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Bond Law Review

Volume 19 | Issue 2 Article 2

12-11-2007

Discreet Digression: The Recent Evolution of the Implied Duty of Good Faith
Marcel Gordon
gordon.marcel@gmail.com

Recommended Citation
Gordon, Marcel (2007) "Discreet Digression: The Recent Evolution of the Implied Duty of Good Faith," Bond Law Review: Vol. 19: Iss. 2, Article 2. Available at: http://epublications.bond.edu.au/blr/vol19/iss2/2

This Article is brought to you by the Faculty of Law at ePublications@bond. It has been accepted for inclusion in Bond Law Review by an authorized administrator of ePublications@bond. For more information, please contact Bond University's Repository Coordinator.

Discreet Digression: The Recent Evolution of the Implied Duty of Good Faith
Abstract

In 1992, the NSW Supreme Courts decision in Renard Constructions (ME) Pty Ltd v Minister for Public Works (Renard) enlivened a controversial principle: that a duty of good faith could in some circumstances be implied into a contract. Barely a decade later, with the decision in Overlook Management BV v Foxtel Management Pty Ltd (Overlook), the orthodox judicial view was that the duty of good faith was implied into a certain class of contracts as a matter of law. During this rapid development there were occasional judicial dissents, but without sufficient consistency or volume to be viewed as an authoritative alternative. At the head of the line of cases born of Renard, Overlook remains the clearest and furthest-reaching statement of law on the implication of a duty of good faith.
Keywords

duty of good faith, discreet digression

This article is available in Bond Law Review: http://epublications.bond.edu.au/blr/vol19/iss2/2

Gordon: Discreet Digression: The Recent Evolution of the Implied Duty of

DISCREETDIGRESSION:THERECENTEVOLUTIONOFTHEIMPLIED DUTYOFGOODFAITH

MARCELGORDON Introduction
In1992,theNSWSupremeCourtsdecisioninRenardConstructions(ME)PtyLtdvMinisterfor PublicWorks1(Renard)enlivenedacontroversialprinciple:thatadutyofgoodfaithcouldin some circumstances be implied into a contract. Barely a decade later, with the decision in OverlookManagementBV v FoxtelManagementPtyLtd2(Overlook), the orthodox judicial view wasthatthedutyofgoodfaithwasimpliedintoacertainclassofcontractsasamatteroflaw. Duringthisrapiddevelopmenttherewereoccasionaljudicialdissents,butwithoutsufficient consistencyorvolumetobeviewedasanauthoritativealternative.Attheheadofthelineof casesbornofRenard,Overlookremainstheclearestandfurthestreachingstatementoflawon theimplicationofadutyofgoodfaith. Commentatorshavewrittenextensivelyonthetopic.3Thosewhotakeacriticalviewtendto focusontheinappropriatenessofimplicationbylawforthetaskathand.Implicationbylaw cannotproperlytakeaccountofthecircumstancesofthecase,thetermsofthecontractor fundamentallytheintentionoftheparties;andwithoutthiscontextinwhichtodetermine thecontentoftheterm,thedutyimpliedmustbedefinedintheabstract.Implicationbylaw isabluntinstrument. Asaresult,thedutyofgoodfaithisinalegalrecession.Somebencheshavefounditeasyto express broad support for the principle, generally while declining to imply a duty or fully explain what it means; others have pattered around deferentially without coming to a firm conclusion. The implied duty of good faith has become an easy argument to make, but a difficult one to resolve. The law on the duty has ceased to develop, leaving Overlook as an uncertainhighwatermark.ManyarelookingtotheHighCourtfordirection.4 In the meantime, a number of less celebrated cases provide a hint of a new or at least intermediatedirection.ThisnewbreedofcasesepitomisedbyMaitlandMainCollieriesPty

BCompSci/LLB(Wollongong). (1992)26NSWLR234. 2 [2002]NSWSC17. 3 See,eg,JWCarterandElisabethPeden,GoodfaithinAustraliancontractlaw(2003)19Journalof ContractLaw155;ElisabethPeden,IncorporatingTermsofGoodFaithinContractLawinAustralia (2001)SydneyLawReview222;RobertMcDougallJ,TheimplieddutyofgoodfaithinAustralian contractlaw(2006)108AustralianConstructionLawNewsletter28;AdrianBaron,Goodfaithand constructioncontractsfromsmallacornslargeoaksgrow(2002)22AustralianBarReview1;Bill Dixon,CommonlawobligationsofgoodfaithinAustraliancommercialcontractsarelational recipe(2005)33AustralianBusinessLawReview87;JWCarterandAndrewStewart,Interpretation, goodfaithandthetruemeaningofcontracts:theRoyalBotanicdecision(2002)18Journalof ContractLaw1;TyroneCarlin,Therise(andfall?)ofimplieddutiesofgoodfaithincontractual performanceinAustralia(2002)25(1)UniversityofNewSouthWalesLawJournal99;AdamWallwork, Arequirementofgoodfaithinconstructioncontracts?(2004)20BuildingandConstructionLaw257; BillDixon,Whatisthecontentofthecommonlawobligationofgoodfaithincommercial franchises?(2005)33AustralianBusinessLawReview207.Finally,ElisabethPeden,GoodFaithinthe PerformanceofContracts(2003),standsoutforitsthoroughness. 4 See,eg,McDougallJ,aboven3,36;CarterandStewart,aboven3,12.
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DISCREETDIGRESSION:THERECENTEVOLUTIONOFTHEIMPLIEDDUTYOF GOODFAITH LimitedvXstrataMtOwenPtyLimited5(Maitland)takeanapproachgroundedinimplication infactrather thanimplication bylaw.These cases consider whethera duty of good faith is appropriateonthefactsofthecaseandinlightofthetermsofthecontract. While not without its weaknesses, implication in fact is a much fairer and more practical approachthanimplicationofadutyofgoodfaithbylaw.Ithasidentifiablesubstance,which the construction approach proposed as an alternative lacks, upon which the duty of good faithcandevelopasadistinctfeatureofmodernAustraliancontractlaw.Moreover,itallows thecontentofthedutytobedeterminedinthecontextofafactualmatrixratherthaninthe abstract. From such factual determinations, and their rationales, a coherent and justifiable doctrine can be built over time. If a duty of good faith is to be implied in contracts, implicationinfactisapreferablemethodtoimplicationinlaw.

