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Vodafone Pacific Ltd & Ors v Mobile Innovations Ltd [2004] NSWCA 15 (20 February 2004)
(b) The implication of an obligation of good faith and reasonableness
183The judge held that there was implied in the ASP Agreement a term described as the obligation to behave honestly and do all things as were necessary to enable Mobile to have the benefit of the contract (para 683) and, when focusing on the discretions given to Vodafone, the obligation to exercise the discretions honestly and in good faith but having regard to the provisions of the agreement (para 685). He regarded the implication of terms as a process of construction of the ASP Agreement (paras 609-10, 612, 679, 688), particularly in his reasons for finding the implied terms notwithstanding cl 24.1(a) of the agreement (paras 726-9).
184In Castlemaine Tooheys Ltd v Carlton & United Breweries Ltd (1987) 10 NSWLR 468 Hope JA discussed (at 486-7) the two kinds of implication of terms in a contract, one implication as a legal incident of a particular class of contract and the other because the implication is necessary to give business efficacy to the contract. The former is commonly called implication as a matter of law. The term is prima facie implied in all contracts of the particular class, but its implication may be excluded having regard to the express terms of the contract and "the relevant surrounding circumstances of the case" (at 487). His Honour observed that the classes of contracts in which the law will imply terms is not closed, and considered (at 487-90) the test for deciding for the first time whether a term should be implied in a particular class of contract.
185The distinction between implying a term as a matter of law and implying a term in order to give business efficacy to a contract is now well recognized, see for example Esso Australia Resources Ltd v Plowman (1995) 183 CLR 10 at 30 and Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 447-8. In the latter of these cases McHugh and Gummow JJ explained (at 449-50) what was meant by implying a term as a matter of law. After saying that some implied terms were "perhaps more usefully identified as rules of construction applied to the express terms of the contract" (at 449), their Honours said (at 450) -
"However, the more modern and better view is that these rules of construction are not rules of law so much as terms implied, in the sense of attributed to the contractual intent of the parties, unless the contrary appears on a proper construction of their bargain. There is force in the suggestion that what now would be classified as terms implied by law in particular classes of case had their origin as implications based on the intention of the parties, but thereafter became so much a part of the common understanding as to be imported into all transactions of the particular description. The matter is put as follows in Halsbury:
`Perhaps the truth is that the ambiguous terminology enables the courts in the first instance to imply terms on the basis of the intention of the parties ... but later there comes a time when the particular implied term has become so much a part of common practice that the courts begin to import it into all transactions of that type as a matter of course; and the result is a rule of law of the type considered in this paragraph.'
This understanding of the matter is consistent with the proposition that terms of this kind, although treated as implied by law, may be excluded by express provision made by the parties and also as a result of inconsistency with terms of the contract. The result is that, even if treated as rules of law, they only apply in the absence of an expression of contrary intent." (citations omitted)
186In Breen v Williams (1996) 186 CLR 71, in a passage adopted in this Court in Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104 at 122, Gaudron and McHugh JJ said at 103 -
"A term implied by law on the other hand arises from the nature, type or class of contract in question. ... Some terms are implied by statutes in contracts of a particular class, for example, money lending and home building contracts. Such terms give effect to social and economic policies which the legislature thinks are necessary to protect or promote the rights of one party to that class of contract. Other terms are implied by the common law because, although originally based on the intentions of parties to specific contracts of particular descriptions, they `became so much a part of the common understanding as to be imported into all transactions of the particular description' (Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 449)".
187187 In Australis Media Holdings Pty Ltd v Telstra Corporation Ltd the Court said at 123 -
"At the end of the day, it is to be remembered that terms implied at law do not depend upon the intention of the parties. In Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322 at 348, Samuels JA said:
`The imposition of terms as a matter of law amounts to no more than the imposition of legal duties in cases where the law thinks that policy requires it'."
188In the present case the implied terms were separated, but effectively an implied term that Vodafone would act in good faith and reasonably in exercising its powers under the ASP Agreement was said to be implied by law. Thus it is necessary to ask whether the ASP Agreement is one of a class of contracts as a legal incident of which such a term is implied, including whether it is to be given that status for the first time, and if so whether the implication by law is precluded by expression of contrary intent. The inquiry, however, can not be made in the abstract. Because there may be exclusion by express provision or inconsistency with the terms of the contract on their proper construction (and into the construction of the contract comes the surrounding circumstances to which Hope JA referred), it is necessary to address the relevant power, that conferred by cl 18.4 of the agreement.
189As I have said, referring to Alcatel Australia Ltd v Scarcella and Burger King Corporation v Hungry Jack's Pty Ltd, an obligation of good faith and reasonableness in the performance of a contractual obligation or the exercise of a contractual power may be implied as a matter of law as a legal incident of a commercial contract. In BurgerKing Corporation v Hungry Jack's Pty Ltd, however, the Court said only that courts had "for the most part proceeded on the assumption" that there may be such an implication in a commercial contract (at [159]). It said that the contract there in question "does not fall into any of the traditional class of cases where terms have been implied as an incident of the contract" (at [166]), and went on to consider by the test of what was reasonable and necessary whether the term should be implied at law as a new class of case (at [167-186]). This fell short of, indeed rejected, treating commercial contracts as a class of contracts carrying the implied term as a legal incident.
