Good Faith and Termination: the English and Australian Experience Wayne Courtney*

Articles Good Faith and Termination: The English and Australian Experience Wayne Courtney* Keywords: bhasin v hrnew, contract, termination, contract rights, contractual discretions, good faith in contract The Journal of Commonwealth Law Vol. 1, Issue 1, 2019 Starting where Bhasin v Hrynew left off, this article onsidersc how the concept of ‘good faith’ may control the exercise of a right to terminate, or not to renew, a contract. It draws upon case law in Australia and the United Kingdom, which may serve as a guide for further developments in Canada. It advances two key themes. The first oncc erns a tension between generality and specificity in 2019 CanLIIDocs 1764 common law method. Rights to terminate vary in nature and purpose. The temptation to apply the same incidents of good faith uniformly to them all must be resisted. Secondly, unless some radical reform is intended, developments in good faith should cohere with the existing body of principles comprising the law of contract. This suggests that any distinct duty of good faith will tend to play an interstitial role. The impact of such a duty upon existing rules and policies of the common law is often neglected; this is particularly evident in relation to termination for breach of contract. i. introduction In its landmark decision Bhasin v Hrynew,1 the Supreme Court of Canada referred to several decisions as showing that a contractual 'discretion' or 'power' could be subject to some form of good faith limitation in Canadian law.2 The Court stopped short of holding that the newfound duty of good faith in performance applied to the right in question, namely, a right to prevent automatic renewal of a dealership contract. Classifying the right as a 'discretion' would be, the Court said, a 'significant expansion of the decided cases under that type of situation'.3 More generally, it was 'unnecessary to decide whether reliance on a discretionary power to achieve a purpose extraneous to the contract… might call for further development' under the newfound principle.4 Taking Bhasin as a starting point, this paper considers the role of good faith in restricting one party's exercise of a right to terminate, or to prevent renewal of, a contract.5 The section immediately below lays out some important challenges * Institution: National University of Singapore Department: Law 1 2014 SCC 71,[2014] 3 SCR 494. 2 ibid [50]–[51], [55], [89]. 3 ibid [72]. 4 ibid [90]. 5 It does not consider dissolution of, or expulsion of members from, partnerships, associations, unions and the like. See, eg, Russell v Russell (1880) 14 Ch D 471; Dickason v Edwards (1910) 10 CLR 243; Kerr v Morris [1987] Ch 90, 110–1 (Dillon LJ; Lloyd LJ and Nicholls LJ agreeing). Good Faith and Termination: The English and Australian Experience for a good faith analysis of termination rights. The third section then considers the current state of Anglo-Australian law on good faith in termination. This may provide some insight on the likely direction of developments in Canadian law, if Canada is inclined to follow these jurisdictions rather than the United States. ii. good faith and fault lines in the common law In Australia and England, the substance of the 'good faith' concept remains a matter of considerable debate.6 Much of the controversy concerns the way in which good faith is to be accommodated within the law of contract. The debate has also been propelled by differing personal views held by judges about the competing values of certainty and fairness. Bhasin at once manages to acknowledge some of these disputes, sidestep others, and sow the seeds for 2019 CanLIIDocs 1764 further conflict. Several points of controversy can be mentioned briefly at the outset. Australian and English cases have not finally settled upon whether 'good faith' is implemented through construction of the contract, by implication of a term in fact or in law, or by some other means.7 Much of the analysis on this point has occurred in relation to the exercise of contractual rights or discretions, where courts have inclined towards implication. Another debate concerns the content of a contractual duty of good faith. Does it merely require honesty-in-fact; does it include an absence of bad faith, arbitrariness, capriciousness and perversity; or does it embody even more demanding expectations of 'reasonableness' or 'fair dealing'?8 Bhasin describes the organising principle in terms of performing 'honestly and reasonably and not capriciously or arbitrarily'.9 English and Australian courts have incorporated an element of reasonableness into 'good faith' though the two jurisdictions differ in what they mean by it. The English courts limit reasonableness to a form of rationality, as may be found in judicial review of administrative action.10 The decision-maker must take into account relevant considerations and ignore those that are irrelevant. And the decision may not be so perverse or outrageous in its defiance of logic that no reasonable 6 For a general account of the Australian position, see JW Carter, 'Good Faith in Contract: Why Australian Law is Incoherent' (Paper presented at the Queensland Bar Association Annual Conference, 8 March 2014). 