Limits on the implied contractual duty to cooperate
Parties to commercial contracts enjoy — and are burdened by — the implied duty that they cooperate in carrying out their respective ends of the bargain so that they each can have the benefit of the contract. The situation can become complicated where the contract expressly contains a mechanism for one party to seek the other’s consent to a particular course of action. Where the contract states that consent must not unreasonably be withheld, is there a binding promise not to unreasonably withhold consent? And how does the implied duty to cooperate interact with the concept of ‘reasonableness’? The Full Court of the Supreme Court of South Australia recently considered such issues.
The facts
The case of New Standard Energy PEL 570 Pty Ltd & Anor v Outback Energy Hunter Pty Ltd & Anor[1] involved a joint venture between Outback Energy Hunter Pty Ltd and New Standard Energy PEL 570 Pty Ltd (NSE). Outback was a wholly-owned subsidiary of Santos Queensland, and NSE a wholly-owned subsidiary of Sundance Energy Australia.
At trial, Santos and Outback sued NSE and Sundance for payment of contributions towards gas field exploration expenditure. By their cross-action NSE and Sundance sought injunctive relief and damages for breach by the Santos parties of an ‘Implementation Agreement’ between the parties. The breach was said to have been committed in circumstances where the Santos parties’ failed to give consent to a proposed change by Sundance in its control — that is, shareholding — of NSE.
There was a term of the Implementation Agreement obliging the Sundance parties to obtain the Santos parties’ consent to this share sale and that, subject to certain matters, any such consent would not be unreasonably withheld. The relevant clause read:
7. No assignment or change in control
7.1 Requirement for consent
During the Earn-in Period a Party must not, without the prior written consent of the other party:
(a) assign, transfer, grant an option in respect of, or otherwise Encumber, all or part of its right, title or interest under this agreement, the JOA or all or any part of their Participating Interest in the Permit; or
(b) permit a Change in Control of that Party to occur.
7.2 Consent parameters
The consent of a Party required under clause 7.1 will not be unreasonably withheld where:
(a) in the case of a proposed assignment, the transferee or acquirer has the financial and technical capabilities to perform the obligations for which it is or will become responsible pursuant to the assignment; or
(b) in the case of a proposed Change in Control, after the Change in Control the Party will continue to have the financial and technical capabilities to perform the obligations for which it is or will become responsible.
NSE and Sundance argued at trial that the requirement that consent not to be unreasonably withheld was promissory and that Outback and Santos had breached the clause by unreasonably withholding their consent. They also asserted the existence of, and failure to comply with, an implied contractual duty to cooperate with respect to the obtaining and giving of consent. The withholding of consent, Sundance argued, resulted in the loss of the opportunity to sell its shares in NSE to another company and to thereafter be relieved of any further liability to contribute toward exploration expenditure.
At trial, the Supreme Court judge held that the prohibition on unreasonably withholding consent in clause 7 was promissory rather than a mere proviso or qualification. The judge also found that clause 7 contained an implied term of cooperation with respect to the process of obtaining and giving consent.
The decision on appeal
The issues on appeal centred around the correct characterisation of clause 7; two of the main issues for determination were:
Was clause 7 promissory with respect to the prohibition on a party unreasonably withholding consent?
If clause 7 was promissory, was there also an implied term as to cooperation in the clause 7 process, and, if so, what was its content?
Nicholson J, with whom Kourakis CJ and Lovell J agreed, gave the Full Court’s leading decision. His Honour addressed, amongst other things, the above two issues.
Did the term contain a promise regarding the giving of consent?
In determining whether the prohibition in clause 7 constituted a promise rather than merely a proviso, Nicholson J looked first to the commercial purpose of the agreement between the parties. His Honour observed that, given the exclusive nature of the joint venture, ‘the identity of each party and its capacity to perform its obligations [was] of paramount importance’ to the parties.[2]
More particularly with respect to the mechanism for obtaining and giving consent, his Honour noted that ‘the primary purpose of the requirement on a party to obtain consent [was] to provide the consenting party with a sufficient opportunity to examine and satisfy itself of the credentials of any proposed assignee or of a remaining party, itself, were a proposed change in control to be effected.’ [3]
Besides the purpose of the parties’ agreement and the particular clause in question, Nicholson J also considered the language of the clause. Three things appear to have been key to his Honour’s analysis.
First, it was relevant to his Honour’s analysis that the consent not be ‘unreasonably’ withheld. The starting point, Nicholson J observed, was that a contractual clause for giving and withholding of consent in such circumstances typically would be non-promissory. His Honour stated:
‘The authorities which canvass the meaning of “unreasonably” or “arbitrarily” and cognate notions in the landlord and tenant and other contractual contexts and which illustrate the application of these descriptors to disparate factual situations are extensive. Contracting parties, by agreeing to qualify a right to withhold consent in such a way, expressly expose themselves to this regime.