Thepremiseofthispaper
Itisnecessarytomakecleartheobjectiveofthispaper.Theaimofthispaperisnottoshow thattheimplicationofadutyofgoodfaithoughttobepartofAustralianlaw.Thatisvery much open for debate. The author is sympathetic to the argument that good faith has long been recognised in a variety of principles, and infuses contract law sufficiently without the implication of a particular duty. Our courts have proven themselves adept at dishonouring actionstakeninbadfaithwithoutrecoursetoanimplieddutybeingnecessary. Instead,thispaperiswrittenonthepremisethattheimplicationofadutyofgoodfaithhas ratherrapidly,andforbetterorforworsebecomepartofourcontractlaw.Acceptingonthe basisofpresentjudicialauthoritythatadutyofgoodfaithistobeimplied,thispaperseeksto arguethatitoughttobeimpliedinfactratherthaninanyothermanner.Suchanapproach will better achieve the underlying purpose, and better facilitate the development of a coherent doctrine of good faith in Australia. Implication in fact is a pragmatic prescription, not an ideal solution; it is recommended as a realistic path out of the present conceptual quagmire.

Theriseandriseoftheimplieddutyofgoodfaith
Thedebatesurroundingtheimplicationofadutyofgoodfaithstarted,forpresentpurposes, withthedecisioninRenardin1992.Ashasbeenpointedoutbyothercommentators,onlyone member of three in the Court of Appeal, Priestley JA, dealt with the question, and only as obiter.6Nevertheless,subsequentcaseshavetendedtotracetheirauthoritybacktoRenard.7 The next ten years of authority saw the remarkably rapid rise of the implied duty of good faith.CarlintracesthedevelopmentofthedoctrineingreatdetailinhisarticleTheRise(and Fall?) of Implied Duties of Good Faith.8Renard begat Hughes Bros Pty Ltd v Trustees of the RomanCatholicChurchfortheArchdioceseofSydney,9inwhichanotablyrestrainedKirbyP(as he then was) declined the opportunity to quash the emerging line of authority, instead

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[2006]NSWSC1235. See,eg,Wallwork,aboven3,265;Carlin,aboven3,105. 7 Asanexception,Carlin(aboven3,105)notesthatinBurgerKingCorpvHungryJacksPtyLtd[2001] NSWCA187,Sheller,BeazleyandSteinJJArecognisePriestleyJAscommentsasobiter(at[154]). Thisisstrictlytrue,butinfactthepassageevidencesthemannerinwhichRenardachieved widespreadacceptance:[w]ehavereferredandreliedextensivelyuponhisHonoursjudgmentin sofarasitdealswithanimpliedobligationofgoodfaith,asitprovides,obiter,authoritative backgroundtothedevelopmentofthelawonthisissue. 8 Carlin,aboven3. 9 (1993)31NSWLR91.

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deferringtoRenardonthebasisofprecedent.10Hughes,bolsteringRenard,begatanynumber of cases: Hughes Aircraft Systems International v Airservices Australia;11Alcatel Australia Ltd v Scarcella;12FarHorizonsPtyLtd v McDonaldsAustralia;13BurgerKingCorp v HungryJacksPty Ltd;14AppleCommunicationsLtd v OptusMobilePtyLtd;15and CommonwealthBankofAustralia LtdvSpira.16 In the course of this evolution, the duty was established as one implied by law and potentially applicable to all commercial contracts. In Garry Rogers Motors (Aust) Pty Ltd v Subaru(Aust)PtyLtd(GarryRogers),FinkelsteinJstatedthatrecentcasesmakeitclearthatin appropriatecontracts,perhapsevenallcommercialcontracts,suchatermwillordinarilybe implied;notasanadhocterm(basedontheintentionoftheparties)butasalegalincidentof the relationship.17Similarly, in OverlookBarrett J held that implied by law into commercial contractsisatermrequiringtheexerciseofgoodfaithintheperformanceofthecontract.This is now in [New South Wales] a legal incident of every such contract.18Clearly, by Overlook theimplicationofadutyofgoodfaithbylawwaswellrecognised. SinceOverlook,therehavebeenahandfulofdecisionsendorsingtheapproachtotheimplied duty of good faith taken in that case.19VodafonePacificLtd v MobileInnovationsLtd held that [a]n obligation of good faith and reasonableness in the performance of a contractual obligationortheexerciseofacontractualpowermaybeimpliedasamatteroflawasalegal incident of a commercial contract.20The use of the word may is notable; Giles JA later explained that he did not think that commercial contracts were a class, wide and indeterminate as it would be, into which such a term is necessarily implied by law. 21 Nevertheless, Vodafone clearly approves the mode of implication, if not the scope of its application.

