The following article was published by Lexology on 9 September 2021:
In an article published earlier this year, we looked at the circumstances in which an express right to terminate a contract might be constrained by implied duties of reasonableness and good faith: https://www.lexology.com/library/detail.aspx?g=14716112-aa5b-4fc5-bd95-98edac8f0a7b.
A duty of good faith is often confused with a duty of co-operation. However, while the two can overlap, they are recognised under the law as separate and distinct duties.
Once described as a universal rule of construction, it is now clear that a duty of co-operation is subject to some important limitations.
What is the duty of co-operation?
In Butt v McDonald (1896) 7 QLJ 68, Griffith CJ said:
“It is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract.”
The above extract (often referred to as the “Butt formula”) is generally regarded as the authoritative formulation of the implied duty of co-operation.
Although the Butt formula expresses the duty of co-operation in the positive, other cases have expressed it in the negative; that is, as a covenant “not to hinder or prevent the fulfilment of the purpose of the express promises” contained in the contract (see, for example, Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126, per Gleeson CJ, Gummow, Kirby and Hayne JJ).
What does the duty mean in practice?
The following cases underscore the significance of the implied duty of co-operation, where it is held to exist:
- a lessee who had agreed to assign a lease would have been precluded from abandoning the lease prior to completing the assignment: Contempree v BS Investments Pty Ltd [2020] QCA 255 at [43];
- a franchisor which had granted an exclusive franchise was obliged to refrain from taking positive steps that would infringe (or cause a third party to infringe) upon that exclusive franchise: Marmax Investments Pty Ltd v RPR Maintenance Pty Ltd [2015] FCAFC 127 at [139];
- where the owner of a colliery had agreed to indemnify the owner of an adjoining rail line in respect of loss suffered due to subsidence, both parties were obliged to do all things necessary for the adjoining owner to have the benefit of the indemnity, including each of them allowing access to the other’s land to identify the real cause of damage to the rail line: Maitland Main Collieries Pty Ltd v Xstrata Mt Owen Pty Ltd [2006] NSWSC 1235 at [52];
- where a dispute resolution regime in a rental increase clause provided for the appointment of an independent valuer (subject to the agreement of the lessor and lessee):
- the lessee was obliged not to refuse unreasonably to agree to that appointment; and
- where there were no grounds asserted by the lessee for objecting, the lessee was bound to agree to the appointment and to do all things reasonably necessary to give effect to the appointment,
- the lessee was obliged not to refuse unreasonably to agree to that appointment; and
(Servcorp WA Pty Ltd v Perron Investments Pty Ltd [2016] WASCA 79 at [169]); and
- where a dispute resolution regime in a contract provided for an expert determination to occur, the defendant was obliged to co-operate to secure the appointment of a suitably qualified expert: LWB QLD SBB Ltd v State of Queensland [2021] NSWSC 462 at [100].
When does the duty apply?
In practice, difficulties may arise for a party seeking to establish that the duty of co-operation is implied. In particular, the duty is not implied where it would be inconsistent with the express terms of the contract. Further, where it applies, the duty is limited to those acts which are necessary to securing the performance of “fundamental obligations” under the contract and is also limited by the principle of reasonableness.
Inconsistency with express terms
The duty of co-operation was at one stage described as a universal rule of construction. However, recent intermediate appellate authority has described it as a term which may be implied by law, and which must therefore meet the tests for such a term (see, e.g., Adaz Nominees Pty Ltd as trustee for the Rado No 2 Trust v Castleway Pty Ltd as trustee for the Castleway Trust [2020] VSCA 201 at [116]-[118]; Bensons Property Group Pty Ltd v Key Infrastructure Australia Pty Ltd [2021] VSCA 69 at [105]-[108]).
This means that the duty will not be implied where the implication would be inconsistent with the express terms of the contract. The High Court has held that “care must be exercised in identifying both the content and operation of an implied obligation to co‑operate lest it be at odds with the terms upon which the parties have expressly agreed” (Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; 238 CLR 304 at [168] - special leave to advance the relevant ground was refused, with the majority holding that it was “not a term necessary to give business efficacy to the parties' agreements” (at [170]); see also Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349 per Sheller JA, with whom Powell and Beazley JJA agreed, at 368C).
Acts necessary to secure fundamental promises
The duty to co-operate is confined to those acts which are necessary to secure the performance of obligations under the contract; that is, “something which the contract requires to happen” (Bell Group NV v Insurance Commission of Western Australia [2017] WASCA 229 at [113]; see also New Standard Energy PEL 570 Pty Ltd v Outback Energy Hunter Pty Ltd [2019] SASCFC 132 at [130]).
