AustLII Home | Databases | WorldLII | Search | Feedback

University of New South Wales Law Journal Student Series

You are here:  AustLII >> Databases >> University of New South Wales Law Journal Student Series >> 2022 >> [2022] UNSWLawJlStuS 31

Database Search | Name Search | Recent Articles | Noteup | LawCite | Author Info | Download | Help

Goyal, Ruchit --- "Express Termination Rights - The Importance Of Party Autonomy And Freedom Of Contract" [2022] UNSWLawJlStuS 31; (2022) UNSWLJ Student Series No 22-31


EXPRESS TERMINATION RIGHTS – THE IMPORTANCE OF PARTY AUTONOMY AND FREEDOM OF CONTRACT

RUCHIT GOYAL*

I INTRODUCTION

It has been long established that one of the hallmarks of a capitalist society is for parties to have the freedom to enter into contracts as they please.[1] However, courts are often required to strike a balance between the competing interests of freedom of contract on the one hand, and seeking to achieve a sense of justice for the ‘innocent party’ on the other.[2] This tension has been visible in several aspects of modern contract law for over a century now, with courts still grappling with ways on how to balance the two.[3] One of such challenges for courts include construing express termination clauses which appear clear and unambiguous on its face; however, their literal application has the potential to result in notions of unfairness for the ‘innocent party’. In such circumstances, courts have demonstrated a tendency to intervene by implying a term of good faith and/or reading down the clause in question in order to give effect to what they call to be ‘commercial practicality’.[4] However, the author argues that by doing so, courts are swaying away from the longstanding notion of the freedom of contract and failing to give effect to the terms of the contract as agreed by the parties.

This paper will begin with a brief overview on the common law termination rights, before moving the discussion onto termination rights which are expressly conferred by the contract. This latter type of termination rights will be closely analysed, followed by discussing the ways by which courts tend to intervene to limit the operation of some express termination clauses. Part IV will then include a discussion on the reasons which courts provide for interfering with express termination clauses, thereby placing the readers in a position to make their own judgment as to the persuasiveness of these reasons. Finally, in Part V, the author states his own opinion on this tension between the freedom of contract and allowing courts to intervene, noting that the justifications provided by courts are inadequate and detailed reasons why the author is of such opinion.

II TERMINATION RIGHTS

Broadly speaking, there are two key sources for a right of termination in a contract – 1) it can be implied by law;[5] or 2) expressly conferred by the contract.[6]

A Common Law Termination Rights

It is usually understood that a common law right to terminate a contract arises in three circumstances – firstly, breach of a condition;[7] secondly, a sufficiently serious breach of an intermediate term;[8] and thirdly, repudiation of obligation.[9] The policy reasoning behind allowing the innocent party to terminate the contract in these circumstances is simple – courts will not force an innocent party to be bound by a contract where the wrongdoer has clearly repudiated and the relationship of trust and confidence is presumably broken.[10] However, there is another set of circumstances, which is often forgotten, but can also be placed in the same category of a termination right arising by way of common law. This occurs where the contract is entirely silent on termination and is otherwise on foot for an indefinite duration.[11] In such circumstances, courts are prepared to imply a right of termination even in an absence of breach, recognising that the ordinary nature of commercial agreements will usually lead to the conclusion that parties must have intended the contract to be terminable on notice at some stage.[12]

However, these common law rights of termination have significant restrictions placed upon them. For instance, in an event of a right of termination arising from a breach, the innocent party must unequivocally elect to rescind the contract through words and/or conduct.[13] The innocent party must also be ready, willing and able to perform the contract at the time of breach,[14] and must not have waived,[15] or be estopped from exercising his/her right of termination.[16] Similarly, when the contract is silent on termination, requirements of reasonable notice and good faith are usually imposed on the party seeking to exercise his/her implied right of termination.[17]

Given that the right of termination itself arises by way of common law, it is not only understandable but also appropriate that certain restrictions and caveats be placed on the implied right in order to achieve a just outcome for both parties.[18] However, the story is different when the contract contains an express termination clause.