Doubt,avoidanceandrecriminations
Academiccriticism However even during that surge indeed, perhaps because of it there was considerable resistance to the direction which was being taken. Criticism came thick and fast from the academy. There is little dispute amongst commentators that the doctrine of good faith has developed markedlysinceRenard,orthatitsdevelopmenthasbeenasignificantevent.22Therehasbeen

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HughesBrosPtyLtdvTrusteesoftheRomanCatholicChurchfortheArchdioceseofSydney(1993)31 NSWLR91,93. (1997)76FCR151. (1998)44NSWLR349. [2000]VSC310. [2001]NSWCA187. [2001]NSWSC635. [2002]NSWSC905. GarryRogersMotors(Aust)PtyLtdvSubaru(Aust)PtyLtd(1999)ATPR41703,43014. OverlookManagementBVvFoxtelManagementPtyLtd[2002]NSWSC17,[62]. See,eg,VarangianPtyLtdvOFMCapitalLtd[2003]VSC444;PacificBrandsSport&LeisurePtyLtdv UnderworksPtyLtd[2005]FCA288. VodafonePacificLtdvMobileInnovationsLtd[2004]NSWCA15,[125]. VodafonePacificLtdvMobileInnovationsLtd[2004]NSWCA15,[191]. CarterandStewartdescribeitas[p]erhapsthemostimportantunresolvedissueinAustralian contractlawtoday(CarterandStewart,aboven3,9).

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DISCREETDIGRESSION:THERECENTEVOLUTIONOFTHEIMPLIEDDUTYOF GOODFAITH general support for good faith as a principle of contract law in Australia.23 Comparative referencesnotetheprevalenceoftheconceptinotherjurisdictions,especiallyEuropeancivil law jurisdictions and the United States.24In general, good faith has either been seen as an overdue arrival or the emergence of a unifying principle from the primordial soup of the commonlaw. Instead, the focus of academic disapproval is the theoretical inconsistency of the approach takenintherecentevolutionofgoodfaith.Thecriticismisthattheimplicationofadutyof goodfaithinthemannerderivedfromRenarddoesnotcoherewithfundamentalprinciples underlyingAustraliancontractlaw;thatitconflictswithmoresuperficialconceptswithinit; that it stretches the rules of implication; that it is in a word ugly. Carlin, for example, bemoans the tortured development of the doctrinethe hallmark of which seems to have beenmisconstructionheapeduponmisconstruction.25 Carter and Peden, whilst endorsing good faith as inherent in contract law, seem positively repulsed by the idea that it be implied by law into all commercial contracts.26Perhaps the leadingauthorityinthearea,ElisabethPedenhasconsistentlyandcogentlyarguedthatthe implicationofgoodfaithbylawisinconsistentwiththelawofcontract.27 Judicialdissent A number of judges clearly disagreed with the approach taken in the leading cases, and foundopportunitiesandmeansbywhichtoexpressthatdisagreement.InGSAGroupvSiebe PLC,RogersCJCommDwascriticaloftheimpositionofadutyofgoodfaithuponparties who are quite able to look after their own interestsespecially where all of the parties are wealthy,experienced,commercialentities.28Suchpartiesmight,astheyhadinthatcase,take thoroughlyadversarialpositions.Implicationofadutyofgoodfaithwouldbeinappropriate insuchcircumstances. In the Federal Court in the same year, Gummow J stated in ServiceStationAssociationLtd v BergBennett&AssociatesPtyLtdthattheimplicationofadutyofgoodfaithbylawwasnot required by any authority. 29 Gummow J also expressed disquiet at judicial reference to communitystandards.30HisHonourrecognisedthatgoodfaithcouldbeseenasinforminga rangeofremediesandprinciples,particularlyinequity,butconsideredthatitrequiresaleap offaithtotranslatethesewellestablisheddoctrinesandremediesintoanewtermimplied bylaw.31

Thedifferencebetweenimplicationbylawandinfact
Implicationbylawistheimplicationofatermintoacontractbaseduponitsmembershipofa certainclassofcontracts.Thetermispresumedtobepartofallcontractsofthattype,butcan be excluded by clear words to that effect.32The problem, in relation to the topic at hand, is that this is not sensitive to the circumstances of the parties or the wording of the contract
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Carlinnotesthestrongsupportforthegeneralimplicationofadutyofgoodfaithincontractual performanceinAustralia(Carlin,aboven3,122). See,eg,CarterandPeden,aboven3,171;Peden(2003),aboven3,10. Carlin,aboven3,122. CarterandPeden,aboven3. Peden(2001),aboven3;Peden(2003),aboven3;CarterandPeden,aboven3. GSAGroupvSiebePLC(1993)30NSWLR573,579. ServiceStationAssociationLtdvBergBennett&AssociatesPtyLtd(1993)117ALR393,407. ServiceStationAssociationLtdvBergBennett&AssociatesPtyLtd(1993)117ALR393,405. ServiceStationAssociationLtdvBergBennett&AssociatesPtyLtd(1993)117ALR393,406. CastlemaineTooheysLtdvCarlton&UnitedBreweries(1987)10NSWLR468.

