1 Good Faith- the common law position

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Good Faith – the common law position

Penny Ward

Partner

Baker & McKenzie

Sydney

Cristina Cecere

Senior Associate

Piper Alderman

Adelaide

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Overview

• Implying terms into contracts

• What does “good faith” mean?

• What does it mean for franchising

• Leading and recent cases

• Practical implications

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Implying terms into contracts

• An issue for the governing law

• Implied as a matter of fact: – necessary to give business efficacy

– so obvious it “goes without saying”

– if fair and equitable to do so

• Implied as a matter of law: – only if to all contracts in a particular category (eg. all commercial contracts?

eg. all franchise agreements?)

– if all reasonable persons in the role would accept the term as part of the relationship

– need not establish intention of the particular parties

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Relationship with Express Terms

• Implied terms cannot contradict express terms

• Can be excluded, expressly or by necessary implication: if clear

• eg: a sole discretion means just that: it will not be modified by an implied term (but its exercise could be challenged on other grounds)

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Examples of Implied Terms

• Duty of co-operation:

– do all things necessary to enable the other to have the benefit of the promise

– not hinder or prevent fulfilment

• Duty of good faith from US, not UK law

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Meaning of Good Faith

Does not apply to X

Unclear ?

Applies to

• does not require a party to subordinate its own interests

• failing to have reasonable regard to the other’s interests

• arbitrary, capricious or reckless action

• does not alter express terms • independent obligation vs fetter on exercise of powers and discretions

• depriving the other of the benefits of the contract

• does not prevent reliance on contractual rights

• not act reasonably • exercising power/discretion for reason extraneous to the contract

• does not constitute a fiduciary duty

• result is unfair

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Leading Cases

Hungry Jack’s Pty Ltd v Burger King Corporation [1999] NSWSC 1029

• Facts:

– Development Agreement required at least 4 restaurants each year in WA, SA and QLD

– Hungry Jack’s was required to obtain Burger King’s approval at its “sole discretion”

– approvals not granted and Burger King purported to terminate agreement for breach of the above and non approved advertising and improper use of trademarks

– Hungry Jack’s claimed implied obligation on Burger King to act in good faith in the exercise of its contractual powers

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Leading Cases

Hungry Jack’s Pty Ltd v Burger King Corporation [1999] NSWSC 1029

• Rolfe J agreed, held that Burger King breached implied term of good faith and reasonableness by, inter alia, deliberately withholding approvals thereby preventing Hungry Jack’s from opening the required number of restaurants and then purporting to terminate

• Used contractual powers for purpose extraneous to the contract

• Hungry Jack’s awarded damages for delay in opening company owned restaurants and for lost opportunity to secure new franchised stores

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Leading Cases

Burger King Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187

• Rolfe J decision (upheld)

• Burger King was entitled to have regard to its own legitimate interests but must not do so for a purpose extraneous to the contract

• An implied duty of good faith was necessary to give commercial efficacy to the contract and the termination of the franchise agreement breached that duty

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Leading Cases

Automasters Australia Pty Ltd v Bruness Pty Ltd [2002] WASC 286 • Facts:

– Franchisee required to strictly comply with operational standards and franchisor’s manual

– Franchisor could terminate if “reasonably of the opinion” franchisee not complying with manual

– manner in which franchisee entered its invoices on data entry system was audited by franchisor

– claim that failure to produce correct invoices was a breach of franchise agreement

– franchisor purported to terminate the agreement after 14 day default notice

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Leading Cases

Automasters Australia Pty Ltd v Bruness Pty Ltd [2002] WASC 286

• Franchisor issued proceedings, claiming damages for repudiation by franchisor

• Franchisee counterclaimed, relying on the express obligation of good faith in the franchise agreement: “The Franchisor will use its best endeavours to promote the performance and success of the Franchise Business and will deal at all times with the Franchisee in absolute good faith.”

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Leading Cases

Automasters Australia Pty Ltd v Bruness Pty Ltd [2002] WASC 286 • Hasluck J, in considering obligation of good faith:

“It is apparent from the decided cases and related discussion that an express term concerning good faith, either in negotiation or performance, is likely to be considered certain and the term will be interpreted to give it meaning. What constitutes good faith will depend on the circumstances of the case and upon the context of the whole of the contract. The Courts will allow normal and reasonable business behaviour, with the result that the parties are not obliged to put aside their own self interest or proprietary rights. A court considering such a provision is entitled to have regard to the reasonableness of the conduct and whether a party has acted unconscionably or capriciously.”

• Held that alleged breaches were trivial, correctable and did not justify termination

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Recent Cases

AMC Commercial Cleaning (NSW) Pty Ltd v Coade [2010] NSWSC 832 • Facts:

– AMC NSW appointed master franchisee for NSW and ACT

– also empowered to enter into sub-master franchise agreements with sub-master franchisees in NSW and ACT

– AMC NSW claimed that AMC National (franchisor) had breached the franchise agreement and acted in breach of an implied term of good faith, issued proceedings against sole director of franchise company

– egs of offending conduct: failing to refer internet inquiry leads; failing to render invoices within a reasonable time; failing to establish/maintain a trust account; failing to account to AMC NSW for bank charges/interest on trust monies; making threats to franchisee about its future; arbitrarily increasing fees; unilaterally increasing fees

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Recent Cases

AMC Commercial Cleaning (NSW) Pty Ltd v Coade [2010] NSWSC 832 • Some of the breaches were of little consequence and the franchisor admitted a

number of them

• Rein J held that its director, Mr Coade, had “conducted itself in a manner entirely inconsistent with the obligations of a franchisor and breached the implied duty of good faith owed to AMC NSW”

• The franchisor’s sole director had attempted to destroy the franchisee’s business, intending to provoke a sale to enable the franchisor to take over

• AMC NSW succeeded and ultimately obtained indemnity costs (damages assessment undertaken by an Associate Judge)

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Recent cases

AMC Commercial Cleaning (NSW) Pty Ltd v Coade [2011] NSWSC 932

• AMC National purported to terminate MFA on the basis that AMC NSW had, inter alia, engaged in fraud

• Issues before MacDougall J:

– had the grounds for termination been made out?

– if so, was the exercise of the power to terminate constrained by obligations of good faith?

– if grounds for termination had been made out and no constraint by good faith, should AMC NSW have relief against forfeiture?

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Recent cases

AMC Commercial Cleaning (NSW) Pty Ltd v Coade [2011] NSWSC 932

• Court found although there was a requirement of good faith in the MFA, the franchisor had not breached it

• onus was on franchisee, not franchisor, to show that the termination was “unconscientious”

• franchisee had participated in a fraudulent scheme

• termination was in circumstances reasonable, not exercised for a capricious or ulterior motive

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Practical implications? Possible indicators of bad faith:

• Ulterior motive • Engineered termination • No real harm from the conduct

• Too short a period to comply • Focus is on own interests

(outside of the contract)

• Differing standards among franchisees

• Different standards for self and others

• Undermining relationships

• Withholding information

• Alleged conduct unclear/ in doubt

• Provoking withdrawal • Failing to give reasons

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Discussion

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Questions?