It is necessary to consider the practical means by which the operation of a doctrine of good faith would be contractually limited or excluded. It has been reasoned that exclusion would be difficult to achieve. No doubt alarm bells are likely to ring if a term expressly
175
mandating bad faith or dishonest conduct were sought to be included by a party to a contract.176 In practical terms it is difficult to conceive an attractively drafted term which overtly seeks to exclude an obligation of good faith and fair dealing.177
Nonetheless, exclusion may seemingly be achieved by more subtle means. For example, contractual clauses may be expressed to permit a party to exercise powers at ‘its sole discretion’ or ‘for any reason whatsoever.’ Such clauses may prevent the Court from scrutinising the motive and reasonableness of the exercise of a contractual power which it might have otherwise done if a breach of good faith were alleged.178 To deem that contracting parties intended a sole discretion clause to be subject to good faith obligations may be a strained construction. An absolute discretion clause may at least serve to dilute the standard of conduct required to discharge a good faith obligation.
In Vero Insurance New Zealand Ltd v Fleet Insurance & Risk Management Ltd Asher J considered a contractual clause which permitted a joint venture party to withhold consent to a change in shareholding of the other joint venture party at its absolute discretion. His Honour held that the absolute discretion element did not necessarily exclude the application of the obligation of good faith which the parties were subject to pursuant to another term of the contract.179 Likewise, in Hungry Jack’s the New South Wales Court of Appeal examined a clause which gave a franchisor the sole discretion to grant consent to the recruitment of third party franchisees and concluded that:
If full force is given to [the sole discretion] concept, it would allow [the franchisor] to give or to withhold relevant approval "at its whim" including capriciously, or with the sole intent of engineering a default of the Development Agreement, giving rise to a right to terminate.180
176
See Finn, above n 40, at 385.
177
See Douglas, above n 171, at [38].
178
Obligations of good faith and reasonableness in respect of the exercise of contractual discretions are extensively discussed in Chapter 4.
179
(High Court, Auckland, CIV 2007-404-1438, 21 May 2007), at [42].
180
Apparently the Court considered that the parties did not intend a sole discretion clause to mandate an arbitrary exercise of the discretion. Such observations may suggest that although it may be possible to specifically exclude an obligation of good faith, an attempt to impliedly do so by virtue of a sole discretion clause and other similarly wide contractual provisions is unlikely to find judicial favour.181
Certainly there is no consistency in judicial approach. In Vero Asher J suggested, in obiter dicta, that it would be most surprising if an unfettered right to cancel or terminate could be subject to the qualification that it must be exercised in good faith.182 A system of contract requiring an examination of the motives for the exercise of contractual rights could be subject to chaos and uncertainty. On this rationale a clause permitting termination at one’s sole discretion is unlikely to be subject to good faith considerations. Seemingly an absolute discretion clause may therefore be sufficient to negate or limit the application of a good faith doctrine in certain circumstances.
Conceivably the doctrine of good faith might also be excluded by an ‘entire agreement’ clause. These clauses frequently appear in commercial agreements. The wording usually adopted is to the effect that the written agreement constitutes the entire agreement between the parties or that or that the document sets out all the express terms and conditions of the bargain. Often entire agreement clauses serve to exclude the operation of the common law. Accordingly such a clause could preclude the application of good faith as a principle of construction. There exists authority for the proposition that an entire agreement clause may effectively preclude the imposition and application of an implied term.183 By analogy, that result could also apply to a rule of construction.
181
See Bill Dixon, ‘Can the Common Law Obligation of Good Faith be Contractually Excluded?’ (2007) 35 Australian Business Law Review 110, at 118.
182
(High Court, Auckland, CIV 2007-404-1438, 21 May 2007), at [43].
183
Hope v RCA Photophone of Australia Pty Ltd (1937) 59 CLR 348; Australian Guarantee Corp Ltd v Ross [1983] 2 VR 319; Johnson Matthey Ltd v AC Rochester Overseas Corp (1990) 23 NSWLR 190; Quantum Timber Products (NZ) Ltd (In Receivership and in Liquidation) v Koppers Arch Wood Protection (NZ) Ltd (High Court, Auckland, CIV 2003-404-50, 8 September 2003, Master Lang), at [13]; Exxonmobil Salesand Supply Corp v Taxaco Ltd [2004] 1 All ER (Comm) 435, at [27] per Teare QC; Filter Solutions
However, others take a contrary view and argue that an entire agreement clause could not preclude the operation of an implied term of good faith. The rationale presented is that an entire agreement clause would not be sufficiently precise to constitute an express exclusion of a duty of good faith and fair dealing that would otherwise be implied in law.184 A further justification is that every implication of a term which the law deems necessary is embodied in the contract as if it were expressly written into the agreement.185 An entire agreement clause does not serve to exclude the operation of terms deemed to be within the contract.
However, this reasoning is dubious. An entire agreement clause may expressly exclude the common law rules of implication and construction.186 It is submitted that such a clause should be effective in precluding any good faith obligations being incorporated into the contract either by construction or implication.
No doubt the courts may need to resort to the rule of contra proferentum to resolve whether a specific clause, including an entire agreement clause or a sole discretion
Ltd v Donaldson Australasia Pty Ltd (High Court, Auckland, CIV 2005-404-1095, 4 July 2006, Associate Judge Doogue), at [87]. Cf Elizabeth Peden and John Carter, ‘Entire Agreement – and Similar – Clauses’ (2006) 22 Journal of Contract Law 1.
184
GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (Federal Court of Australia, NG 733 of 1997, 12 February 2003), at [922] per Finn J.
185
Hart v MacDonald (1910) 10 CLR 417, at 427 per O’Connor J.
186
Lewis v Bell (1985) 1 NSWLR 731; NT Power Generation Pty Ltd v Power and Water Authority (2001) 184 ALR 481; Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15, at [200] per Giles JA. In Stanley v Fuji Xerox New Zealand Ltd (High Court, Auckland, CP 479/96, 5 November 1997) Elias J observed (at 24) that a ‘term is not to be implied merely because it is sensible or reasonable unless in all the circumstances the term must have been intended by the parties at the time of entering into the contract…The contract itself purports by clause 11 to embody the entire understanding of the parties and exclude the implication of any other terms. While that provision is not conclusive it prompts caution. It indicates that the parties themselves intended to express their obligations in the written agreement with some precision.’
provision, is clearly worded enough to exclude the subject good faith doctrine.187 Those legal issues are however somewhat distinct from the good faith debate. Prima facie, an appropriately drafted clause could exclude or limit the doctrine.
Traditionally the common law has prevented the contractual exclusion of certain obligations on the grounds of public policy. It is necessary to consider whether public policy considerations could be invoked to displace the above finding that the subject doctrine could be contractually limited or negated. These public policy issues are explored below.