was reasonably necessary by way of exploration work to ascertain a higher mineral resource grade; and
- second, the appellants' particularised what was necessary under the implied duty as the '21 hole exploration program', which was a certain program proposed by the appellants' expert. The court held that this proposal was based on the benefit of hindsight, instead of considering what was necessary at the date of the final agreement.
Due to these issues, the court refused to imply the duty to cooperate into the final contract, even though the appellants’ conditional entitlement to the third tranche of payment was valueless without further exploration work. With regard to this perceived loss of opportunity, the court remarked:
It is important to bear in mind that, notwithstanding that necessity is the source of the implication of the Secured Income duty to cooperate, the rationale being to prevent the enjoyment of the rights conferred by the contract being rendered nugatory, worthless, or seriously undermined, as stated in Australis: “It would be, however, fallacious to elide the purpose of implying such terms with the terms themselves. To do so would replace necessity with desirability.”
Implied exploration term
The appellants argued that the implied exploration term required that the respondents undertake the 21-hole exploration program as a matter of business efficacy. As the appellants were at risk that the respondents would not conduct the work necessary to have EPC 1802 graded as a Measured Mineral Resource, the appellants pleaded that the term was so obvious that it went without saying. The court rejected this contention and held that had the parties wanted to include a term concerning exploration, they had a number of solutions to choose from including, but not limited to, the 21-hole exploration program.
Macquarie International Health Clinic Pty Ltd v Sydney Local Health District  NSWCA 161
Default of obligations – breach of contract – right to terminate
In this case, the NSW Court of Appeal of the Supreme Court considered whether the termination of an agreement to build a hospital was valid.
The court held that various notices of default and notices of termination were validly issued and that the termination of the agreement was valid.
This case reinforces the basic principles underlying the construction and interpretation of contracts. When interpreting a contract, the court will always look at the reasonable meaning of the text and the surrounding commercial circumstances. When considering whether a party to a contract has been given a reasonable time to remedy a default, the actual time given to remedy the default will be considered.
In 1996, Macquarie International Health Clinic Pty Ltd entered into an agreement with Sydney Local Health District to construct and lease a private hospital and related facilities. The agreement gave SLHD the power to grant an extension of time for particular activities involved in the development if there was a delay. Macquarie had several obligations under the agreement, including to lodge all required applications with the council in relation to the development.
Plans for the hospital were lodged with a development application and a building application in 1997. In 2000, SLHD tried to terminate the agreement, a move the Court of Appeal found to be invalid in 2010. Macquarie regained possession of the site in 2015. In 2015, SLHD proposed an extension of time due to the delay and warned Macquarie not to propose a different development than it had been contracted to build. SLHD told Macquarie that it was obliged to make a further application for a construction certificate. Without SLHD's knowledge, Macquarie submitted a different proposal than agreed.
In February 2017, SLHD served notices of default on Macquarie regarding the agreement. In August 2017, SLHD terminated the agreement. Macquarie challenged the validity of the notices and the termination. At first instance, the court held that the notices and termination of the agreement were valid. Macquarie appealed this decision to the Court of Appeal.
The court considered three issues.
- The first issue was whether Macquarie was in default of its obligations under the agreement at the time the notices of default were issued;
- This required an examination of what the agreement required and was a matter of construction. It is well established that the meaning of the terms of a commercial contract are to be determined by what a reasonable businessperson would have understood those terms to mean. It requires consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purposes to be secured by the contract;
- Under the agreement, it was an essential term that Macquarie was required to lodge a building application that was consistent with the initial development plans;
- Macquarie initially lodged a building application that had expired. Due to the delays in construction between 1998 and 2016, it became necessary to lodge a fresh application to gain further approval. The agreement allowed SLHD to extend its timetable and to provide for a new date by which Macquarie had to obtain a construction certificate. The court held that the discretion was subject to the good faith obligation set out in the agreement, notwithstanding that the power was granted to SLHD in its 'absolute and unfettered discretion'. SLHD used this discretion in good faith as there is nothing unreasonable about requiring Macquarie to comply with a milestone as an essential term;
- Macquarie then lodged a building application that differed from the Development Application and did not propose to build the hospital in the way that was originally agreed upon. This was a breach of the agreement and meant Macquarie was in default of its obligations.
