Driveforce Pty Ltd v Gunns Ltd (No 3)
[2010] TASSC 38
•11 August 2010
[2010] TASSC 38
COURT: SUPREME COURT OF TASMANIA
CITATION: Driveforce Pty Ltd v Gunns Ltd (No 3) [2010] TASSC 38
PARTIES: DRIVEFORCE PTY LTD
v
GUNNS LTD
FILE NO: 96/2007
JUDGMENT
APPEALED FROM: Driveforce Pty Ltd v Gunns Ltd (No 2) [2010] TASSC 23
DELIVERED ON: 11 August 2010
DELIVERED AT: Hobart
HEARING DATE: 3 August 2010
JUDGMENT OF: Blow J
CATCHWORDS:
Contracts – General contractual principles – Construction and interpretation of contracts – Implied terms – Other cases – Implied duty of good faith, fair dealing and reasonableness – Content of duty – Contract for harvesting and delivery of wood.
Tote Tasmania Pty Ltd v Garrott (2008) 17 Tas R 320; Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA 228, referred to.
Aust Dig Contract [109]
REPRESENTATION:
Counsel:
Appellant/Defendant: S B McElwaine
Respondent/Plaintiff: P W Tree SC
Solicitors:
Appellant/Defendant: Shaun McElwaine & Associates
Respondent/Plaintiff: FitzGerald and Browne
Judgment Number: [2010] TASSC 38
Number of paragraphs: 26
Serial No 38/2010
File No 96/2007
DRIVEFORCE PTY LTD v GUNNS LTD (No 3)
REASONS FOR JUDGMENT BLOW J
11 August 2010
This is an appeal from a decision of the Associate Judge granting a plaintiff leave to amend its statement of claim in an action for damages for breach of contract. The defendant contends that the amendments are futile, and therefore should not have been permitted.
The defendant, Gunns Ltd, at all material times carried on a business of managing forests and processing forest products. That business was previously carried on by another company, North Forest Products Pty Ltd ("North"). By a written contract dated 1 May 2001, North engaged the plaintiff, Driveforce Pty Ltd, to harvest and deliver wood. After Gunns took over North's business, Driveforce continued to harvest and deliver wood. Gunns and Driveforce have treated the provisions of the 2001 contract as constituting the contract between them. All of those facts are undisputed. A copy of the contract was before the learned associate judge.
The contract specified a quantity of wood – 65,000 tonnes – as a quantity which was to be harvested annually by Driveforce. It required Driveforce to harvest and deliver a weekly quota as advised by Gunns from time to time. Driveforce contends that Gunns breached the contract during the years ending 30 April 2005 and 30 April 2006 by permitting it to harvest much less than 65,000 tonnes of pulpwood during each of those years, and by specifying weekly quotas which brought about that result. Driveforce contends that the weekly quotas specified by Gunns were sometimes too high and sometimes too low. The quotas specified for every week during the two years to which the action relates have been pleaded by Driveforce and admitted by Gunns.
The primary claim made by Driveforce is based on allegations that Gunns breached certain express terms of the contract. On 24 December 2009, some 2 years and 9 months after the writ was filed, Driveforce applied to amend its statement of claim so as to plead that Gunns had breached two implied terms of the contract – an implied term "that each party would perform their obligations under the agreement in good faith", and an implied term "that the defendant would determine the weekly quota by reference to approximately 1/50th of the base quota, subject to any variations reflective of seasonal conditions, coup logistics and other like constraints". The learned associate judge permitted the statement of claim to be amended so as to plead an implied term as to performance in good faith, but did not permit Driveforce to plead an implied term as to the determination of weekly quotas. Driveforce has not appealed in relation to the unsuccessful part of its application, but Gunns has appealed in relation to the entirety of the amendments that were permitted.
The impugned amendments cover three topics:
·The existence of an implied term requiring the parties to perform their contractual obligations in good faith.
· The alleged effect of a requirement of good faith in relation to the fixing of weekly quotas.
·The facts and circumstances that allegedly satisfy the criteria for the implication of a term as formulated in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283.
The pleading of an implied term as to good faith
Clause 2.1 of the contract contains a contractual promise by Driveforce to harvest and deliver wood. That clause reads as follows:
"The Company agrees to engage the Contractor to harvest and deliver wood and the Contractor agrees to accept that engagement on the terms in this agreement."
Throughout the contract, Driveforce is referred to as the "Contractor". The words "the Company" originally referred to North, but now apply to Gunns.
The provisions of the contract as to the annual quantity of timber to be harvested by Driveforce are unusual. Clause 1.1 sets out a series of definitions, including the following:
"'Base quota' means the quantity of wood specified in Part One of Schedule A which is to be harvested annually by the Contractor provided to the Delivery Contractor to destinations determined by the Company."
