Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL & Ors [2005] VSCA 228

6 The appellant ("Esso"), the first-named respondent ("SPP") and Central Pacific Minerals ("CPM") formed a joint venture to exploit mineral tenements near Gladstone in Queensland to produce shale oil. Relations between the parties were

governed by a written joint venture agreement dated 15 March 1985. Esso held a 50% interest in the venture, while SPP and CPM each held a 25% interest.

7 World oil prices fell after the agreement was made and Esso, as it was entitled to do under the agreement, deferred the work necessary to exploit the tenements.

8 In March 2002 the shareholdings in SPP and CPM were merged under court approved schemes of arrangement. CPM became the subsidiary of SPP.

9 In 2003 SPP and CPM were in financial difficulties. On 2 December 2003 a chargee appointed receivers and managers to SPP and CPM. Early in 2004 administrators were appointed to the companies. The interests of SPP and CPM in the joint venture were not secured by the charges.

10 On 24 August 2004 the creditors of SPP and CPM approved two draft deeds of company arrangement which provided for the effective disposition of the companies' interests in the joint venture. One deed, provided for the purchase of SPP's shares in CPM by Queensland Energy Resources Ltd. The other deed, which was proposed by one John Allen Browning, acting on behalf of the unsecured creditors of SPP, provided for the assignment of the interest of SPP in the joint venture to a company to be formed designated as SPV. The price of the assignment was $175,000, to be paid into a fund for the benefit of the administrators and the unsecured creditors of SPP.

11 Assignment of the participants' interests in the joint venture was governed by article 24.01 of the joint venture agreement, which provided, so far as is presently relevant:

"24.01(a) Each Participant shall have the right to assign all or part of its Interest to a Related Corporation without the consent of the other Participant, subject only to the Related Corporation's assumption of the assignor's obligations under the various agreements relating to the Joint Venture and the assignor guaranteeing the performance of the Related Corporation. Such guarantee will not cease merely because the assignee ceases to be a Related Corporation.

(b) Subject to this Article each Participant may with the prior written consent of the other, which shall not be unreasonably withheld, assign all or part of its Interests to a third party ...."

The remainder of the clause regulated assignment pursuant to sub-clause 24.01(b) and provided for the circumstances in which the participants could use their interests in the joint venture as security for loans.

12 Article 1 of the agreement provided in part:

"'Related Corporation' shall have the same meaning as ascribed to that term by Section 5(1) of the Companies Act 1981. Without limiting the generality of the foregoing a Corporation shall be deemed to be a Related Corporation of SPP/CPM if it is a Related Corporation of either SPP or CPM."

"27 Conflict Of Interest

Subject to this agreement each Participant shall at all times during the currency of this agreement use its best endeavours to ensure that no actions taken by itself, its servants, agents and contractors which could or might result in or give rise to the existence of conditions prejudicial to or in conflict with the best interests of the other Participant in respect of this Joint Venture. In particular, but without limiting the generality of the foregoing, a Participant shall take or cause to be taken all necessary and proper precautions to prevent its servants, agents and sub-contractors from receiving from, or making, providing or offering to any person who could or might be in a position to influence the decisions hereunder of the other Participant with respect to the Project any substantial gift, entertainment, payment, loan or other consideration. Nothing in this article shall preclude either Participant from carrying on its normal course of business outside the Area."

14 The draft deed of company arrangement to be made by SPP provided for the appointment by SPP, with the consent of Browning, of three named persons as the directors of SPV. The Companies Act provided that a corporation would be deemed to be a subsidiary of another corporation if that other corporation controlled the composition of the board of directors of the first-mentioned corporation. It was also provided that the composition of a corporation's board of directors would be taken to be controlled by another corporation, inter alia, if that other corporation could appoint or remove all or the majority of directors, whether with or without the concurrence or consent of any other person. The draft deed met the requirements of article 24.01(a) by providing for the assumption by SPV of SPP's obligations under the joint venture agreement and a guarantee by SPP of the performance of those obligations by SPV.

15 The draft deed also provided for SPP to be liquidated after class creditors had been paid their entitlements, SPV had acquired the interests of SPP in the joint venture and the administrators had certified that the deed had been wholly effectuated. The trial judge found that the purpose of the liquidation was to enable the creditors of SPP " ... to claim a write-off for tax purposes."

16 The draft deed contemplated that the creditors of SPP would take up shares in SPV and provided for a loan of between $245,000 and $250,000 by certain of the creditors to SPV for a term of 20 years to be used, inter alia, as working capital.

17 Esso brought these proceedings seeking to restrain SPP and the administrators from assigning SPP's interests in the joint venture to SPV. At trial Esso advanced various interpretations of the joint venture agreement which, if accepted, would prevent article 24.01(a) applying to the proposed assignment to SPV. Alternatively, it was contended that the establishment of a new company which achieved the status of a subsidiary of SPP by conferring a limited control over the composition of the board of SPP for the purpose of precluding Esso from exercising its rights under article 24.01(b) constituted a breach of an implied obligation of good faith. Finally, it was contended that the proposed assignment constituted a breach of article 27.

18 The trial judge held that the proposed assignment did meet the requirements of article 24.01(a). Her Honour did not expressly decide whether a duty of good faith was to be implied in the joint venture agreement. Rather, her Honour appeared to assume the existence of such a duty and found that there was no want of good faith. She said:

"If clause 24.01(a) entitled SPP to assign to SPV in the manner and circumstances proposed, as I have found it does, there is no lack of good faith or fair dealing in SPP acting to promote its own interests consistently with the basis on which it may be taken to have entered into the contract."