- The second issue was whether non-compliance with the notice of default meant SLHD lost the right to terminate the agreement;
- Section 129 of the Conveyancing Act 1919 (NSW) requires that notices of default that will terminate a lease specify the particular breach that needs to be rectified and what needs to be done to remedy the breach, as well as provide a reasonable time within which to remedy the default;
- In this case, the notice of default specified which clause of the agreement had been breached and the required remedy, which was that a construction certificate needed to be lodged by a certain date. Macquarie was aware of what was required to go on this certificate. The court held that this was sufficiently specific;
- The notice of default only has to state that the tenant has a reasonable time to remedy the default but there is no need to specify a particular amount of time. If the notice does state a time period, this reference can be disregarded if it is not a reasonable time. Termination can only take place after an objectively reasonable time to remedy the default has elapsed;
- In this case, while SLHD had only given Macquarie 28 days to remedy its breach in the notice of default, in reality it did not terminate the agreement for six months after the notice of default was sent. The original 28 days could be disregarded and did not affect the validity of the notices. The court determined that SLHD did give Macquarie a reasonable time to remedy its default;
- As the notices were valid, SLHD therefore validly terminated the agreement based on non-compliance with the notices.
- The third issue was whether there was a breach of the duty of cooperation.
- Macquarie argued that SLHD was breaching its implied duty of cooperation by trying to terminate the agreement as it was bona fide seeking to exercise its rights under the contract;
- The court held that there was no breach of the implied duty to cooperate at the date of termination, as SLHD did not have to consent to the modification of the development plans as that was within its contractual rights.
- An application for leave to appeal to the High Court was dismissed.
Glencore Coal Queensland Pty Limited v Aurizon Network Pty Ltd & Ors; Yarrabee Coal Company Pty Ltd & Ors v Aurizon Network Pty Ltd & Ors  QCA 182
Implied terms – implied term of good faith
In this case, the Queensland Court of Appeal considered whether the appellants could give notice to vary a deed based on the terms of the contract, the effect of which would result in the appellants not having to pay the agreed fees for the development of rail network infrastructure, while enjoying the benefits for which they bargained.
The court held that the proper construction of the deed did not allow the appellants to give any such notice unless the relevant part of the rail network was no longer necessary for the performance of the entire network. The court held that, if incorrect in its construction of the contractual provisions, the same outcome would be reached by an implied term of business efficacy.
This case is significant, as the trial judge considered whether a duty of good faith is implied into commercial contracts. On appeal, the Court of Appeal found it was unnecessary to consider the potential for an implied term of good faith, given its conclusion regarding the construction of relevant provisions of the contract. This area of law remains unsettled.
The respondent, Aurizon, operates the Central Queensland Coal Network, which is a rail network for shipping coal from mines to several port facilities on the Queensland coast. The appellants are four coal mining companies that contracted with Aurizon to use the rail network.
At the time the contracts were entered into, the appellants were developing the Wiggins Island Coal Export Terminal as a new port facility for the shipping of their coal. The appellants, along with other coal mining companies not party to these proceedings (each considered a 'customer'), entered into a deed to have Aurizon upgrade the capacity of the rail network to facilitate the transport of the customers' coal to the new terminal. In consideration for Aurizon doing so, the customers agreed to pay Aurizon a fee. The fee amount was different for each customer, as the fee was calculated according to each customer's anticipated use of the upgraded sections of the rail network and that anticipated use differed between customers. The upgrade to the rail network involved six segments. Where a segment served more than one customer, the fee for that segment was apportioned between the customers by consensus, based on the different levels of anticipated use of that segment.
The agreed apportionment to a segment was able to be varied by one customer giving notice under clause 6.1(c) of the deed. The consequence of such notice, if validly given, was that the customer giving it would no longer be liable to contribute towards the upgrade of that segment. The burden of what had been that customer's contribution was to fall on the remaining customers, effectively prejudicing the other customers and exposing Aurizon to a risk that it would not recover the full amount of the fees.