B Express Termination Rights

The other broad type of termination rights are ones that are expressly conferred by the contract.[19] To understand the range of options available to a draftsperson when including an express termination clause in the contract, the author invites readers to consider two ends of a spectrum. On the one end, you have an approach whereby the draftsperson seeks to, as some may call, ‘cover the field’.[20] As explained by French J in Wallace-Smith, adopting such an approach allows parties to define their rights to terminate the contract ‘exhaustively by the terms of the contract itself’,[21] and therefore, seeking to leave no room for the operation of the common law.[22] On the other end of the spectrum you have an approach which involves the bare minimal drafting on the part of the draftsperson, and thereby allowing the common law to govern parties’ rights, should a potential termination event occur.[23] For example, the draftsperson may merely identify which the essential terms of the contract are, or perhaps simply note the existence of the right of termination, and in doing so, leave the rest in the hands of the common law.[24]

There are pros and cons to each approach.

Covering the field gives parties certainty and allows them to remain in control of their termination rights by clearly distinguishing between breaches that give rise to a right of termination versus ones that only entitle the innocent party to damages.[25] However, a contractual entitlement to use the termination clause does not allow the innocent party to recover loss of bargain damages, which would otherwise be available under common law termination rights.[26] This can be one of the incentives for employing a drafting approach which is away from the ‘cover the field’ end of the spectrum. In saying so, skilful draftspersons can employ a liquidated damages clause into the contract that seeks in effect to compensate for the common law loss of bargain damages entitlement.[27]

Another downside of employing an expansive termination clause is that, as explained by French J in Wallace-Smith, it can be difficult to predict every possible future repudiation of the contract.[28]

However, despite the limitations, some parties nevertheless prefer a drafting approach which is close to the ‘cover the field’ end of the spectrum. Such contracts are often entered into by commercial and well-advised parties as it allows them to retain control over the contract by ousting the operation of the common law.[29] It is that end of the spectrum which will be focused on for the remainder of this paper.

However, by allowing readers to consider the range of drafting possibilities as a spectrum as opposed to fixed categories,[30] the author wishes to emphasise that there exist countless drafting approaches and techniques available to draftspersons. In fact, termination clauses in most commercial contracts will seek to use or build upon the common law,[31] and therefore, sit somewhere along the spectrum as opposed to the far ends.[32] This naturally allows parties to not only retain some level of control over the contract, but to some extent, also rely on the common law entitlements in an event of termination.[33] However, as mentioned above, the key focus of the rest of this paper will be on the ‘cover the field’ end of the spectrum.

III COURTS’ INTERVENTION

As explained above, express termination clauses in a contract can range in specificity, leaving courts with the task of determining whether parties intended the common law (and therefore the courts) to intervene. However, in construing such termination clauses, courts have demonstrated a tendency to limit the use of certain express termination rights, even where the language employed by parties is clear and unambiguous (i.e., clauses that can unquestionably be placed close to the ‘cover the field’ end of the spectrum). Some ways in which courts have done so will now be discussed.

A Good Faith

A term of ‘good faith’[34] is sometimes implied in a contract by the courts where it appears that one party has exercised their termination rights in a manner which displays qualities of dishonesty, even though their conduct is permitted within the confines of the contract.[35] An example of the court doing so was in the case of Burger King Corporation v Hungry Jack’s Pty Ltd.[36] The Court, relying on the judgment of Priestley JA in Renard,[37] held that Burger King had breached the implied term of ‘good faith’ when they served Hungry Jacks with the notice of termination – even though the notice gave Hungry Jacks an opportunity to rectify their breach and was in accordance with the termination clause of the contract.[38] The Court of Appeal discussed the use of an implied duty of good faith in commercial contracts and noted that there ‘appears to be increasing acceptance’ that ‘terms of good faith and reasonableness [can be implied] as a matter of law’.[39] Although the appropriateness of the court’s implication of such a term will be explored below in detail, it is worth noting at this stage that the implication of such a duty in commercial contracts has found ‘wide support by Australian courts’.[40]

B Automatic Termination

An automatic termination clause can be drafted into a contract with the intention that the contract be automatically terminated (i.e., discharging parties of all future obligations) upon the occurrence of a stipulated event or events.[41] A classic example as provided by Lord Atkinson is when a contract ‘stipulate[s] that if rain should fall on the 30th day after the date of the contract, the contract should be void. Then if rain did fall on that day the contract would be put to an end by this event, whether the parties so desire or not’.[42] However, Australian courts have demonstrated a great reluctance to allow such clauses to take effect in practice, particularly if the stipulated event lies within the power or control of one or more of the parties.[43]