Such provisions typically, but not universally, have been construed in the sense of being a proviso or qualification to the right to withhold consent rather than a contractual promise to that effect’.[4]
Second, the clause contained a particular type of mandatory language, that is, that it required that a party’s consent ‘will not’ be unreasonably withheld. His Honour observed:
‘When regard is had to the language used in these and other analogous cases, and the construction given to this language, the use of the phrase “will not” is not, of itself, indicative of promise rather than proviso or qualification. There is no reason to elevate it beyond, for example, “shall not” or “is not to be”.’[5]
Finally, the use of passive rather than active language:
‘[T]he use of the passive voice tends against the conclusion that the qualification in the chapeau to subclause 7.2 was intended by the parties to be promissory. It is the required consent that is to be acted upon or affected by the future tense verb phrase “will not be unreasonably withheld”. … Had the drafter used the active voice – “the other party will [shall, must] not unreasonably withhold its consent where ...” the argument for a promissory construction would have been stronger, although still not conclusive.’[6]
In concluding, the Court was minded to follow the ‘settled approach’ that a provision like clause 7 typically would be non-promissory, stating:
‘The underlying commercial purpose of, the structure of and the language used in clause 7, in combination, strongly militate against such a construction. There is no reason, in my view, to depart from the settled approach to and understanding of such clauses.’[7]
Was there a duty to cooperate?
So far as the law regarding the implied term of cooperation is concerned, the High Court in Secured Income Real Estate (Aust) Ltd v St Martin's Investments Pty Ltd[8] held that there is a term implied in all commercial contracts that each party will cooperate with the other by doing all such things as are necessary to enable the other party to have the benefit of the contract.
Justice Nicholson’s conclusion that clause 7 of the Implementation Agreement was not promissory was sufficient to dispose of the appeal. That said, his Honour considered the second question — that is, whether or not, and in what sense, there was an implied term regarding the granting/withholding of consent — in case his Honour was wrong on the first question. His Honour’s key observations were as follows.
First, his Honour did not consider that implying a duty to cooperate would satisfy the requirements as set out in the dictum of Mason J in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales,[9] in particular the requirement that it be ‘necessary to give business efficacy to the contract’. His Honour stated:
‘The duty of cooperation implied at law requires performance only of acts that are necessary to preserve the benefit of the contract. In this respect, the authorities draw a distinction between benefits or outcomes of the contract that have been promised by a party and benefits or outcomes which may occur but which the contract does not require to occur. The implied duty to cooperate is confined to acts which are necessary to the performance by a party of fundamental obligations under the contract.’[10]
Second, his Honour considered that the ‘reasonableness’ measure in clause 7 afforded the parties the appropriate degree of protection in the circumstances; imposing an additional requirement of cooperation would be superfluous. Nicholson J stated:
‘The express requirement in clause 7.2 that consent will not be unreasonably withheld is sufficient to embrace all of the factual considerations, be they acts of omission or commission, that might arise in any iterative process undertaken when the legal principles concerning what it means to act reasonably or unreasonably are applied. Clause 7.2 is efficacious by its own terms and it cannot be said that an implied duty to cooperate in the process of obtaining consent is necessary to give business efficacy to the contract in this respect.’[11]
Finally, his Honour noted that to imply a duty to cooperate might be to interfere with ‘reasonableness’ as the particular standard which the parties specified in their agreement; there was a risk that to imply a duty to cooperate would be to ‘impose obligations, including as to timing, over and above or different from that ordinarily imported within the notion of reasonableness as employed in clause 7.2’.[12]
Comment
The facts in New Standard Energy v Outback Energy Hunter serve as a reminder of the importance of precision and of the use of appropriate language when drafting agreements. The Full Court’s decision demonstrates how the commercial purpose of an agreement, and even the tone and language employed in the particular clause in question — whether, for example, in the active or the passive voice — can tend towards an interpretation of that clause as being a proviso rather than a promise. The case also illustrates the circumstances in which a court may be reluctant to imply a term requiring parties to cooperate in carrying out a particular term of their agreement.
[1]: [2019] SASCFC 132 (‘New Standard Energy v Outback Energy Hunter’).
[2]: Ibid [63].
[3]: Ibid [65].
[4]: Ibid [68]–[69].
[5]: Ibid [93].
[6]: Ibid [94]–[95] (emphasis added).
[7]: Ibid [96].
[8]: (1979) 144 CLR 597, 607.
[9]: (1982) 149 CLR 337, 347.
[10]: New Standard Energy v Outback Energy Hunter [2019] SASCFC 132, [130].
[11]: Ibid [141].
[12]: Ibid.