Thinking | 9 December 2013
The Famestock case – The implied contractual duty to co-operate
There is a strong line of authority in Australia recognising that, as a matter of law, every contract imposes on the parties to it an implied general duty to cooperate. However, questions will invariably be raised about the scope of this implied duty. A recent decision of the Queensland Supreme Court of Appeal has reinforced that the implied duty to cooperate is subject to limitations and that its scope must be determined by the obligations imposed on the parties by the particular contract.
Content and scope of the implied duty
The duty to cooperate is most frequently defined in the following formula:
It is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract.1
As a corollary to the obligation to do what is necessary to give the other party the benefit of the contract, each party is implicitly obliged to refrain from doing anything that would deprive the other party of the benefit of the contract.
The underlying principle is that contracting parties must not only adhere to the letter of the contract, but must also take all necessary steps to contribute to the full realisation of the contractual bargain.
The duty to cooperate is particularly pertinent where the performance of a contract is qualified by a contingent condition, which requires some specified event to occur before the parties are obliged to continue with the performance of the contract. For example, a failure to obtain a permit or to take other steps necessary to ensure the lawful operation of a contract may breach the duty. The duty has also been applied in a wider range of contexts. For instance, an employer may breach the duty by excluding an employee from activities that would increase his or her remuneration.
Limits on the duty to cooperate
Despite wide acceptance of the duty to cooperate as a term implied at law into every contract, the courts have acknowledged that the duty does have limits.
The principal qualification is that the scope of the required cooperation must be defined by what has been promised under the particular contract. In other words, the duty requires performance only of acts that are necessary to preserve the ‘benefit of the contract’, rather than the ‘benefit of the party’.
The scope of the duty is also affected by its commercial context, such that in most commercial contexts it is accepted that each party to a contract is entitled to look to its own benefit in preference to that of the other party, and the scope of the duty is limited accordingly.
It has also been acknowledged that the duty is further limited to what can reasonably be required in the circumstances.
The Famestock2 decision
The recent decision of the Queensland Supreme Court of Appeal in Famestock reinforces that the scope of the required cooperation must be defined by what has been promised under the particular contract.
The appellant (a caretaking and letting manager for a residential unit development) entered into a written letting agreement with the respondent body corporate. Two years after the contract commenced it was discovered that the appellant had failed to renew its real estate licence and was consequently operating unlawfully and in breach of several clauses of the letting agreement.
The appellant lodged a new licence application with the relevant authority, the Office of Fair Trading, and requested that the respondent write to the authority confirming that it approved the conduct of the letting business. The respondent refused to do so. The appellant’s application was unsuccessful due to the absence of satisfactory evidence of body corporate approval and the respondent thereafter sought to terminate the letting agreement.
The appellant argued that the duty to cooperate required the respondent to inform the Office of Fair Trading that the agreement between the parties was still on foot, having regard to the fact that body corporate approval to conduct the letting business was a relevant factor to the granting of a licence.
The Court of Appeal decision
The Court of Appeal upheld the finding of the trial judge that the respondent had not breached its implied duty to cooperate.
The Court observed that:
- the scope of the duty must be determined, not by what is reasonable, but by the obligations imposed – either expressly or impliedly – upon each party by the agreement itself;
- a party who has entered into a contract which can only proceed under an existing set of circumstances is under an implied obligation to do nothing of its own motion to put an end to that state of affairs; and
- while the duty to cooperate is continuing, if one party is in breach of its duty to cooperate so that performance of the contract cannot be effected, the other party will be entitled to terminate the contract.
The duty to cooperate may have required the respondent to take reasonable and necessary steps to assist the appellant to maintain the currency of existing licenses. However, on these facts it could not be implied from the letting agreement that the duty to cooperate was so broad as to require the respondent to assist the appellant to remedy its breach and secure a new licence after having operated unlicensed and in breach of the agreement for over two years.
The recent decision of the Queensland Court of Appeal in Famestock reinforces that while a general duty to cooperate may be implied into all contracts as a matter of law, its scope must be determined by the obligations imposed upon the parties by the particular contract.
Rather than protecting a party’s anticipated benefit from a contract, it appears that the duty will extend only to doing such as acts as are required to deliver on contractual obligations.
1Known as the Butt formula. See Butt v M’Donald (1896) 7 QLJ 68, endorsed by the High Court in Secured Income Real Estate (Aust) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 597.
2Famestock Pty Ltd v The Body Corporate for No 9 Port Douglas Road Community Title Scheme 24368  QCA 354.
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