Schedule A to the contract reads as follows:
"SCHEDULE A
THE CONTRACTOR'S ANNUAL BASE QUOTA IS:-
65,000 tonnes total
Which may be composed of;
Supply from Western and Central Supply zones."
The words "base quota" do not appear anywhere else in the contract. Except in the definition of "base quota", the contract does not contain anything resembling a promise that Driveforce will harvest 65,000 tonnes of wood annually, nor anything resembling a contractual promise that such a quantity of wood will be made available annually to Driveforce.
Clause 6 of the contract makes provision for weekly quotas. It reads as follows:
"6 CONTRACTOR'S PERFORMANCE AND QUOTAS
6.1The Contractor is to harvest and deliver the weekly quota as advised by the Company from time to time. The Contractor must delivery [sic] the weekly quota in a constant flow throughout the operating days of the week.
6.2The Company may authorise the Contractor to harvest all or some of its weekly quota in a subsequent week if the Contractor's failure to harvest the weekly quota was caused by unforeseen and unavoidable circumstances.
6.3The Company may by notice in writing to the Contractor vary the Contractor's weekly quota. Provided that the Company will not reduce the week's quota in any week except in the event of a major downturn in business activity or a reduction in the volumes required by the Company due to circumstances beyond the Company's control. Any reduction in a weekly quota may be made up in subsequent months at the discretion of the Company.
6.4The Company shall not be liable for any loss or damage suffered by the Contractor, its employees, agents and sub-contractors, as a result of a reduction in the weekly quota by the Company in accordance with sub-clause 6.3."
There is no other express provision in the contract that restricts Gunns' power to fix or vary Driveforce's weekly quota. Driveforce contends that the express terms of the contract do not contain anything that would prohibit Gunns from fixing very low weekly quotas, which would result in its operations being unprofitable, nor from fixing very high weekly quotas, requiring it to harvest quantities of timber far greater than it could possibly harvest. Driveforce contends that, because of the absence of any such prohibitions, it is necessary, in order to give the contract business efficacy, to imply a term that each party will perform its obligations under the contract in good faith. Gunns disagrees.
It is clear that an implied term of good faith is not a necessary legal incident of all commercial contracts; that an obligation of good faith does not apply indiscriminately to all the rights and powers conferred by a commercial contract; and that whether a term requiring the exercise of good faith is to be implied depends upon the ordinary principles relating to the implication of contractual terms: Tote Tasmania Pty Ltd v Garrott (2008) 17 Tas R 320, at par[16] (Full Court); Service Station Association Ltd v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84 (Gummow J); Asia Pacific Resources Pty Ltd v Forestry Tasmania (unreported, 101/1997, Underwood J), at 9; Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA 228, per Buchanan JA, with whom Warren CJ and Osborn AJA agreed, at par[25].
The conditions which must be satisfied for a contractual term to be implied are as formulated by members of the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (above) in the following passage at 283:
" … for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract."
There is nothing in the express terms of the contract to prohibit North or Gunns from maliciously specifying very low or very high weekly quotas. For example, there is nothing to prohibit the specification of an enormous weekly quota of wood for a particular week, eg 40,000 tonnes, which Driveforce would be unable to harvest and deliver. Under cl 10.2 of the contract, North or Gunns was entitled to terminate the contract immediately in the event of a serious breach of any provision of the contract by Driveforce. Without an implied term requiring reasonableness or good faith, North or Gunns arguably could have required Driveforce to harvest and deliver a weekly quota far beyond its ability, terminated the contract for breach, and sued for damages. Similarly, without an implied term requiring reasonableness or good faith, North or Gunns arguably could have maintained a very low weekly quota for month after month, with catastrophic effects upon Driveforce's cashflow and profitability. I think it must follow that it is at least reasonably arguable that the implication of a term requiring good faith was necessary in order to give the contract business efficacy, that such a term was so obvious that it went without saying, and that the other Westernport prerequisites were satisfied.
However, that is by no means the end of the matter. The situation has been made complicated by the contents of the impugned amendments relating to the alleged effect of an implied term requiring good faith, and as to the facts and circumstances warranting the implication of such a term. The substantial parts of relevant amendments, as allowed by the learned associate judge, read as follows:
"24Further or alternatively to paragraph 21, there was an implied term of the agreement that each party would perform their obligations under the agreement in good faith.