Such an issue arose in the High Court case of Suttor v Gundowda,[44] where a clause provided that the ‘contract shall be deemed to be cancelled’ if ‘the consent of the Treasurer [was] not ... obtained within two months from the date hereof’.[45] Such consent was not obtained within the given timeframe.[46] Nevertheless, the vendor’s reliance upon the clause was unsuccessful as the clause was unanimously read down by the High Court.[47] Latham CJ, Williams and Fullagar JJ noted that despite the wording of the clause (which the author argues is clear and unambiguous), the contract can only be brought to an end once one of the parties have exercised their option to terminate the contract.[48]

However, it is important to understand the reasons why courts tend to intervene in such circumstances – where the termination clauses are arguably drafted using clear and unambiguous words.

IV WHY COURTS INTERVENE?

In most circumstances, courts will respect the terms of the contract as employed by the parties.[49] However, as discussed above, there will be situations where courts do intervene, and below are some reasons which courts give for doing so.

A Commercial Practicality

The most common reason cited by courts for swaying away from the express termination clauses in a contract is to give effect to commercial practicality.[50] Let’s take the High Court case of Suttor v Gundowda mentioned above as an example where the Court read down an automatic termination clause.[51] In doing so, Latham CJ, Williams and Fullagar JJ held that the failure to obtain the consent of the Treasurer ‘is to be construed as making the contract not void but voidable’.[52] In doing so, courts believe that they are giving effect to commercial practicality by avoiding a ‘construction which makes commercial nonsense or is shown to be commercially inconvenient’.[53] Given that the consent of the Treasurer was eventually obtained in Suttor v Gundowda,[54] and the obligations under the contract could have been performed without affecting the interests of either party, the Court held that terminating the contract in the absence of breach would be uncommercial for the parties.[55] Such an approach reflects the court’s broader ‘preference for a [contractual] construction that will encourage performance rather than avoidance of contractual obligations’.[56]

In doing so, courts infer that commercial parties would not have intended for the contract to be terminated automatically if,[57] using the example above, the consent of the Treasurer was subsequently obtained. As such, courts conclude that they are in fact giving effect to parties’ ‘presumed commercial purposes’ and noting that the achievement of such purposes must not be defeated by an ‘excessively narrow and artificially restricted construction’ of the contract.[58]

In this way, avoiding uncommercial outcomes tends be one of the key reasons why courts feel obliged to intervene despite an express termination clause in the contract.

B Fairness

Another reasoning which courts provide for interfering with express termination clauses is to give effect to notions of fairness.[59] For instance, the trial judge in Hungry Jack's Pty Ltd v Burger King Corporation found that Burger King had sought to, by the exercise of its sole discretion, deprive Hungry Jack’s of the contractual benefits and done so ‘totally without justification’.[60] His Honour further went on to note that had Burger King not sought to terminate the contract, there was ‘no rational reason or explanation for [Hungry Jack’s] wishing to abandon the business’.[61] Therefore, it is usually in circumstances such as this – where one party has an unfettered discretion to terminate the contract for no reason other than a personal desire to do so – that courts tend to interfere and stop that party from exercising that right arbitrarily.[62]

Notions of fairness can also be seen in the court’s reluctance of allowing automatic termination clauses to take effect, particularly where one party holds control to influence the stipulated event.[63] Courts usually prefer an interpretation which keeps the contract on foot and does not deprive the innocent party of the benefits of the contract.[64] As such, despite an express termination clause in the contract, courts are ready to intervene in order to prevent the party with an unfettered discretion from using that discretion in a manner that is to the detriment of the other party.[65]

V SHOULD COURTS INTERVENE?

Discussed above are some reasons why courts tend to step in and steer away from an express termination clause in a contract. However, the author respectfully disagrees by the justifications provided and strongly argues, as discussed below, for a position whereby courts adopt a strict interpretation of the contract when it comes to express termination rights and not intervene if the words used by draftspersons are clear and unambiguous (i.e., termination clauses that fall close to the ‘cover the field’ end of the spectrum).