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(beyondclearexclusions).Itcanonlybesaidtobebasedontheintentionofthepartiestothe extentthatallpartiestothegiventypeofcontractarepresumedtohaveintendedtoinclude it. Further,implicationbylawisanallornothingapproach.Eitherthecontractisgovernedbya dutyofgoodfaith,oritisnot.Theindividualmechanismsofthecontractcannotbeassessed on their terms to determine whether a duty of good faith is appropriate, nor can the circumstancesinwhichthepartiescontractedortheobjectivewhichtheywishedtoachieve. Asaresult,thedutyofgoodfaith,ifitexists,isadutyatlarge,andthereislittlecontextin whichtodetermineitscontent. Basingtheimplicationofadutyofgoodfaithontheparticularcircumstancesofthecaseisa preferableapproach.Itpermitssensitivitytomorethanjustclearwordsofexclusion,anda range of factors enter into consideration: what the parties sought to achieve; the circumstancesofthecontract;therelationshipbetweentheparties;andthetermsusedinany givenclause,whetheraclearexclusionornot.Examiningthedutyofgoodfaithinthefactual matrix of the agreement provides a context in which the content of the duty can be determined.33Ingoodcommonlawstyle,itallowsjudgestodefinethedutyofgoodfaithas thecaserequiresonthefactsprovidingajurisprudencefromwhichgeneralprinciplescan be drawnasthey emerge, rather than relying upon the divination ofa flawless principle in theabstract.Mostimportantly,thetouchstoneofimplicationinfactisthecoreconcernofthe lawofcontract:theintentionoftheparties.

Discreetdigressionimplicationinfactinaction
A number of recent cases have discreetly adopted an approach which is best understood under the rubric of implication in fact. These cases demonstrate in their reasoning and outcomesthatimplicationinfactisapragmaticandusefulmethodbywhichtodealwiththe dutyofgoodfaith,andintheirexistencethattheimplicationofadutyofgoodfaithinfact ratherthanbylawisendorsedbyasmallbutgrowingbodyofrecentauthority. Council of the City of Sydney v Goldspar Australia Pty Ltd34(City of Sydney) provides a good example.Afterconsideringthebewilderingarrayofauthoritiesandacademicviews,35Gyles Joptedtoconcentrateupontheparticularcontractualprovisioninquestion,intheparticular contract,intheparticularcircumstancesofthecaseinordertodeterminewhetheradutyto act in good faith ought to be implied or not. 36 In doing so, his Honour eschewed the implicationbylawapproach,expressedsoclearlyinthesamecourtinGarryRogers,infavour ofimplicationinfact. An equally clear example of the change of approach is found in EssoAustraliaResourcesPty LtdvSouthernPacificPetroleumNL37(Esso).InthatcasetheCourtrefusedtoimplyadutyof good faith to constrain Southern Pacifics use of its power of assignment. Warren CJ consideredthatwherecommercialleviathansarecontractuallyengaged,itisdifficulttosee that a duty of good faith will arise.38Buchanan JA, with whom the other members of the Courtagreed,madeasimilarobservation,reservingthedutyforcasesinwhichitcanprotect

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SeealsoPaulFinn,GoodFaithandFairDealing:Australia(paperdeliveredattheCommercial GoodFaithConference,AucklandNewZealand,2September2005)7.FinnJconsidersareasonable expectationsapproach,thegreatestmeritofwhichisitsconcernwiththecontextofarelationship. [2006]FCA472. CounciloftheCityofSydneyvGoldsparAustraliaPtyLtd[2006]FCA472,[166]. CounciloftheCityofSydneyvGoldsparAustraliaPtyLtd[2006]FCA472,[168]. EssoAustraliaResourcesPtyLtdvSouthernPacificPetroleumNL[2005]VSCA228. EssoAustraliaResourcesPtyLtdvSouthernPacificPetroleumNL[2005]VSCA228,[4].