25In the circumstances, good faith required the defendant to calculate the weekly quota at approximately 1/50th of the base quota subject to any variations reflective of seasonal conditions, coup logistics and other like constraints because, to the defendant's knowledge:
iThe plaintiff's capacity to harvest and deliver pulpwood was limited to approximately 1,300 tonnes of pulpwood per week;
iiThe plaintiff's capacity to harvest and deliver pulpwood in excess of 1,300 tonnes was severely limited; and
iiiThe achievement of a satisfactory level of profitability of the plaintiff's logging and wood delivery business was dependant upon delivery to the defendant of approximately 1,300 tonnes of pulpwood per week continuously.
26The term referred to in paragraph 24 above is to be implied as a fact as:
(a)The term was reasonable and equitable;
(b)The term was necessary to give business efficacy to the contract; in that, at the time the plaintiff entered into the agreement, the other party to the agreement, North Forest Products, through it's [sic] agent, Daniel Webster, knew the following:
ithat a contract for the harvest and delivery of 40,000 tonnes per year was inadequate for the profitability of the plaintiff, because the plaintiff intended to purchase, through a loan agreement, a feller-buncher machine that required to be operated on a full time basis;
iithe plaintiff required a loan to purchase the feller-buncher machine, which machine cost over $600,000;
iiithe plaintiff had calculated that a harvesting contract in the order of 65,000 tonnes pulpwood per annum would translate into delivery of 1,300 tonnes or [sic] pulpwood per week.
ivin the circumstances outlined in iii above, the plaintiff's harvesting and log transport operation would be reasonably profitable and enable it to pay wages, fuel and service its loan agreements and the like.
vannual delivery of pulpwood to the defendant that fell short of approximately 65,000 tonnes per year would compromise the profitability of the plaintiff.
vithe plaintiff also was entitled under the agreement to take sawlogs from coupes made available to the plaintiff by the defendant, and the reduction in pulpwood required to be delivered to the defendant reduced the plaintiff's access to sawlogs.
(ba)The term was necessary to give business efficacy to the contract; in that, at the time the plaintiff entered into the agreement:
ia contract for the harvest and delivery of 40,000 tonnes per year was inadequate for the profitability of the plaintiff, because the plaintiff intended to purchase, through a loan agreement, a feller-buncher machine that required to be operated on a full time basis;
iithe plaintiff required a loan to purchase the feller-buncher machine, which machine cost over $600,000;
iiithe plaintiff had calculated that a harvesting contract in the order of 65,000 tonnes pulpwood per annum would translate into delivery of 1,300 tonnes or [sic] pulpwood per week.
ivin the circumstances outlined in iii above, the plaintiff's harvesting and log transport operation would be reasonably profitable and enable it to pay wages, fuel and service its loan agreements and the like.
vannual delivery of pulpwood to the defendant that fell short of approximately 65,000 tonnes per year would compromise the profitability of the plaintiff.
vithe plaintiff also was entitled under the agreement to take sawlogs from coupes made available to the plaintiff by the defendant, and the reduction in pulpwood required to be delivered to the defendant reduced the plaintiff's access to sawlogs
vii there was no other suitable pulpwood market available to the plaintiff for the supply of pulpwood on a weekly or short terms [sic] basis in the event the defendant did not require the harvest and delivery of approximately 1300 tonnes per week in accordance with the agreement;
viiithe plaintiff could not harvest pulpwood for and supply pulpwood to any other pulpwood market with the use of its feller-buncher machine as the costs of transporting the said machine to another coupe – if one had been available – for short periods of time and back again to a Gunns nominated coupe was prohibitively expensive.
(c)The term is obvious;
(d)The term is capable of clear expression;
(e)The term does not contradict any express term of the contract.
27The implication of the term pleaded in paragraph 24 above was obvious because:
iAbsent the term, the contract would not be commercially viable for the plaintiff, because the limit on the amount of wood that the plaintiff could harvest and deliver was a maximum of approximately 1,600 tonnes of pulpwood in any week, and that this level was sustainable for the plaintiff for no more than 2 or 3 weeks at a time.
iiTo the knowledge of North, the plaintiff did not have the resources to hire or purchase other or further machinery to lift the rate of harvest and delivery beyond the rate particularised in paragraph I above.
iiiTo the knowledge of North, the plaintiff could only sustain the production level referred to in paragraph I above in circumstances where the pulpwood made available by the defendant for harvest by the plaintiff required limited haulage and snigging and was otherwise relatively accessible."
Driveforce originally sought to introduce pars26 and 27 not just in relation to an asserted implied term requiring good faith, but also in respect of the implied term that it wished to plead to the effect that, as a general rule, each weekly quota would be approximately one fiftieth of the annual base quota. It seems to me that a lot of the matters contained in those paragraphs were included primarily, or even solely, because Driveforce wanted to plead an implied term relating to the size of weekly quotas. The pleading of such an implied term was not allowed, but there has been no filleting out and removal of any subsidiary material that was unrelated to the implication of a term requiring good faith.