A Freedom of Contract

Sir George Jessel MR, one of the most influential British judges of the late 19th century,[66] observed the notion of a ‘freedom of contract’ almost 150 years ago, when he noted that ‘men [and women] of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by Courts of justice’.[67] This notion has also been recognised by the High Court of Australia, with Gleeson CJ, Gummow, Kirby, Hayne, Callinan and Heydon JJ observing that the ‘law of contract normally upholds the freedom of parties, with no relevant disability, to agree upon the terms of their future relationships’.[68]

Freedom of contract allows parties, particularly commercial parties, to clearly set out their rights and obligations in what can sometimes be a sophisticated and complex arrangement.[69] Therefore, if such a contract contains a clear and unambiguous termination clause, as parties drafted in the Burger King Corporation v Hungry Jack’s Pty Ltd case discussed above,[70] the intervention by courts is a derailment from not only the longstanding notion of the freedom of contract, but also the intrinsic value of party autonomy.[71]

As such, the author argues that if parties clearly understood their termination rights at the time of entry into the contract, a court’s role must be to give effect to the words and not look beyond the four corners of the contract in an attempt to achieve what they believe is the best commercial outcome.[72] Instead, it can be argued that the ‘innocent party’ had ample opportunities to object to the terms during the negotiations phase, or alternatively, simply refuse to enter into the contract. We are not here talking about a consumer sale or an employment contract where parties hold significantly unequal bargaining power.[73] Instead, these are two commercially sophisticated parties who wish to enter into an arrangement in an open and competitive marketplace. And by signing the contract, these parties acknowledge that they agree to the terms and consent to be bound by them.[74] In such circumstances, the author argues that even if one party is given an unfettered discretion as to termination,[75] courts must not seek to apply their own definition of commerciality. For instance, even if the exercise of the termination clause in Suttor v Gundowda led to an uncommercial outcome and notions of unfairness, parties agreed to be bound by the contract and therefore, the role of a court must be to give effect to those words.

B Commercial Advantage

The theory of law and economics provides that commercial parties are inherently self-interested, and their primary goal is profit maximisation.[76] Whilst a relationship between two contractual parties is undoubtedly much more complex than this, at a broad level, it can be said that most commercial parties act in their self-interest in the pursuit of profits.[77] In this way, the author argues that each party in a commercial contract should have an opportunity to gain a commercial (or competitive) advantage through their freedom to contract,[78] given that they act within the realms of the law.

In fact, it is the parties to the contract themselves that are best placed to fully understand the commerciality of their business, which includes taking calculated risks. Courts are simply not placed in a position to evaluate the commerciality of the decisions made by the parties and/or weigh the risks against the returns from a business mindset. In these circumstances, courts’ tendency to intervene could potentially act as a disincentive for commercial parties to engage in entirely self-interested contracts – which is one of the perks of living in a capitalist society.

VI CONCLUSION

This tension between the freedom of contract on the one hand, and seeking to achieve a just outcome in the circumstances discussed in the paper on the other, is an incredibly difficult scale to balance. Courts have often been inclined to imply a term of good faith and/or read down certain clauses in order to avoid uncommercial outcomes and achieve notions of justice; which some may argue that courts have successfully done in the past. However, the author is of the position that longstanding notions such as the freedom of contract and a commercial party’s ability to gain a competitive advantage must be given greater weight, even if the decision fails to achieve commercial practicality and potentially cause injustice to the ‘innocent party’. If parties do wish to avoid these ‘uncommercial outcomes’, they have the means to do so through the terms of the contract.


* Final year undergraduate law student at the University of New South Wales (UNSW). I would like to thank Mr Simon Kozlina for his support and advice. All opinions and errors are solely attributable to the author.

1 Printing and Numerical Registering Company v Sampson [1875] UKLawRpEq 48; (1875) LR 19 Eq 462, 465 (Sir George Jessel MR) (‘Printing and Numerical Registering Company v Sampson’); See also Morris Cohen, ‘The Basis of Contract’ (1933) 46(4) Harvard Law Review 553, 558; Arthur Chrenkoff, ‘Freedom of Contract: A New Look at the History and Future of the Idea’ (1996) 21 Australian Journal of Legal Philosophy 36, 37-9 (‘Freedom of Contract: A New Look at the History and Future of the Idea’). Note that this notion of a freedom of contract is subject to any statutory provisions, which is outside the scope of this paper: see Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28; (2016) 258 CLR 525, 594-5 [220] (Keane J).