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DISCREETDIGRESSION:THERECENTEVOLUTIONOFTHEIMPLIEDDUTYOF GOODFAITH avulnerablepartyfromexploitiveconductwhichsubvertstheoriginalpurposeforwhichthe contract was made.39His Honour added that implication in this fashion is perhaps ad hoc implicationratherthanimplicationasamatteroflaw.40 Returning to New South Wales, in Australian Hotels Association (NSW) v TAB Limited (Australian Hotels) Bergin J held that commercial contracts are not a class of contracts into whichanobligationofgoodfaithisimpliedbylaw,quotingapassagefromBuchananJAs judgment in Esso.41Her Honour then quoted from Warren CJs judgment in the same case, approving the reluctance to imply a duty of good faith where commercial leviathans are involved.42In light of this, Bergin J stated that whether such an obligation is impliedwill depend upon the terms of the particular contract, and the other matters to which it is permissibletohaveregard.43Thepreference,again,isforimplicationinfact. MaitlandMainCollieriesPtyLimitedvXstrataMtOwenPtyLimited Maitland is typical of the new breed of decisions in this area. Maitland centred upon a deed executed by the plaintiff, Maitland Main Collieries (MMC), and the defendant, Xstrata Mt Owen(Xstrata).XstratawishedtoconstructaraillinkfromitsmineatMtOwentothemain railwayline,crossinganareawhichcouldbesubjecttosubsidencefromundergroundmining proposed by MMC. The parties entered into negotiations. MMC sought certain guarantees from Xstrata before acquiescing in the construction of the link, in order to alleviate three concerns: potential liability for subsidence damage to the rail link; sterilisation of coal deposits;andincreaseddifficultyinobtainingminingapprovals. The deed which resulted from the negotiations was remarkably and, in hindsight, imprudently brief, and disputes on its meaning were not long in the making. The factual circumstances in which they arose are not immediately relevant, but resulted in MMC seeking,interalia,twosalientdeclarations:thatthedeedcontainedanimpliedtermrequiring Xstrata to act reasonably and in good faith in the performance of its obligations; and that thattermhadbeenbreached. Indeterminingwhetherthedeedcontainedanimplieddutyofgoodfaith,BerginJreferredto thejudgmentofWarrenCJinEssodiscussedabove.44WarrenCJfounditdifficulttoseethat a duty of good faith will arise where commercial leviathans are contractually engaged; BerginJ,asshehaddoneinAustralianHotels,45explainedthatsuchanimplicationdepended upontheparticularcontract.AccordingtoherHonour,thepresenceorabsenceofadutyto act reasonably and in good faith will depend on the nature of the obligations in the contract...Commercialcontractsarenotaclassofcontractsthathaveanimpliedobligationof goodfaith.46 Bergin J went on to consider each clause of the contract individually in order to determine whetherthatclauseoughttobesubjecttoarequirementofgoodfaith.Wherethedutywas justifiedasamatterofconstruction,inlightoftheintentionoftheparties,itwasimplied.47In the circumstances as they were in Maitland, Bergin J considered that the duty of good faith

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EssoAustraliaResourcesPtyLtdvSouthernPacificPetroleumNL[2005]VSCA228,[25]. EssoAustraliaResourcesPtyLtdvSouthernPacificPetroleumNL[2005]VSCA228,[25]. AustralianHotelsAssociation(NSW)vTABLimited[2006]NSWSC293,[75]. AustralianHotelsAssociation(NSW)vTABLimited[2006]NSWSC293,[77],[80]. AustralianHotelsAssociation(NSW)vTABLimited[2006]NSWSC293,[78]. Seeaboven38andaccompanyingtext. Seeabovenn42and43andaccompanyingtext. MaitlandMainCollieriesPtyLimitedvXstrataMtOwenPtyLimited[2006]NSWSC1235,[56]. MaitlandMainCollieriesPtyLimitedvXstrataMtOwenPtyLimited[2006]NSWSC1235,[56][59].

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wasapplicabletotwooftheclauses:theobligationthatXstrataanditscontractorsandagents abide by conditions imposed upon the use of the rail link; and the indemnity that Xstrata gave to MMC regarding damage to the rail link due to subsidence and the cost of extra drainage work. Bergin J refused to recognise a duty of good faith at large, outside of the operationoftheparticularclauses. BerginJsapproachinMaitlanddemonstratesclearlythesuitabilityofimplicationinfactfor the duty of good faith. Bergin J examined the particular clauses of the contract and the circumstances in which itwas agreed.Her Honourapproached the duty of good faith with the intentions of the parties foremost in mind. The resulting examination is practical, commerciallysensitiveandrealistic. RevisitingRenard Althoughitisperhapsasurprisingrevelationinlightofinterveningdevelopments,Priestley JA actually considered both implication in fact and implication by law in Renard.48When consideringimplicationinfact,hisHonourexaminedindividuallytheclauseinquestionand itssubclauses,aswellastheintentionoftheparties.49HisHonoursconclusionwasthatthe particular contract in this case contains the terms implied ad hoc.50Moreover, Priestley JA cited considerable authority for this approach, no less than the High Court51in Meehan v Jones52andtheNSWCourtofAppealinProgress&Properties(Strathfield)PtyLtdvCrumblin53 (Progress&Properties). Unfortunately,neitherofthesecasesoffercompellingauthorityforPriestleyJAsjudgment. Meehan v Jonesexemplifies a court divided: Mason and Wilson JJ held that an obligation of honestyshouldbeimplied,butthattherewasnoneedtodecidewhetheranobligationtoact reasonably(commonlyseenascontainedwithinanimplieddutyofgoodfaith)existed;Gibbs CJconcurredonthequestionofhonestybutdeclinedtoimplyadutytoactreasonablybased on the business efficacy rule; Murphy J considered a duty of honesty to add nothing and a dutytoactreasonablyunwarranted;andAickinJpassedawaybeforejudgmentwasgivenin thecase.Progress&Propertiesaddslittlemore,acknowledgingthesplitinauthorityinMeehan v Jones and favouring the implication of a duty of reasonableness in almost identical circumstances. The net result is a weak authority for the implication of a duty of reasonableness,atleastwherecompletionofasaleisconditionaluponthepurchaserfinding satisfactory finance. The most that can be said is that these cases do not exclude the use of implicationinfactinthismanner. PriestleyJAwentontoconsiderimplicationbylaw.HisHonourconsideredthatthecontract in question was an example of a wider and common class of contractin which one party promises to build a work of some size for the other party.54However, even in considering implication by law for this nominal class of contracts, Priestley JA constrained the scope of theimplieddutyofreasonablenesstotheparticularclausesinissueinthecasethenathand.55 Asaconsequence,anydutyofreasonablenessimpliedbylawderivedfromRenardshouldbe circumscribed very tightly to the class of contract described, in which there are powers investedintheprincipalbasedonacontractorsfailuretoshowcause,andtothoseclauses
48 49 50 51 52 53 54 55