The case authorities suggest that this requirement is not satisfied easily. In some instances, an obligation under the contract exists, but there is no act which is necessary to the performance of that obligation. For example, there might be more than one way of performing the obligation, such that the (alleged) defaulting party’s conduct does not actually prevent it.
In Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596, Mason J said (at 607-8):
“It is easy to imply a duty to co-operate in the doing of acts which are necessary to the performance by the parties or by one of the parties of fundamental obligations under the contract. It is not quite so easy to make the implication when the acts in question are necessary to entitle the other contracting party to a benefit under the contract but are not essential to the performance of that party’s obligations and are not fundamental to the contract. Then the question arises whether the contract imposes a duty to co-operate on the first party or whether it leaves him at liberty to decide for himself whether the acts shall be done, even if the consequence of his decision is to disentitle the other party to a benefit. In such a case, the correct interpretation of the contract depends, as it seems to me, not so much on the application of the general rule of construction as on the intention of the parties as manifested by the contract itself.”
Two cases highlight this distinction:
- First, the duty of co-operation did not require a financier to assist the borrower to set up a direct debit facility so that the borrower could make repayments in that manner. This was because there was more than one possible way of making repayments, with the Court saying:
“What was required under the 1 December 2009 arrangement was that all future repayments be made on time. It was not fundamental to the performance of this obligation that the payments be made by direct debit, although it is clear that that mode of payment is what was contemplated by the parties.”
(Wolfe v Permanent Custodians Limited [2013] VSCA 331 at [30]).
- Second, a franchisor which had granted an exclusive franchise was not obliged to take positive steps to investigate possible incursions upon the rights of the franchisee, because “[i]t could not be said that the absence of a requirement to investigate such conduct would render the RPR Franchise agreement nugatory, worthless or seriously undermined”: Marmax Investments Pty Ltd v RPR Maintenance Pty Ltd [2015] FCAFC 127 at [139].
Taking the analysis one step further, where there is no underlying contractual promise, a party will not be in breach of an implied duty to co-operate, even if its actions tend to destroy the subject matter of the agreement. The following three cases illustrate this point:
- A party to an intercreditor agreement was not obliged to refrain from commencing proceedings in its own right, even if doing so would destroy or undermine the subject matter of the intercreditor agreement. This was because there was no promise of a return of capital, and its obligation was confined to ensuring that any pooled funds (if received) were distributed in an agreed ratio: Bell Group NV v Insurance Commission of Western Australia [2017] WASCA 229 at [118]-[119].
- A developer who had no active role to play in the permit application process was not in breach of a duty to co-operate, even if it had actively intervened to stop the attempt to obtain a permit: Bensons Property Group Pty Ltd v Key Infrastructure Australia Pty Ltd [2021] VSCA 69 at [152]-[153].
- In the absence of an express promise to extend the lifts in an office building, there was no obligation on a lessor to co-operate with the lessee’s initiative to do so or to invite lift contractors who had been invited to tender for the replacement works to provide an estimate of the cost of extending the lifts, even if this would be to the convenience of the lessee: Impact Funds Management Pty Ltd v Roy Morgan Research Ltd [2016] VSC 221 at [133]-[136].
The requirement of reasonableness
Even where a duty of co-operation is found to exist, it is subject to the principle of reasonableness. For example, in Secured Income Real Estate (see above), refusal of Secured’s offer to take the lease of unlet building spaces was held to be reasonable, due to justifiable apprehension as to the financial capacity of Secured to perform the obligations of the intended lease.
Further, the duty of co-operation cannot be used as a mechanism for alleviating “hard, even harsh or unconscionable” contractual provisions: Council of the City of Sydney v Goldspar Australia Ltd [2006] FCA 472 at [162]. In that case, Gyles J also found (at [162]) that the “duty of co-operation does not extend to being nice or even reasonable to the other party”.
So, what should commercial parties be aware of in relation to the implied duty of co-operation?
The present state of the law in Australia is that a duty of co-operation is not implied in all commercial contracts. Rather, the duty is implied only where it meets the usual tests for an implied term, including that is not inconsistent with the express terms of the contract.
Where it exists, the duty applies only to acts which are necessary to securing the performance of fundamental obligations under the contract and which are reasonable.
That said, the duty can in some instances be a powerful supplement to the express terms of a contract, in ensuring that a commercial party is not denied the benefit for which it contracted, by the actions of the other party.