On 30 September 2015, one of the appellants, Glencore Coal Queensland, gave a notice, purportedly under clause 6.1(c), for each of its segments. If valid, the notice would relieve Glencore of its obligations to pay its fee, which at that time amounted to $185 million, and cause the other customers sharing that segment to become liable for that fee amount. The following day, the other appellants served notices, also purportedly under clause 6.1(c), which, if valid, would cause the entirety of the appellants' fee to fall on one customer. Aurizon brought proceedings in the Supreme Court of Queensland, to dispute the validity of those notices.
This case centres on clause 6.1(c) and the validity of the notices. Aurizon made three arguments for the invalidity of the notices:
- First, that on the proper construction of clause 6.1(c), a notice could not be given unless the customer would no longer be using the segment of the rail network to transport its coal to Wiggins Island Coal Export Terminal, which had not been the case with the appellants' notices.
- Second, that by an implied term, a customer could give a notice under clause 6.1(c) only if acting in good faith, and none of the appellants had done so.
- Third, that the notices were given too late.
At first instance, Justice Jackson of the Supreme Court of Queensland rejected Aurizon's first argument but accepted its case on the good faith issue. His Honour did not need to consider the third argument but said that, had it been necessary, he would have rejected Aurizon's argument in relation to the timing of the notices.
Each of these three issues was challenged on appeal. The appellants argued that they were entitled to make the notices on the proper construction of the deed and were not constrained by a duty of good faith. The respondent, Aurizon, argued that it ought to have succeeded in its argument regarding the construction of clause 6.1, or on either of its alternative arguments, at trial.
The Queensland Court of Appeal dismissed the appeal, albeit based on different reasons from those of the trial judge. Justice McMurdo (Appeal Justices Fraser and Mullins agreeing) disagreed with the trial judge's conclusion on the construction of clause 6.1(c). Justice McMurdo held that the correct construction of the provision was that a notice could only be given if the distinguishing feature of the customer's segment of the rail network no longer existed. Justice McMurdo stated that clause 6.1(c) was intended to capture a situation where a segment of the rail network was no longer necessary for the functionality of the entire rail network. His Honour's construction was derived from the terms of the deed, the recitals, and the expression in clause 6.1(c) 'cease being a Customer's Segment'.
In the event that His Honour was incorrect in his construction of clause 6.1(c), Justice McMurdo held that he would give the same effect to the clause by an implied term. The term that would be implied is that a notice under clause 6.1(c) could not be given for a segment that remained necessary to facilitate access to the rail network. Justice McMurdo noted that the implied term would be necessary for business efficacy, as it would not make commercial sense if the customers could opt out of contributing to the cost of the delivery of the infrastructure, while enjoying the benefits of the infrastructure. His Honour said that the other conditions of an implied term were also satisfied, those being that:
- the implied term would be reasonable and equitable;
- having regard to the essential purposes of the contract (ie the delivery of the infrastructure that was necessary to meet the needs of the customers in return for the customers contributing to the cost of the delivery), the implied term would be so obvious that it would go without saying;
- the implied term would not contradict any express terms of the contract; and
- the implied term could be clearly expressed.
Due to Justice McMurdo's conclusions regarding the construction of clause 6.1(c) and his views on the implied term, it was unnecessary for His Honour to consider the trial judge's reasoning in relation to any implied term of good faith or fair dealing.
However, Justice McMurdo did comment that he 'would have difficulty in accepting that the Customers’ exercise of the power under cl 6.1(c) was in breach of any implied term of good faith and fair dealing'. The reason for this being that the trial judge said that 'whether the Customer was acting in good faith and fairly would depend not only upon whether it still needed the Segment, but upon all of the circumstances, and his Honour [the trial judge] may not have identified the circumstances of this case by which the appellants’ use of the power was in bad faith or unfair'.
The Court of Appeal concluded that the notices given by the appellants were ineffective. The court dismissed the appeal and upheld the trial judge's orders.
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