RenardConstructions(ME)PtyLtdvMinisterforPublicWorks(1992)26NSWLR234,2578. RenardConstructions(ME)PtyLtdvMinisterforPublicWorks(1992)26NSWLR234,25660. RenardConstructions(ME)PtyLtdvMinisterforPublicWorks(1992)26NSWLR234,260. RenardConstructions(ME)PtyLtdvMinisterforPublicWorks(1992)26NSWLR234,260. (1982)149CLR571. (1984)3BPR9496. RenardConstructions(ME)PtyLtdvMinisterforPublicWorks(1992)26NSWLR234,261. RenardConstructions(ME)PtyLtdvMinisterforPublicWorks(1992)26NSWLR234,262

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DISCREETDIGRESSION:THERECENTEVOLUTIONOFTHEIMPLIEDDUTYOF GOODFAITH only. This is a very narrow approach, and one which conforms much more closely to the approachinMaitlandthanabroadimplicationbylaw. Finally, in case the class of contract described was not a proper one for the purposes of implicationbylaw,hisHonourturnedtoanotherargument.Withrespect,thatargumentwas a misunderstanding of an earlier High Court authority, Gullett v Gardner. 56 In Gullett v Gardner, Dixon J implied a term based on the intention of the parties, stating that [t]he intentionistobegatheredfromwhattheyhavesaidanddone,andconcernswhateachparty tothecontracthadtherighttoexpect,butitdoesnotnecessarilymeananenquiryintotheir actual mental state.57Priestley JA reasoned that if the parties mental state was not to be considered, then the Court was deciding what implied obligation would be attached to a contract,irrespectiveoftheactualintentionofthepartiesandthuseitherimplicationbylaw rather than ad hoc, or at least as a hybrid between the two. 58 Respectfully, his Honour conflatedthelackofenquiryintothepartiesactualmentalstatewithalackofconsideration oftheactualintentionoftheparties.TheintentionofthepartieswasconsideredbyDixonJ, it wassimply considered on the basis of objective evidence ratherthan subjective evidence. Hence,theimplicationwasmadeinfact,notbylaw. Priestley JAs judgment can be seen to rest much more comfortably, if not solely, on implicationinfactratherthanimplicationbylaw.Implicationinfactisconsideredfirst,and theconclusionisdecisive.Ontheotherhand,theconsiderationofimplicationbylawismuch lessconvincing,and,evenifvalid,isrestrictedtoaverynarrowambit.Ifanapproachtothe implieddutyofgoodfaithistobedrawnfromPriestleyJAsjudgmentinRenardwhich,as notedabove,wasobiterasregardsthisissueitisthattheimplicationofadutyofgoodfaith oughttobeanimplicationinfact,basedontheintentionoftheparties.Inaddition,Handley JAimpliedarequirementofreasonablenessintooneoftheclausesofthecontractinamanner which, although not expansively explained, is best described as implication in fact.59As a result,Maitlandandtheotherrecentcasesdiscussedabovearguablyconformmorecloselyto RenardthantotheseriesofcasesculminatinginOverlookandGarryRogers. Implicationinfactversusconstruction Criticismsofimplicationinfact Asnotedabove,ElisabethPedenhaswrittenextensivelyontheissueofgoodfaith.Pedenhas cogentlycriticisedthecaselawwhichhasemergedfromRenard.60Inherbookonthesubject,61 as well as identifying the difficulties with implying a duty of good faith by law, Peden highlightsthekeyweaknessinthedoctrineofimplicationinfact:thelackofcertaintyinthe definitionandapplicationofthetestsfortheimplicationofaterminfactenumeratedinBP Refinery (Westernport) Pty Ltd v Shire of Hastings 62 (BP Refinery), in particular those of obviousness and necessity for business efficacy. The flexibility of these socalled tests can

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(1948)22ALJ151. QuotedbyPriestleyJAfromtheHighCourttranscriptinRenardConstructions(ME)PtyLtdv MinisterforPublicWorks(1992)26NSWLR234,263.Thesamewordsinthepastratherthanpresent tensearefoundin(1948)22ALJ151,155. RenardConstructions(ME)PtyLtdvMinisterforPublicWorks(1992)26NSWLR234,263. RenardConstructions(ME)PtyLtdvMinisterforPublicWorks(1992)26NSWLR234,280. Seeaboven27andaccompanyingtext. Peden(2003),aboven3. BPRefinery(Westernport)PtyLtdvShireofHastings(1977)180CLR266.