190Applying a test of what is reasonable and necessary in order to decide whether for the first time a term should be implied in a particular class of contract, as was accepted in BurgerKing Corporation v Hungry Jack's Pty Ltd at [167] founded on Castlemaine Tooheys Ltd v Carlton & United Breweries Ltd and Byrne v Australian Airlines Ltd, has some overlap with implication of a term to give business efficacy to a contract. In BurgerKing Corporation v Hungry Jack's Pty Ltd the overlap was rather marked, because the very contract was assessed as if for the task of ad hoc implication, and the focus was not on any particular class of contract. That meant that there was merger of whether the term should be implied by law and whether the implication by law was precluded by expression of contrary intent.
191The ASP Agreement was no doubt a commercial contract. It was not suggested that it fell within some other class of contract already carrying the implied term as a legal incident or which it should now be found to have that status. I do not think the law has yet gone so far as to say that commercial contracts are a class of contracts carrying the implied terms as a legal incident, and the width and indeterminancy of the class of contracts would make it a large step. However, I am content to assume, expressly without deciding, that unless excluded by express provision or because inconsistent with the terms of the contract, Vodafone was under an implied obligation to act in good faith and reasonably in exercising its powers under the ASP Agreement, specifically the power of determining target levels in cl 18.4. Whether the assumption might be justified by commercial contracts already carrying the implied term or now being found to have that status does not matter. I consider that the present case can be decided by addressing whether the implication of the term as a matter of law, as to the power conferred by cl 18.4 of the ASP Agreement, is precluded by expression of a contrary intent.
192In addressing contrary intent, it is necessary to have in mind a content for the obligation of good faith and reasonableness. Only then can one sensibly enquire whether there is inconsistency with the terms of the contract. There is regrettable lack of uniformity in the cases. Reasonableness can be seen as part of good faith, and acting in bad faith is hardly reasonable. The difficulty in arriving at the content of an obligation of good faith, in particular, has often been noted: Farnsworth, "Good Faith Performance and Commercial Reasonableness under the Uniform Commercial Code" (1963) 30 U Chi L R 666 at 668 calls it a "protean" phrase. In Abu Dhabi National Tanker Co v Product Star Shipping Ltd ("The Product Star") (No 2) (1993) 1 Ll R 397, which seems to have been the source of the judge's reference to exercise of the discretion arbitrarily or capriciously (para 678), there is variable reference to bad faith, unreasonableness, abuse, arbitrariness and capriciousness. In Paragon Finance Plc v Staunton (2002) 2 All ER 248 a term was implied not to exercise a discretion to vary interest under a mortgage either "dishonestly, for an improper purpose, capriciously or arbitrarily" (at 201) or unreasonably in the sense of what no reasonable person would do (at 263). In Burger King Corporation v Hungry Jack's Pty Ltd the breach of a duty of good faith was found in "a deliberate plan to prevent HJPL expanding, and to enable BKC to develop the Australian market unhindered by its contractual arrangements with HJPL" (at [311]).
193Good faith meaning honesty and good faith meaning doing what is necessary to enable the party to have the benefit of the contract were two elements of the implied obligation taken up by the judge (para 683). They are really different. Perhaps different again is good faith meaning reasonableness, which the judge seems also to have taken up. It should be recalled how the judge encapsulated his findings of breach of the obligation of good faith and reasonableness, that revealing the content which he thought material to his decision: para 687 should be repeated -
"687Insofar as it is shown to have been unreasonable for Vodafone to determine a nil target, it is seen to have failed to act in good faith as well as to have acted unreasonably. Since determination of a nil target prevented the parties going forward in an endeavour to reach a business plan, Vodafone is shown to have unreasonably interfered with the enjoyment of an important benefit conferred by the express contractual terms so that the enjoyment was seriously undermined and rendered nugatory. Hence one may regard Vodafone's interference of this kind as
(1)a breach of the implied obligation to act reasonably; and
(2)a breach of the good faith obligation - insofar as there has been shown to be a failure to comply with standards of conduct which are reasonable having regard to the interests of the parties."
194I have earlier explained why I consider that the breaches of contract found by the judge did not extend to arbitrary or capricious exercise of the discretion conferred by cl 18.4, or to abuse of the power by using it for a purpose for which it was not intended. It is not necessary to decide whether or when an implied term of good faith so far as it precludes arbitrariness, capriciousness or abuse of a power can be excluded. It is sufficient to ask whether an implied obligation of good faith and reasonableness with the content upon which the judge rested his findings of breach is inconsistent with the terms of the contract, although it will be necessary to return later in these reasons to the raising of abuse of power in the appeal. What follows is concerned with obligation of good faith and reasonableness so confined.
