The implied duty of cooperation in contracts: two recent Queensland decisions offer guidance
Two recent decisions of the Supreme Court of Queensland provide some useful guidance on the operation of the implied duty of cooperation in contracts.
It is uncontroversial that a contract will impose an implied obligation on each party to do all things reasonably necessary to secure performance of the contract.1 In other words, as a general rule parties will agree, by implication, to do all such things as are necessary on their part to enable the other party to have the benefit of the contract; this general rule applies to all contracts.2
The implied duty of cooperation in contracts: two recent Queensland decisions offer guidance
Two recent decisions of the Supreme Court of Queensland provide some useful guidance on the operation of the implied duty of cooperation in contracts.
It is uncontroversial that a contract will impose an implied obligation on each party to do all things reasonably necessary to secure performance of the contract. In other words, as a general rule parties will agree, by implication, to do all such things as are necessary on their part to enable the other party to have the benefit of the contract; this general rule applies to all contracts.
What often causes disputes between parties is the scope of the implied duty to cooperate. For example, the implied duty is seemingly limited to what is necessary for performance, so a court must determine what is “necessary”.3 A court must also determine what the “benefit” of the contract is,4 because that will inform the scope of the duty.
When is enough, enough?
In Wellington v Huaxin Energy (Aust) Pty Ltd,5 Jackson J had to determine whether the implied duty to cooperate went so far as to require a purchaser to undertake certain exploration works. Briefly, the facts involved:
- The plaintiff/seller entered into a contract to sell an exploration permit and related environmental authority and mining information to the defendant/purchaser.
- The consideration under the contract included an obligation by the purchaser to issue shares to the seller. However, the obligation to issue shares was contingent upon the estimated quantity of the mineral resource within the exploration permit area being determined to be at a particular level, by a particular date.
- The purchaser undertook some initial exploration work that resulted in an estimated quantity below the minimum required to satisfy the contingent condition. After that, the purchaser did not undertake any further exploration work and did not issue the shares because the condition to require the issue had not been met.
- The seller commenced proceedings alleging, inter alia, that the implied duty to cooperate required the purchaser to do all things necessary to give the seller the benefit of the contract, and that included undertaking further exploration work.
Jackson J considered similarities that could be drawn between the present case and earlier decisions also involving contingent conditions. For example, his Honour considered contracts for the purchase of land that are subject to satisfactory finance; cases of that nature have determined that a buyer is obliged to apply for finance and consider whether the offer of finance was satisfactory.6 That is, a buyer cannot decline to apply for finance and then seek to terminate the contract on the basis of not having received satisfactory finance. Such a course of action would be in breach of the implied duty to cooperate.
Jackson J undertook a detailed analysis of the authorities relating to the implied duty to cooperate and held that the question to be determined is, ultimately, a matter of construction of the relevant contract. In the present case, that question was whether the contract, on its proper construction, required the purchaser to carry out the exploration work or whether the purchaser was at liberty to decide not to undertake further work.
It was held that the seller had not established that the duty to cooperate required the purchaser to undertake the exploration work and, therefore, the purchaser had not breached the implied duty.
Running interference
In Lake Laurel Pty Ltd v Nichols Constructions Pty Ltd (No 2),7 Bowskill J considered whether the implied duty to cooperate required a party not to obstruct efforts to register plans for subdivision. The facts of the case were somewhat complicated and need not be repeated here, other than very briefly below.
There was a loan agreement and mortgage between the parties whereby a principal sum was to be repaid by the defendant to the plaintiff in equal instalments on the sale of each lot in a proposed subdivision.
It was not in dispute that it was an implied term of the loan agreement and mortgage that the parties would cooperate and do all such things as were necessary to enable the other party to have the benefit of the loan agreement and the mortgage.8
Bowskill J found that there was no obligation on the lender to do anything to obtain approval (or the like) to enable the proposed subdivision, but there was an implied obligation on the lender not to hinder the borrower’s efforts.
Intersection with the concept of good faith
The implied duty of cooperation is not to be confused with an implied duty of good faith. First, whether a duty of good faith is implied into contracts is presently unresolved. Second, the duty of good faith (if it exists) is more concerned with standards of conduct, relating to honesty and fairness, as opposed to whether certain conduct is impliedly agreed to be undertaken by reason of the implied duty of cooperation.
Practical application
From a practical perspective, the scope of the implied duty of cooperation will depend on the “benefit” under the contract, as well as the proper construction of the relevant contract.
Therefore, the implied duty ought not to be relied on to fill any gaps in express contractual terms. If there is some act or thing that ought to be done to give effect to, or ensure the benefit of, the contract, then the parties ought to include it as an express term.
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LAURA GERCKEN
SENIOR ASSOCIATE