7 See, eg, Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234, 257, 261 (Priestley JA), 279 (Handley JA); Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349, 368; Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116, [2008] 1 Lloyd's Rep 558 [66] (Rix LJ); Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB), [2013] 1 Lloyd's Rep 526 [131]–[132]. See also JW Carter and E Peden, 'Good Faith in Australian Contract Law' (2003) 19 JCL 155; E Peden, '"Implicit Good Faith"– or Do We Still Need an Implied Term of Good Faith?' (2009) 25 JCL 50; JW Carter and W Courtney, 'Good Faith in Contracts: Is There an Implied Promise to Act Honestly?' (2016) 75 CLJ 608. 8 See generally AF Mason 'Contract, Good Faith and Equitable Standards in Fair Dealing' (2000) 116 LQR 66. Cf Uniform Commercial Code §§1–201(20) and 1–304 ('honesty in fact and the observance of reasonable commercial standards of fair dealing'); Restatement (2d) of Contracts (1981) §205 ('good faith and fair dealing in … performance and … enforcement' of the contract); SJ Burton and EG Andersen, Contractual Good Faith: Formation, Performance, Breach, Enforcement (Little, Brown & Co, 1995) §3.3; Principles of European Contract Law arts 1:201, 1:202 (duty to act 'in accordance with good faith and fair dealing' and duty 'to co-operate in order to give full effect to the contract'). 9 Bhasin (n 1) [63]. 10 See, eg, Socimer (n 7) [66] (Rix LJ). The Journal of Commonwealth Law 2 Good Faith and Termination: The English and Australian Experience decision-maker could have come to it. Australian decisions often go further, eliding good faith with reasonableness as an objective standard.11 Next, there is the question of how a good faith 'requirement' (to use a neutral word), operates in relation to the parties' agreement. Is it, for example, a distinct duty; a contractual obligation; or a restriction applied to another aspect of the contract, defining theligation ob to perform or limiting the exercise of a contractual right? The answer to that question has ramifications for actions taken not in good faith. I say no more about these debates because they affect good faith generally. Turning to the exercise of rights to terminate, the reasoning about good faith in Anglo-Australian cases reveals four fault lines. First, whether termination is different from performance, so that it should be exempt from any duty 2019 CanLIIDocs 1764 of good faith. Secondly, whether there is a taxonomy of 'rights' in contract, under which some or all termination rights are treated differently from other rights. Thirdly, the interaction of good faith and contract doctrine. These three are symptomatic of another tension, between generality and specificity in the development of good faith. a. is termination different from performance? In attempting to circumscribe the operation of good faith, it has been suggested that rights to terminate are different from rights or obligations in performance.12 Good faith ought not to apply to termination, it is said, because that process brings to an end the parties' shared endeavour. The Supreme Court in Bhasin must have rejected that view as a general rule, by its approval of several decisions on termination which it said illustrated the application of good faith.13 A distinction between performance and termination is unsustainable if good faith truly is an 'organising principle' or, as I would prefer it, immanent in the body of doctrines and rules that comprise the law of contract.14 The contrast is pitched at the wrong level of generality. It treats all rights to terminate as if they were the same, which is manifestly not the case.15 Moreover, an aspect of good faith is loyalty to the spirit of the bargain.16 Contractual duties to co-operate and not to impede performance serve that end, though Anglo- Australian law does not conventionally label them as 'good faith'. From this perspective termination is merely the obverse of performance. It cannot be isolated from other contractual (or extra-contractual) acts that diminish the counterparty's receipt of the benefit of theargain. b Some incidents of 'good 11 See, eg, Renard (n 7); Burger King Corp v Hungry Jack's Pty Ltd [2001] NSWCA 187, (2001) 69 NSWLR 558 [169]–[171]. 12 Monde Petroleum SA v Western Zagros Ltd [2016] EWHC 1472 (Comm), [2016] 2 Lloyd's Rep 229 [272]. 13 Bhasin (n 1) [51], [54], [89].

Load more