195The power in cl 18.4 was emphatically described as a sole discretion. Since there was only one Vodafone (whichever of the entities it was), the point of "sole" lay in the exclusion of any constraint upon Vodafone. Its exercise was excluded from the dispute resolution procedure, with the further emphasis that "Vodafone's decision will be conclusive and binding on the parties" (cl 32.6) and the emphasis again that it could be exercised in any manner Vodafone saw fit (cl 41). These words in the ASP Agreement can not be passed over, and they weigh against the implied obligation of good faith and reasonableness in the exercise of the power.
196Clause 18.4 should be understood in the circumstances in which the parties contracted. I have earlier referred to the fundamental tension between Mobile's interest in maximizing the number of New Subscribers it acquired and Vodafone's interest in the subscribers being profitable to it. The ASP Agreement could only work if, should it be necessary, one party or the other had the whip hand as to the acquisition of subscribers. The agreement gave Vodafone control over terms and conditions and tariffs, and by cl 18.4 over the raw numbers. Vodafone was given control over the acquisition activities of Mobile - which, after all, was its agent - and could exercise the control in accordance with its own interests rather than those of Mobile.
197The contrast is marked in this respect between the absolute discretion in cl 18.4 and other occasions when, according to the ASP Agreement, Vodafone or Mobile had to act reasonably (cll 2.9(a), 5.2, 7.7, 9.2, 10.2, 10.4(a)(i), 10.7(d), 11.1(b), 12.1(b), 13.1(a), 13.7(b), 14.4, 15.3(a)(ii), 25.11(a), 25.11(b), and 37(b)), and even in good faith (cl 11.4(g) concerning participation in mediation under the dispute resolution procedure).
198Without more, in my opinion, the implication of the obligation to act in good faith and reasonably in exercising the power of determining target levels in cl 18.4 was excluded. To this may be added cl 24.1(a), by which "To the full extent permitted by Law and other than as expressly set out in this Agreement the parties exclude all implied terms ... ".
199Mobile submitted that a term implied by law was not caught by such a provision. It relied on Hart v MacDonald (1910) 10 CLR 417. A contract for the erection of a dairy plant and butter factory provided that payment by the defendant should be from the proceeds of butter produced by the defendant's cows and manufactured within the factory. The contract provided that "there is no agreement or understanding between us not embodied in this tender and your acceptance thereof". It was held that there was an implied term that the defendant would do all that was necessary to put himself in a position to pay, and that the implication of the term was not affected by the whole agreement provision. Griffith CJ said (at 421) that a promise to commence dairying and manufacture butter within a reasonable time "arises by necessary implication upon a proper construction of the express words". O'Connor J said (at 427) that "Every implication which the law makes is embodied in the contract just as effectively as if it were written therein in express language". Isaacs J said (at 430) that the whole agreement provision -
" ... excludes what is extraneous to the written contract: but it does not in terms exclude implications arising on a fair construction of the agreement itself, and in the absence of definite exclusion, an implication is as much part of a contract as any term couched in express words."
200The whole agreement provision was much less than the express exclusion of all implied terms in cl 24.1(a) of the ASP Agreement. Its equivalent in the ASP Agreement was cl 44. The question is one of contrary intent, and cl 24.1(a) expresses a clear intent where in Hart v MacDonald it was held that the whole agreement provision did not.
201The judge considered that, because the implied terms were "implied in the sense of being attributed to the contractual intent of the parties, discerned from the ASP objectively construed" (para 726), they were to be regarded as express agreements although unwritten (para 727) and "embodied in the ASP just as effectively as if they were written there in express language" (para 728). The reasoning appears to have been that, because the attributed contractual intent was "discerned from the ASP objectively construed", the implied terms were to be regarded not as implied terms, or perhaps as terms expressly set out in the agreement. I am respectfully unable to agree.
202The judge had referred to the cooperation obligation being "an implied legal duty discerned by a process of construction, a rule of law or an implied term" (para 679), a mixture of concepts which it is not easy to understand but treating an implied term, at least one implied as a matter of law, as something found by construction of the contract. Undoubtedly the implication of a term in law has been referred to as a process of construction. Lord Blackburn in Mackay v Dick at 263 said that "the construction of the contract" is that the parties agree to cooperate, and in Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 607 Mason J described this as a "rule of construction". In the passages in Hart v McDonald earlier mentioned Griffith CJ and Isaacs J referred to implications on the proper or fair construction of the contract. In Codelfa Construction Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 353 Mason J described the implication of a term as "an illustration of the process of construction, though differing from the more orthodox establishment of the meaning of a contractual provision". In Byrne v Australian Airlines Ltd at 440 McHugh and Gummow JJ referred to a number of these observations and said that some implied terms "are perhaps more usefully identified as rules of construction applied to the express terms of the contract."
203Many other illustrations could be given, but matched by as many or more references to the implication of a term in law which have not treated the implied term as something found by construction of the contract. For example, a frequently cited statement of the Mackay v Dick obligation to co-operate is that of Griffith CJ, the same judge who spoke of construction of the contract in Hart v McDonald, in Butt v McDonald (1896) 7 QLJ 68 at 70-1 -