[2] Note that the use of the term ‘innocent party’ in this paper refers to the party who wishes for the contract to remain on foot; AMEV-UDC Finance Ltd v Austin [1986] HCA 63; (1986) 162 CLR 170, 194 (Mason and Wilson JJ) (‘AMEV-UDC Finance v Austin’); See also Anthony Gray, ‘Termination for Convenience Clauses and Good Faith’ (2012) 7(3) Journal of International Commercial Law and Technology 260, 261-4.

[3] See, eg, L Schuler AG v Wickman Machine Tool Sales Ltd [1973] UKHL 2; [1974] AC 235 (Lords Reid, Morris, Simon and Kilbrandon, Lord Wilberforce dissenting) where Lord Wilberforce held that the Court should not interfere as his Lordship felt himself bound by the chosen classification as made within the terms of the contracts: see Joshua Thomson, Leigh Warnick and Kenneth Martin, Thomson Reuters, Commercial Contract Clauses: Principles and Interpretation (online at 9 July 2022) [100230]) (‘Commercial Contract Clauses: Principles and Interpretation’).

[4] See Pan Foods Company Importers & Distributors Pty Ltd v Australia and New Zealand Banking Group Ltd [2000] HCA 20; (2000) 74 ALJR 791, 794 [24] (Kirby J) (‘Pan Foods v ANZ’).

[5] Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17, 31 (Mason J), 55-6 (Deane J).

[6] See John Randall, ‘Express Termination Clauses in Contracts’ (2014) 73(1) The Cambridge Law Journal 113 (‘Express Termination Clauses in Contracts’).

[7] Associated Newspapers Ltd v Bancks [1951] HCA 24; (1951) 83 CLR 322, 339 (Dixon, Williams, Webb, Fullagar and Kitto JJ); Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632, 641-2 (Jordan CJ).

[8] Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61; (2007) 233 CLR 115, 138 [49] (Gleeson CJ, Gummow, Heydon and Crennan JJ) adopting Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1961] EWCA Civ 7; [1962] 2 QB 26 on the basis that it ‘has long since passed into the mainstream law of contract as understood and practised in Australia’: at 139 [50].

[9] Shevill v Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620, 625 (Gibbs CJ, Murphy and Brennan JJ agreeing); See also Michael Bennett, ‘Breach & Terminating a Contract’ (Paper Presented at the State Legal Conference CLE, 30 March 2012) (‘Breach & Terminating a Contract’).

[10] See Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549, 556-7 (Mason ACJ, Wilson, Brennan and Dawson JJ) (‘Ankar v National Westminster Finance’).

[11] Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438 (McHugh JA, Priestley JA agreeing at 440) (‘Crawford Fitting v Sydney Valve’).

[12] Ibid 444. Note that a determination of whether a commercial agreement contains an implied term to that effect requires taking into account the subject matter of the agreement and all the circumstances in which it was made: at 443-4.

[13] Tropical Traders Ltd v Goonan [1964] HCA 20; (1964) 111 CLR 41, 55 (Kitto J); Sargent v ASL Developments Ltd [1974] HCA 40; (1974) 131 CLR 634, 656 (Mason J); See also Immer (No 145) v Uniting Church in Australia Property Trust (NSW) [1993] HCA 27; (1993) 182 CLR 26, 41-2 (Deane, Toohey, Gaudron, McHugh JJ).

[14] DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423, 433 (Stephen, Mason and Jacobs JJ) approved by Foran v Wright [1989] HCA 51; (1989) 168 CLR 385, 408 (Mason CJ), 427 (Brennan J), 452 (Dawson J).

[15] Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57; (2008) 238 CLR 570, 596-9 [83]-[84] (Gummow, Hayne and Kiefel JJ).

[16] Legione v Hateley [1983] HCA 11; (1983) 152 CLR 406, 421 (Gibbs CJ and Murphy J).

[17] Note the comments of McHugh JA in Crawford Fitting v Sydney Valve (n 11) where his Honour explains that reasonable notice allows ‘parties to bring to an end in an orderly way [their] relationship ... [and] a reasonable opportunity to enter into alternative arrangements and to wind up matters which arise out of their relationship’: at 448.

[18] See Jeannie Paterson, Andrew Robertson and Arlen Duke, Principles of Contract Law (Thomson Reuters, 5th ed, 2016) 483-4 (‘Principles of Contract Law’).