By pleading the matters set out in par25, Driveforce has confined its case in relation to the alleged existence and breach of an implied term requiring good faith. In order to decide whether the impugned amendments should have been allowed, it is necessary to consider whether there is any prospect of Driveforce recovering damages for the breach of such an implied term, having so confined its case. I therefore turn to consider par25.
The content of an implied contractual duty of good faith
The nature of the practical effect of an implied contractual duty of good faith was made clear by Buchanan JA in Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL (above) at par[28], in the following passage:
"The content of an implied contractual duty of good faith has been variously described. In Renard [Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 263] Priestley, JA equated good faith with reasonableness. In Garry Rogers [Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd (1999) ATPR 41 – 703 at 43014] Finkelstein, J said that an obligation of good faith required a party 'not to act capriciously'. Breach of the obligation has been described as seeking to prevent the performance of the contract or withholding its benefits [Metropolitan Life Insurance Co v RPR Nabisco Inc 716 F Supp 1504 (SDNY, 1989) per Walker J at 1517] and as seeking to further an ulterior purpose or purpose extraneous to that for which a right or power is conferred [Far Horizons v McDonalds Australia [2000] VSC 310 at [120] per Byrne J; Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349 at 368 per Sheller, JA]."
It has been held in New South Wales that an implied contractual duty of good faith is confined to "acts necessary for the parties to have the benefit of the contract or deed": Russell v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (2007) 69 NSWLR 198 at par[112], per Rothman J, citing Maitland Main Collieries Pty Ltd v Xstrata Mt Owen Pty Ltd [2006] NSWSC 1235, at par[54] et seq.
In contrast to what was said in the various cases referred to by Buchanan JA, Driveforce has pleaded in par25 that the obligation of good faith required Gunns to fix each weekly quota at approximately one fiftieth of the "base quota", subject to certain matters. It is difficult to see how an implied contractual duty of good faith could have such a specific result, particularly in the light of certain express terms of the contract, some of which I have not previously referred to.
Under cl 6.4, which is set out above, Gunns cannot be liable for any loss or damage suffered by Driveforce as a result of a reduction of the weekly quota in accordance with cl 6.3. Under cl 6.3, which is also set out above, Gunns was prohibited from reducing "the week's quota in any week except in the event of a major downturn in business activity or a reduction in the volumes required by the Company due to circumstances beyond the Company's control". Plainly the quota could be reduced very significantly if either of those circumstances occurred. Since cl 6.3 used the words "in any week", rather than "for any week", it may be that it related only to mid-week reductions, and that there was a general unfettered power to reduce quotas from week to week. Counsel made no submissions as to that possibility.
Clause 4.9 of the contract provides as follows:
"The Contractor agrees that in entering into this agreement the Contractor has had regard to the period of this agreement and the minimum level of activity to which it relates and that the Contractor is solely responsible for any relevant business judgments made concerning:
a whether to enter into the agreement;
bthe economic life and capacity of equipment intended to be used for the purpose of the agreement; and
cany decision made during the term of this agreement to purchase, hire, lease or invest in new or different equipment for the purpose of the agreement; and that no claim will be made against the Company with respect to any such matter."
In the light of these express terms, it must inevitably be concluded that, in entering into the contract, Driveforce took the risk that there would be substantial variations in weekly quotas from time to time. I think it must follow that it is not reasonably arguable that a contractual obligation of good faith required Gunns, as a general rule, to fix weekly quotas of approximately 1,300 tonnes every week. It follows that the claim made by Driveforce on the basis of an implied term as to good faith, as confined by par25, cannot possibly succeed.
Conclusion
All of the amendments allowed by the learned associate judge were based on the premise that an implied term requiring good faith had the effect pleaded in par25. Since the claim based on such an implied term, as confined by par25, could not possibly succeed, none of the amendments should have been allowed. The learned associate judge erred in law by allowing them. This appeal must therefore succeed.
It may be that Driveforce will wish to plead a claim based on the existence and breach of an implied contractual duty of good faith, adopting reasoning as to the content of such a duty that is more in accordance with the authorities referred to by Buchanan JA in Esso Australia Resources. On the material before me, I am not able to say that such re-pleading would be futile. However I will hear counsel as to the imposition of a time limit for the making of any application to further amend the statement of claim for that purpose.
For the reasons set out above, I allow the appeal, quash the order of the learned associate judge dated 20 May 2010, and dismiss the application made by letter dated 24 December 2009.
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