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conceal policy judgments as to whether a term of good faith ought to be implied in a contract.63 Infact,inRenarditselfPriestleyJAnotedthatthetestsofbusinessefficacyandobviousness couldprovedifficultinthecontextofthedutyofgoodfaith;64andinMaitlandandothercases these tests have been largely overlooked. As Priestley JA foreshadowed, these recent cases have considered the issues embodied by the requirements enumerated in BP Refinery in a moregeneralway.65ThisisnottoavoidthequestionPedenscriticismsarevalid.Thetests arenotoriouslyflexible,andatworstaresimplymasksforpolicydecisions,abasisonwhich thecourtcanselecttheoutcomewhichitconsidersfairest. However,thesecriticismsdonotcompromisetherelevanceofimplicationinfactindealing with the duty of good faith. First, the tests for implication in fact are unduly flexible in general,notjustwithregardtothedutyofgoodfaith.Therefore,implicationinfactisjustas acceptable in this context as it is in any other; and it will be refined in this context as it is refined in any other. Second, implication in fact is a considerable improvement upon implicationbylawbecauseitfocusesjudicialattentionontherightareas:thefactsofthecase; the words of the contract; and the intention of the parties. Further, it provides a context in whichtodefinethedutyofgoodfaith.Third,itprovidesaplatformonwhichtobuild,over time,throughprecedentandargument,adoctrinewhichdoesnotsufferfromthesedefects. Thetestsmayormaynotproverelevanttotheimplicationofthedutyofgoodfaithlegal argument and judicial rationale will determine that. Finally, the advocated alternative, labelledconstruction,lackssubstanceanddoesnotofferanyoftheseadvantages. Exploringthealternativeofconstruction Although Pedens opposition is strongest toward implication by law, she prefers that the existence of a duty of good faith be dealt with as a matter of construction rather than implication in fact. 66 Peden seeks to distinguish construction from implication in fact. To quote the faint praise of Sir Anthony Mason which introduces Pedens book, [i]t is this elusive distinction that underlies [Pedens] approach. Whether the distinction is as sharp as theauthorcontendsmaybeopentoquestion.67Aswillemergebelow,itiscontendedinthis paper that the distinction is more imagined than real. However, it is clear that Peden considersthattheconstructionapproachtoincorporatingthedutyofgoodfaithintocontract lawisdistinctfrombothimplicationinfactandimplicationinlawthatitrepresentsathird wayanditisdiscussedbelowonthatbasis. In comparing construction and implication in fact, Peden recognises that [t]he inference of thepartiesintentionsinvolvedinconstructionandimplicationinfactarethesameandthat [t]he courts would merely be moving away from the use of tests of implication that have beenshowntobelacking.68Inlightofthat,whatwouldadoptingconstructionachievewhich implicationinfactdoesnot?Ifthetestsofimplicationinfactaremerelyhollowvehiclesfor policy,movingtoconstructionissimplyarebrandingexercise.Ifthetestsholdanyvalueat

63 64 65 66 67

68

Peden(2003),aboven3,7291. RenardConstructions(ME)PtyLtdvMinisterforPublicWorks(1992)26NSWLR234,2578. RenardConstructions(ME)PtyLtdvMinisterforPublicWorks(1992)26NSWLR234,258. Peden(2001),aboven3,230;Peden(2003),aboven3. Peden(2003),aboven3,Foreword(perSirAnthonyMason).SirAnthonyMasonrecognisesthe booksgreatvalueinotherrespectsinparticularregardingthetestsforimplicationinfact,the relationshipbetweengoodfaithandthedutyofcooperationandtheconceptofgoodfaithbutis noticeablyelusiveonthedistinctionbetweenconstructionandimplicationinfact. Peden(2003),aboven3,141.