[19] See generally Randall, ‘Express Termination Clauses in Contracts’ (n 6).

[20] Thomson, Warnick and Martin, Commercial Contract Clauses: Principles and Interpretation (n 3) [100410]; See also Wallace-Smith v Thiess Infraco (Swanston) Pty Ltd [2005] FCAFC 49 [60] (French J) (‘Wallace-Smith’).

[21] Wallace-Smith (n 20) [60] (French J).

[22] Thomson, Warnick and Martin, Commercial Contract Clauses: Principles and Interpretation (n 3) [100410].

[23] Ibid [100370].

[24] Ibid.

[25] Ibid [100410]; See also Bennett, ‘Breach & Terminating a Contract’ (n 9) 10-1.

[26] Loss of bargain damages are based on the price the innocent party would have received if the contract had been performed as promised, less the price the innocent party would receive by entering into a substitute transaction: Paterson, Robertson and Duke, Principles of Contract Law (n 18) 561; See also Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245, 260 (Mason CJ), 273 (Gaudron J); Wayne Courtney, ‘Good Faith and Termination: The English and Australian Experience’ (2019) 1(1) Journal of Commonwealth Law 185, 215-6; For a detailed discussion on loss of bargain damages, see Qiao Liu, ‘Unintended Acceptance of Repudiatory Breach and Loss of Bargain Damages’ (2021) 37 Journal of Contract Law 49.

[27] However, note that there exists a danger that drafting a liquidated damages clause could be assessed by a court as vulnerable to being struck down as a penalty: Thomson, Warnick and Martin, Commercial Contract Clauses: Principles and Interpretation (n 3) [100410]. For a detailed discussion on this topic, see John Carter and Elisabeth Peden, ‘A Good Faith Perspective on Liquidated Damages’ (2007) 23 Journal of Contract Law 157; See also John Carter, ‘Termination Clauses’ (1990) 3 Journal of Contract Law 90, 113-4.

[28] Thomson, Warnick and Martin, Commercial Contract Clauses: Principles and Interpretation (n 3) [100410]; Wallace-Smith (n 20) [60] (French J).

[29] See generally Wallace-Smith (n 20) (French J).

[30] Thomson, Warnick and Martin, Commercial Contract Clauses: Principles and Interpretation (n 3) [100350] notes that ‘there appears to be three main drafting approaches’.

[31] Ibid [100390].

[32] In saying so, the author does acknowledge that it can be almost impossible to mark an exact point on such a spectrum, but is nonetheless of the view that visualising a spectrum provides for a better representation of the drafting options available to draftspersons.

[33] Ibid; See also Wallace-Smith (n 20) [56]-[62] (French J).

[34] Note the discussion of whether the term ‘good faith’ has the same meaning as ‘reasonableness’ in this context: Hungry Jack's v Burger King [1999] NSWSC 1029 [440] (Rolfe J) (‘Hungry Jack’s v Burger King’); Alcatel Australia Ltd v Scarcella [1998] NSWSC 483; (1998) 44 NSWLR 349, 369 (Sheller JA, Powell and Beazley JJA agreeing at 370) (‘Alcatel Australia v Scarcella’); Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234, 263-4 (Priestley JA) (‘Renard Constructions’); See also Elisabeth Peden, ‘‘Implicit Good Faith’ – Or Do We Still Need an Implied Term of Good Faith?’ (2009) 25 Journal of Contract Law 50, 50-1.

[35] See, eg, Burger King v Hungry Jack’s Pty Ltd [2001] NSWCA 187; (2001) 69 NSWLR 558 (‘Burger King v Hungry Jack’s’); Alcatel Australia v Scarcella (n 34); Renard Constructions (n 34); Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15.

[36] Burger King v Hungry Jack’s (n 35) (Sheller, Beazley and Stein JJA).

[37] Renard Constructions (n 34).

[38] Hungry Jack's v Burger King (n 34) [247]-[255]. Clause 15.2 stated the following – ‘In the case of any breach which is capable of being cured [Burger King] shall not terminate this agreement unless and until [Hungry Jack’s] shall have failed to cure such breach...’: see also Thomson, Warnick and Martin, Commercial Contract Clauses: Principles and Interpretation (n 3) [100950].

