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The implied duty of cooperation: working together to ensure the success of the lease

The concept of cooperation between parties is all about teamwork: working together in unity, collaboration, and ...

In the drafting of a retail lease, there is an obligation for both parties to ‘cooperate’. Very often a clause to this effect may not be in the lease but the obligation is certainly still there. In this article, John Morrison looks at the extent of the implied obligation.

The concept of cooperation between parties is all about teamwork: working together in unity, collaboration, and give-and-take. It is fair to say that the success of a relationship often depends on the element of cooperation.

The ability to create a contractual agreement is no different and, in order to be successful, requires the parties to the agreement to cooperate. But the extent of the implied duty for the parties to a commercial contract to cooperate may be more akin to acts of diplomacy than esprit de corps. In most commercial contracts, including leases, the parties have independent legal advisors, the terms are considered and extensively negotiated, risk is allocated and, in the commercial context, legitimate self-interest through profits and outcomes are considered.

It is a well-established principle of the common law that the obligation to cooperate applies to all types of contracts, including a lease. But, unlike the dictionary definition of cooperation, the application of the obligation at law is subject to limitations and will not operate to rewrite the contract between the parties.

The implied obligation to cooperate should not be confused with the implied obligation of good faith which is more about reasonableness, proper purpose and legitimate interest, and is not considered by this article.

The question is not about whether the positive obligation to cooperate applies to a landlord and tenant, but more about the extent of the obligation, the tension being the degree of cooperation which the parties are required to engage in when performing their contract.

Origin of the obligation

The concept of the obligation to cooperate can be traced back to the 1881 English decision in Mackay v Dick.

In Australia, the Queensland decision in Butt v McDonald (1896) 7 QLJ 68 is the case cited as being the precedent for the application of the duty to cooperate. In Butt’s case, the Court (at 70–71) held that the duty of cooperation implies that the parties to a contract will “do all such things as are necessary on [their]part to enable the other party to have the benefit of the contract”.

Extent of the obligation

The required degree of cooperation will vary from contract to contract. The case law in the area indicates that the obligation requires a party to the contract:

• not to prevent the performance of the contract by the other party;
• not to prevent fulfilment of the other party’s purpose;
• to do all things necessary to ensure the performance of the contract; and
• to do all things necessary to ensure the other party has the benefit of the contract.

The High Court in Secured Income Real Estate (Australia) Ltd v St Martins Investment Pty Ltd (1979) 144 CLR 596 at 607 approved Butt’s case and held that both parties to the contract are under an obligation to do all things necessary to “secure the success of the contract”.

In the Secured Income case, Mason J noted (at 607–608) that the extent of the obligation to cooperate must be determined having regard to the express promises made in the contract, the intention of the parties and the circumstances of the case. His Honour qualified the obligation noting “it is easy to imply a duty to cooperate in the doing of acts which are necessary to the performance by the parties or by one of the parties of fundamental obligations under the contract. It is not quite so easy to make the implication when the acts in question are necessary to entitle the other contracting party to a benefit under the contract but are not essential to the performance of that party’s obligations and are not fundamental to the contract.”

In his article Contract, Good Faith and Equitable Standards in Fair Dealing (2000) 116 LQR 66 at 75 Mason J gives further consideration to the obligation to cooperate and observes that “the implied obligation does no more than spell out what, on the true construction of the contract, is the effect of the promises and undertakings entered into by the party. In reaching that conclusion, it will be relevant to take account of the legitimate, or reasonable expectations of the parties when they make the contract.”

Limitations on the obligation

In the Council of the City of Sydney v Goldspar Australia Ltd [2006] FCA 472, the court observed that the duty to cooperate “is not a mechanism for alleviating the consequences of hard, even harsh or unconscionable contractual provisions. The duty of cooperation does not extend to being nice or even reasonable to the other party”.

The qualification applied by Mason J in the Secured Income case limits the duty of cooperation, so that it does not extend to a benefit that is unrelated to an express obligation in the contract.

While the decision in the Secured Income case has been followed by the High Court in subsequent cases, the view that the duty of cooperation is limited to fundamental obligations under the contract is yet to be considered in detail by the High Court.

When considering the application of the obligation to cooperate, the NSW Court of Appeal applied the settled rule that a term will only be implied in a contract where it is necessary. In Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 13 NSWLR 104 at 124 the Court of Appeal held that the implied obligation to cooperate only applied to prevent interference with the parties’ obligations under the contract. The obligation does not require the parties to bring about “something which the contract does not require to happen”.

The settled rule that is applied to determine whether a term is to be implied in a particular contract was laid down in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266. The Court held that, for a term to be implied, it must:

• be reasonable and equitable;
• be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
• be so obvious as to go without saying;
• be capable of clear expression; and
• not contradict an express term of the contract.

