Australia - When The Music Stops, Everyone Keeps Their Chair: Implied Good Faith Trumps Express Contractual Right.

Legal News & Analysis - Asia Pacific - Australia - Construction & Real Estate - Dispute Resolution

6 September, 2019

 

Aurizon Network Pty Ltd v Glencore Coal Queensland Pty Ltd & Ors [2019] QSC 163

 

What you need to know

 

  • Australian law remains unsettled as to whether an obligation of good faith is implied at law into commercial contracts. 
  • In this decision, Jackson J found that an obligation of good faith and fair dealing was implied in fact with respect to the exercise of an express right under the WIRP Deed.  
  • Commercial parties may be surprised to learn that their express rights under their contracts may be constrained by the implication of such an obligation.  
     

Australian courts have long grappled with the concept of good faith in commercial contracts. Courts in recent years have moved away from the notion that such a requirement is implied into all commercial contracts.

 

Lower courts more recently favoured an implication of the term in fact (if at all). 

Jackson J of the Queensland Supreme Court in Aurizon Network Pty Ltd v Glencore Coal Queensland Pty Ltd & Ors[2019] QSC 163 recently held that the right to exercise an express power under an agreement was subject to the implied term of good faith and fair dealing. His Honour held that the term was implied in fact, having satisfied the requirements enunciated by the Privy Council in BP Refinery (Westernport) v Shire of Hastings (1977) 180 CLR 266. 

 

This decision may come as a surprise to some commercial parties and practitioners, who may argue that freedom of contract should be paramount and parties should be entitled to rely on the express terms of their bargain.

 

Background

 

Aurizon is the operator of the Central Queensland Coal Network, a rail freight network that connects approximately 40 coal mines with five shipping terminals at three ports.

In about 2008, various companies (including most of the defendants or related companies) developed a proposal to establish a new coal expert terminal that has become the Wiggins Island Coal Export Terminal (WICET).  This proposal required various extensions and enhancements to the existing rail infrastructure on Aurizon's network.

 

In order to facilitate the extensions and enhancements, Aurizon entered into separate contracts with eight coal miners (Customers), including the six defendants. Each of the contracts was based on a standard form and styled the Wiggins Island Rail Project Deed (WIRP Deed), and covered the funding and construction by Aurizon of the required works. The project was expected to cost $905M.  

 

It was not expected that each Customer's use of the expanded and enhanced rail network would be the same. Due to their location, not all Customers would use each part of the new works. Further, the Customers had different levels of production.  

The WIRP Deeds dealt with this by allocating the total scope of the upgrade works and splitting the costs (WIRP Fee) across the Customers by reference to:

 

  1. the particular segments that each Customer required; and
  2. for each segment, the proportion that each Customer's capacity allocation bears to the total increase in capacity for that segment.
 
Where a Customer intended to use a Segment that would also be used by other Customers, the WIRP Deed defined the other Customers as Intended Other Customers.  


Clause 6.1(c) of the WIRP Deed provided a mechanism for the Customers to give notice essentially opting out of paying their proportion of the WIRP Fee for a Segment, provided that there was at least one remaining Segment Customer for the Segment.  

 

The effect of giving notice under clause 6.1(c) of the WIRP Deed was to throw that Customer's Proportion of the WIRP Fee for the Segment onto any remaining Segment Customers for that Segment. Importantly, the Court held that, as a matter of construction of the clause, a Customer was permitted to give notice under clause 6.1(c) even though the relevant Segment was required by that Customer to transport coal from its mine to WICET.

Each of the defendants, in what his Honour described as "a superficially bizarre game of musical chairs", purported to give notice under clause 6.1(c) of their respective WIRP Deeds with the collective effect of throwing the whole of the burden of the WIRP Fee onto the last remaining Customer for all Customer Segments. 

 

Aurizon contended that the notices were invalid on three grounds, including relevantly, because there was an implied term of the WIRP Deed that the Customer has a duty to act in good faith and deal fairly with Aurizon in respect of giving notice under clause 6.1(c), and that this duty was breached by the defendants.  

 

Implied Duty of Good Faith

 

His Honour considered in some detail the case law that followed the decision of Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234, in which the NSW Court of Appeal first accepted the existence of an implied term of good faith in commercial contracts either generally or in a particular context.  His Honour was not ultimately required to resolve whether or not the term was implied in law, finding instead that it was implied in fact having satisfied the test enunciated by the Privy Council in BP Refinery (Westernport) v Shire of Hastings (1977) 180 CLR 266. The requirements of that test are: 

 

  1. it must be reasonable and equitable; 
  2. it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; 
  3. it must be so obvious that it 'goes without saying'; 
  4. it must be capable of clear expression; and 
  5. it must not contradict the express terms of the contract. 

 

Aurizon submitted, and his Honour accepted, that the implied term was necessary to address the inconsistency that would arise between a Customer enjoying access to a Segment while at the same time enjoying an unconstrained right to avoid paying the WIRP Fee.  His Honour was not prepared to accept that the WIRP Deed might operate such that a Customer who only had a low capacity allocation for a Segment and corresponding liability for payment of the WIRP Fees would be left as the only Customer responsible for all of the WIRP Fees.  Had this been raised at a meeting at the time of entering the WIRP Deeds, his Honour considered that the parties would have responded "Of course not!"

His Honour rejected the first defendant's argument that separate express provisions in the contract imposing an obligation of good faith in certain circumstances negated the "obviousness" of the implication of term into clause 6.1(c). His Honour accepted that those provisions contextually told against the implication, but did not accept them to be determinative. 

His Honour also rejected the first defendant's argument that an implied term of good faith would result in a "constructional inconsistency" with the entire agreement provision in clause 24.12(a) of the WIRP Deed.  His Honour accepted the contextual effect of the clause, but again did not consider it determinative.

Having concluded that the exercise of the power under clause 6.1(c) was subject to the implied term of good faith and fair dealing, his Honour was then required to consider whether the implied term was breached.  Aurizon argued that a breach had occurred in circumstances where the defendants' intention in giving the notices under clause 6.1(c) was to deprive Aurizon of a substantive benefit under the WIRP Deed, namely payment of the WIRP Fee by the defendants.  The defendants argued that their conduct did not deprive Aurizon of the substance of the benefit of the bargain, but that Aurizon only suffered an increased credit risk on the basis that its right to recover the full WIRP Fee was limited to recovery from the last remaining Segment Customer.  His Honour considered the defendants' contention "uncommercial" and "far-fetched".  

His Honour found that each of the defendants had, prima facie, breached the implied term of good faith and fair dealing in respect of giving notices under clause 6.1(c).

Some commercial parties and practitioners may be surprised by the outcome of this case: surely parties should be entitled to act in accordance with the clear and express terms of the contract?  This is an issue that arises from time to time, particularly in the context of a right to terminate a contract for convenience. 

 

Prudent commercial parties should seek legal advice before exercising a right under a contract that may have the effect of depriving their contractual counter party of the substantial benefit of the contract. Commercial parties seeking greater certainty around the exercise of discretions may wish to consider bespoke drafting which excludes good faith or dictates how such a discretion will be exercised.

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For further information, please contact:

 

Jeremy Chenoweth, Partner, Ashurst

jeremy.chenoweth@ashurst.com