[39] Burger King v Hungry Jack’s Pty Ltd (n 35) 569 [164]; See also Alcatel Australia v Scarcella (n 34) 369; Renard Constructions (n 34) 271 (Priestley JA), 276 (Meagher JA), 279 (Handley JA); cf Saxby Bridge Mortgages Pty Ltd v Saxby Bridge Pty Ltd [2000] NSWSC 433 where Simos J rejected the implication of a term of good faith in an agreement for a provision of mortgage services.

[40] Albert Monichino, ‘Termination For Convenience: Good faith and Other Possible Restrictions’ (2015) 31 Building and Construction Law Journal 68, 70; See also Renard Constructions (n 34) 266-7; Hughes Aircraft Systems International v Airservices Australia (No 3) [1997] FCA 558; (1997) 76 FCR 151 (Finn J); Alcatel Australia v Scarcella (n 34); Burger King v Hungry Jack’s Pty Ltd (n 35). Australian courts have been greatly influenced, although not directly, from United States law which specifically notes that ‘every contract... imposes an obligation of good faith in its performance or enforcement’: John Carter, ‘Good Faith in Contract: Why Australian Law is Incoherent’ (Paper Presented at the Bar Association of Queensland 2014 Annual Conference, 8 March 2014) 6 (‘Good Faith in Contract: Why Australian Law is Incoherent’).

[41] Thomson, Warnick and Martin, Commercial Contract Clauses: Principles and Interpretation (n 3) [100590]; Suttor v Gundowda Pty Ltd [1950] HCA 35; (1950) 81 CLR 418, 440 (Latham CJ, Williams and Fullagar JJ) (‘Suttor v Gundowda’).

[42] New Zealand Shipping Co Ltd v Societe des Ateliers et Chantiers [1919] AC 1, 9.

[43] Thomson, Warnick and Martin, Commercial Contract Clauses: Principles and Interpretation (n 3) [100570]; Suttor v Gundowda (n 41) 441-2; See also Rudi’s Enterprises Pty Ltd v Jay (1987) 20 NSWLR 568, 579–80 (Samuels AP). For a comparison and a discussion of the use of ‘automatic termination’ in South Africa, see Judith Geldenhuys, ‘The Effect of Changing Public Policy on the Automatic Termination of Fixed-Term Employment Contracts in South Africa’ (2017) 20 Potchefstroom Electronic Law Journal 1.

[44] Suttor v Gundowda (n 41); See also Thomson, Warnick and Martin, Commercial Contract Clauses: Principles and Interpretation (n 3) [100590].

[45] Ibid 440-2.

[46] However, note that the consent of the Treasurer was eventually obtained but did not directly affect the High Court’s reasoning: ibid 440-2.

[47] Ibid 445.

[48] Ibid 440-2; A similar approach was adopted in the case of Gange v Sullivan [1966] HCA 55; (1966) 116 CLR 418 (Barwick CJ, Taylor, Menzies, Windeyer and Owen JJ) (‘Gange v Sullivan’) where the High Court once again read down an automatic termination clause that otherwise may have operated by itself to deliver an automatic termination: see also Thomson, Warnick and Martin, Commercial Contract Clauses: Principles and Interpretation (n 3) [100610].

[49] See David McLauchlan, ‘Objectivity in Contract’ [2005] UQLawJl 28; (2005) 24(2) University of Queensland Law Journal 479.

[50] See, eg, Suttor v Gundowda (n 41); Gange v Sullivan (n 48). It was further noted by Kirby J in Pan Foods v ANZ (n 4) that commercial documents ‘should be construed practically, so as to give effect to their presumed commercial purposes and so as not to defeat the achievement of such purposes by an excessively narrow and artificially restricted construction’: at 794 [24].

[51] Suttor v Gundowda (n 41).

[52] Ibid 441.

[53] Hide & Skin Trading Pty Limited v Oceanic Meat Traders Limited (1990) 20 NSWLR 310, 313-4 (Kirby P) (‘Hide & Skin Trading v Oceanic Meat Traders’).

[54] The contract stipulated for the Treasurer’s consent to be obtained within two months before the contract came to an automatic termination. This date was to be 20 December 1947, which was a Saturday. Consent was eventually obtained on 5 January 1948, which was a Monday. Taking into account the holiday period and weekends, consent was technically merely three business days delayed: see Thomson, Warnick and Martin, Commercial Contract Clauses: Principles and Interpretation (n 3) [100590].