Express exclusion of the obligation

In the context of the implied obligation to cooperate, the question of whether the implied obligation to cooperate may be excluded is yet to be answered by the courts.

It is accepted at law that, if a term is to be implied, that term may only be implied if it is not expressly excluded by a term of the contract, or is not inconsistent with an express term of the contract.

By way of illustration, this approach has been applied in the application of the implied duty of the parties to a contract to act in good faith. In the decisions Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15 and Solution 1 Pty Limited v Optus Networks Pty Limited [2010] NSWSC 1060, the Court held that the right for one of the parties to do something at their “sole discretion” or “absolute discretion” weighed against the implication of the obligation of good faith. In the circumstances, the party may exercise the right having regard to its own interests, rather than the interests of the other party.

In considering whether the implied duty for the parties to act in good faith is excluded, the courts will look for a clear intention by the parties to expressly exclude the obligation. In the Vodafone case, the Agreement included the following clause:

“To the full extent permitted by Law and other than as expressly set out in the Agreement the parties exclude all implied terms.”

The Court formed the view that a general clause, drafted on the above terms, was sufficient to oust the implied obligation of good faith.

Given the approach of the courts in the context of the implied duty of good faith, it seems reasonable to assume that a similar approach may apply to the exclusion of the implied duty to cooperate. But, for the moment, there is no certainty surrounding the question of whether it is possible to exclude the implied obligation to cooperate, and we must wait for some judicial direction as to whether the parties can expressly exclude the obligation.

Express inclusion of the obligation

Just as a party may wish to exclude the implied obligation of cooperation, it is becoming more common for the parties to a contract to include an express obligation of cooperation in the contract. An example of an express obligation to cooperate contained in a lease is:

“Each party must do anything to give effect to this Lease and to the transactions contemplated by it, and must ensure that its employees and agents do anything that the other party may reasonably require to give full effect to this Lease.”

These sorts of clauses, generally referred to ‘further assurance’ clauses, often form part of the boilerplate suite of clauses and, as a consequence, are rarely considered in detail by the parties.

Example of the application of the obligation

Suppose a shopping centre owner leased a shop to a restaurant operator with a permitted use that permits the lessee to hold a liquor licence and, at the time of the application for the liquor licence, the lessor refused to support the application. The centre owner would have an implied obligation, even though it might not be stated in the lease, to cooperate and support the application.

In every shopping centre lease, there is a clause dealing with the removal of rubbish. Even if the lease is silent on the issue of where to dump it, there is an implied obligation for the lessor to co-operate by providing the necessary bins and facilities to allow the lessee to perform the obligation.

In shopping centre leases, even though (in many cases) a clause to this effect is not expressly included lessors and lessees must be aware that the implied obligation to cooperate applies, as and when required, to every retail lease.

Conclusion

The obligation to cooperate is not absolute. It may not be implied where it is inconsistent with the intentions of the parties, as expressed by the terms of the contract.

The extent of the obligation to cooperate was put succinctly by Nettle JA in Beerens v Bluescope Distribution Pty Ltd [2012] VSCA 209 as “a duty to afford the other party the benefit of what he has contracted for; not a duty to act generally in the other party’s interests.”

The implied obligation to cooperate does not prevent the parties from negotiating an agreement on their preferred terms, and is not a fetter on the parties pursuing their self-interest when negotiating terms.

The obligation should not be relied upon to fill in the gaps in drafting or impose an obligation on the other party. There is no substitute for ensuring the lease (or contract) contains all of the terms with sufficient detail, so that the extent of each party’s obligation to perform an express term can be ascertained from an express clause in the lease. If a party is required to undertake certain steps or to abstain from certain behaviour, then the document should specifically set out both the positive and negative obligations. A deficient clause will result in unforeseen obligations, restrictions and consequences.

Whilst there is some uncertainty surrounding the question of whether the implied obligation to cooperate may be expressly excluded by the terms of the contract, it is still appropriate for the parties to consider whether the obligation should apply to a particular term and, if appropriate, expressly exclude the implied obligation to cooperate. SCN

Disclaimer: This article is not intended to be a substitute for obtaining legal or other expert advice and no responsibility is accepted for any action taken as a result of any material in this article. Information and advice relating to your specific commercial dealings can be obtained by contacting HWL Ebsworth Lawyers.

About the author

John Morrison

John Morrison is a Special Counsel in the NSW office of the national HWL Ebsworth Real Estate and Projects Group. John has extensive experience in the area of shopping centre retail leasing throughout Australia and New Zealand. He has advised a number of well known national landlords and tenants. John has acted for REITs in high volume retail leasing and the disposal and acquisition of shopping centres.

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