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DISCREETDIGRESSION:THERECENTEVOLUTIONOFTHEIMPLIEDDUTYOF GOODFAITH all,whatisgainedtocompensateforremovingthem?Allinall,wouldconstructionnotat bestbeequallyuncertain? Pedens response to this question which she poses herself is unconvincing. 69 The uncertaintyofconstructioneventuallyseemstobeconceded,asPedensuggeststhat[t]othe extent that the business efficacy and obviousness tests help courts discover and implementthepartiesintentions,thereisnoreasonwhytheycouldnotberetainedastestsof construction.70This is recognition that tests of some nature may be necessary to constrain uncertainty. Peden turns to the very tests used in implication in fact. This undermines the argumentfortheuseofconstructionasdistinctfromimplication;indeed,itunderminesthe distinction between construction and implication. If in adopting construction the courts would merely be moving away from the use of tests of implication, reinstating those tests returnsustothepointofdeparture.Thisisfarfromtheinitialassertionthatimplicationin factgenerallyisrenderedmeaninglessbyconstruction.71 The problem with the entire argument is the false dichotomy drawn between construction and implication in fact. In her conclusion, Peden notes that implication in fact is a rule of construction, and [t]he tests of business efficacy and obviousness are guides to determining the intentions of the parties. 72 In contrast, construction as an independent doctrine does not have any identifiable substance of its own. Peden inadvertently demonstratesthisintryingtoshowitslackofuncertaintyinregardtothedutyofgoodfaith. AsPedenstates,implicationinfactshouldbeseenaspartofconstructioncourtsconstrue contracts to decide whether an implied term is needed or not. 73 Implication in fact is a specific rule of construction. It is construction at work, in context, with content an illustrationoftheprocessofconstruction,inthewordsofMasonJ(ashethenwas).74 Undoubtedly,thereisanelementoffictiontoimplicationinfact.Pedenrightlycriticisesthe vagueness of the requirements for implication in fact and their use to obscure policybased decisionmaking.Thereisnodoubtthatthelawhaslesspatienceforfictionsthaninthepast, andproperlyso;buttimeisofsingularimportanceinthedevelopmentofthecommonlaw. AsPedenshowsinthecasesoffrustrationandanticipatorybreach,75policyfrequentlybreaks throughfrombeneaththeveneerofwhateverfictionshelteredittoproduceacommonlaw

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Ibid,1445.Pedenhighlightstheinevitabilityofmarginalcasesandthetensionbetweencertainty andjustice,buttheseobservationsdonothingtoabsolveconstructionfrombeingpurediscretion. Pedenthenmakesthesolitaryassertionthat[w]hileconstructionisaflexibletool,itprovides predictability,butassupportshecitesMegawLJcommentingontheimportanceofuniformityand predictabilityinthelaw.Pedenfallsbackupontheexistenceofanumberofcanonsofconstruction, butnotesthatthesearemerelydevicesfordeterminingintention,astherequirementsofgoodfaith are,andthattheexcessofrulesallowsselectiveapplication.Inaddition,theexistenceoftheserules ofconstructiondoesnothingtojustifytheinstancingofgoodfaithasaruleofconstructionrather thanimplicationinfacttheyapplyequallyineithercase.Intheend,Pedenconcedesthatthe outcomewillbelefttojudges,withanappealtohavefaithintheirinformedandeducated judgment,formulatedinpublicdiscussionandfoundednotmerelyuponasharedexperienceofthe practicaladministrationofjustice,butalsouponanacceptedbasisofsystematiclegalprinciple.This faithmaybefairlyinvested,butitisfaithindiscretionjustasitiswithimplicationinfact(takinga cynicalviewoftheestablishedtests). Ibid,147. Ibid,141. Ibid,152. Ibid,142. Ibid,141. Ibid,1924.

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ruleindependentofitsorigins.76Yetthisextricationcanonlycomewhentheweightofcase law, the trial of time, glosses, analogies, special cases in sum, precedent provides a principledbasisonwhichtoproceed.77Atthispoint,aconstructionapproachtothedutyof good faith has no content of its own visvis an implication in fact approach. The constructionapproachisimplicationinfact. Theupshotfromthisistwofold.First,thoselookingtoconstructionasapanaceafortheillsof implication in fact should reconsider their focus. The construction argument is apt at identifying the problem, but it does not offer a solution. Second, and most importantly, the common goal of good law, both rational and certain is obtainable from the present position. Just as frustration and anticipatory breach have done, good faith can evolve from implication to become an integral, independent rule of the common law. While Maitland certainly does not cure the defects of implication in fact, the elements which should be importantfromapolicyperspectivearetakenintoaccountmuchmorefairly.Asaresult,itis apositivestepastepontheroadtoclarityandtransparencyforthedoctrineofgoodfaith.

Conclusion
Withoutnecessarilyacceptingthatadutyofgoodfaithoughttobeimpliedintocontracts,it seemsclearthatifsuchanimplicationistobeemployed,itoughttobeanimplicationinfact ratherthanbylaw.Employingimplicationinfactwouldallowabodyofcaselawtodevelop which provides a reliable indication of the types of clauses into which a duty of good faith willbeimplied,andthecontentwhichthatdutywillbegiven. Maitland,EssoandCityofSydneycanbeseenasexamplesoftheimplicationinfactofaduty of good faith. There is enough authority, and enough confusion in existing authority festeringintheabsenceofadefinitiveconsiderationbytheHighCourttoallowimplication infacttobeadoptedbycourtsinthefuture.Implicationinfactoffersapracticablepathfor theimplieddutyofgoodfaith.

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Topositatippingpointorcriticalmass:suchatransitionhappenswhenthefictiondoesmoreto createuncertaintybyobscuringthetruepolicyfactorsinformingthedoctrinethanitdoestoenhance certaintybyrootingthedoctrineintheintentionoftheparties(orotherknown,established concerns). 77 Thisisreflectedinthelackofuniformitybetweenthedoctrineswhichhavemovedawayfrom implicationinfact.Therearenounifyingfeatureswhichmaketheircharacterisationasrulesof constructionrevelatoryinanyway.Rather,theyareindependentrulesofthecommonlaw,with theirowncontentandoperation,whichhavedevelopedfromacommonbasisinimplicationinfact. Theymayberulesofconstruction,butthisisagrouping,notacommonality.

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