[55] Suttor v Gundowda (n 41) 440-2.

[56] Ankar v National Westminster Finance (n 10) 556-7; See also Amann Aviation Pty Ltd v Commonwealth [1990] FCA 55; (1990) 22 FCR 527, 554-5 (Burchett J) (‘Amann Aviation v Commonwealth’).

[57] Hide & Skin Trading v Oceanic Meat Traders (n 53) 313-4.

[58] Pan Foods v ANZ (n 4) 794 [24]; Compare a slightly stringent approach applied by the English Courts: Randall, ‘Express Termination Clauses in Contracts’ (n 6) 123-4.

[59] See Thomson, Warnick and Martin, Commercial Contract Clauses: Principles and Interpretation (n 3) [100270].

[60] Hungry Jack's v Burger King (n 34) [595].

[61] Ibid [595].

[62] These are also sometimes referred to as ‘termination for convenience’ clauses: Thomson, Warnick and Martin, Commercial Contract Clauses: Principles and Interpretation (n 3) [100990]; See generally Ruth Loveranes, ‘‘Termination for Convenience’ Clauses’ [2012] UNDAULawRw 6; (2012) 14 The University of Notre Dame Australia Law Review 103.

[63] See Thomson, Warnick and Martin, Commercial Contract Clauses: Principles and Interpretation (n 3) [100270].

[64] Ankar v National Westminster Finance (n 10) 556-7; Amann Aviation v Commonwealth (n 56) 554-5.

[65] See Thomson, Warnick and Martin, Commercial Contract Clauses: Principles and Interpretation (n 3) [100270].

[66] David O'Keeffe, ‘Sir George Jessel and the Union of Judicature’ (1982) 26(3) The American Journal of Legal History 227, 228-30.

[67] Printing and Numerical Registering Company v Sampson (n 1) 465; See also Chrenkoff, ‘Freedom of Contract: A New Look at the History and Future of the Idea’ (n 1); For a discussion of this notion of ‘freedom of contract’ in the United States, see David Bernstein, ‘Freedom of Contract’ (Research Paper No 08-51, George Mason University School of Law, George Mason University Law and Economics).

[68] Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71; (2005) 224 CLR 656 [31]; See also AMEV-UDC Finance v Austin (n 2) 190.

[69] Note the rise of commercial contracts now being entered into by corporations since the end of the 19th century due to the establishment of a corporation as a separate legal entity: Salomon v Salomon & Co Ltd [1897] AC 22.

[70] Note the comment by Professor John Carter that the contract in question can be described as a ‘detailed commercial contract’: Carter, ‘Good Faith in Contract: Why Australian Law is Incoherent’ (n 40) 28.

[71] Ibid 13; See also Mann v Paterson Constructions Pty Ltd [2019] HCA 32; (2019) 267 CLR 560, 580 [20] (Kiefel CJ, Bell and Keane JJ).

[72] Note that in some legal systems, a freestanding duty or concept of good faith provides a gateway through which external norms can be recognised and accommodated within the law of contract: John Carter and Wayne Courtney, ‘Good Faith in Contracts: Is There An Implied Promise to Act Honestly?’ (2016) 75(3) Cambridge Law Journal 608, 613.

[73] Cf New South Wales Cancer Council v Sarfarty (1992) 28 NSWLR 68 (Gleeson CJ, Mahoney AP and Handley JA).

[74] See the rule in L’Estrange v Graucob [1934] 2 KB 394 that a person who signs a contractual document is bound by the terms of that document, approved and adopted by Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 165, 185 [57] (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ).

[75] See, eg, Thiess Contractors Pty Ltd v Placer (Granny Smith) Pty Ltd (2000) 16 BCL 255 (Ipp, Steytler and Wheeler JJ).

[76] Cento Veljanovski, ‘The Economic Approach to Law: A Critical Introduction’ (1980) 7(2) British Journal of Law and Society 158, 162.

[77] See ibid.

[78] See generally Larry DiMatteo, ‘Strategic Contracting: Contract Law as a Source of Competitive Advantage’ (2010) 47(4) American Business Law Journal 727.


AustLII: Copyright Policy | Disclaimers | Privacy Policy | Feedback
URL: http://www.austlii.edu.au/au/journals/UNSWLawJlStuS/2022/31.html