The trial judge disposed of the argument that the proposed assignment constituted a breach of article 27 by holding that as article 24 specifically permitted the proposed assignment, the assignment did not breach the more general provision in article 27, which was expressed to be "subject to this agreement."

19 On appeal Esso eschewed the construction arguments advanced below and propounded a new contention that SPP was in breach of an implied obligation of good faith as a consequence of the provision in the draft deed of company arrangement that SPP would be wound up. Esso also maintained that the assignment breached article 27.

20 It was submitted that the price of using article 24.01(a) to achieve an assignment was to give the remaining participant or participants in the joint venture the benefit of a guarantee by the assignee and the continued presence of an original participant because the new co-venturer was related to it. The planned liquidation of SPP deprived Esso of those benefits at a stroke. SPP did not intend to secure the performance of SPV's obligations, and that was an essential feature of a contract of guarantee.[9] It was conceded that SPP was entitled to assign its interest to a corporation which became a corporation related to the assignor solely for the purpose of utilising article 24.01(a). The liquidation of SPP, however, by designedly rendering the guarantee of no effect and removing the comforting presence of the related corporation, constituted, so it was said, a breach of the duty of good faith owed by SPP to Esso.

21 Counsel for SPP submitted that Esso should not be permitted to contend on appeal that the planned liquidation of SPP deprived it of the enjoyment of the benefit of the guarantee and was thus a breach of the obligation of good faith, when no such contention had been advanced at trial. Counsel was unable to say that the trial would have been conducted differently if the case based upon liquidation of SPP had been put at trial, and in my view the respondents are not prejudiced by the point being taken now.

22 Counsel for Esso submitted that SPP was bound to exercise good faith in assigning its interest in the joint venture agreement because "an additional term implied by law into commercial contracts is a term requiring the exercise of good faith in the performance of the contract".[10] The argument appeared to run that as this was a commercial contract, an obligation of good faith attended the exercise of every right and power conferred by the contract, including the power of assignment contained in article 24.01(a).

23 Esso's case was advanced on the basis that an obligation of good faith qualified the power or right of assignment conferred by article 24.01(a), so that "cynical resort to the black letter"[11] of the contractual provision was necessarily a breach of contract. At trial Esso contended that the linking of SPP and SPV as related corporations for the sole purpose of denying Esso the power of vetoing the assignment of SPP's interest in the joint venture displayed a want of good faith. In my view the abandonment of that approach was correct. It is difficult to discern a want of good faith in the exercise of a power which can serve only the interests of the party upon whom the power is conferred. The ostensible purpose of the exercise of such a power will almost invariably be its true purpose. The power may be contrasted with a power expressed in general terms in a contract, such as a partnership agreement, which is concerned with co-operation to produce a result beneficial to all the parties to the agreement.[12]

24 In Metropolitan Life Insurance Co. v. RPR Nabisco Inc.[13] Judge Walker said:

"In other words, the implied covenant will only aid and further the explicit terms of the agreement and will never impose an obligation which would be inconsistent with other terms of the contractual relationship .... Viewed another way, the implied covenant of good faith is breached only when one party seeks to prevent the contract's performance or to withhold its benefits .... As a result, it thus ensures that parties to a contract perform the substantive, bargained-for terms of their agreement."

If a contractual right or power, which is intended to advance only the interests of the party on whom it is conferred, is fettered by an implied obligation of good faith, resort to the duty may become an obstacle to the promotion of that party's legitimate interests.[14]

25 I am reluctant to conclude that commercial contracts are a class of contracts carrying an implied term of good faith as a legal incident[15], so that an obligation of good faith applies indiscriminately to all the rights and power conferred by a commercial contract. It may, however, be appropriate in a particular case to import such an obligation to protect a vulnerable party from exploitive conduct which subverts the original purpose for which the contract was made. Implication in this fashion is perhaps ad hoc implication meeting the tests laid down in BP Refinery (Westernport) Pty. Ltd. v. Shire of Hastings[16], rather than implication as a matter of law creating a legal incident of contracts of a certain type.

26 The attack in this case mounted on appeal against the proposed deed of arrangement was aimed at a proposal which, while it attended the assignment, was not a necessary part of it. The liquidation of SPP could have taken place independently of the assignment, and would have been open to the same objection raised against it as a term of the proposed arrangement, namely, that it deprived Esso of the advantages of a continuing guarantee and the presence of an original participant in the joint venture.

27 In this case it is not necessary to determine whether a term requiring the exercise of good faith is to be implied in the agreement, for even if such an obligation was imposed upon SPP, in my opinion it was not breached.

28 The content of an implied contractual duty of good faith has been variously described. In Renard[17] Priestley, J.A. equated good faith with reasonableness. In Garry Rogers[18] 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[19] and as seeking to further an ulterior purpose or purpose extraneous to that for which a right or power is conferred.[20] In my opinion the provision in the proposed deed of arrangement for the winding up of SPP is not unreasonable, capricious or the pursuit of an ulterior purpose and did not prevent the performance of the contract or deny Esso its benefits.

29 The substance of the transaction proposed by Browning was to replace a moribund joint venturer[21] with one capable of contributing funds to advance the

venture. The liquidation of SPP did not deprive Esso of anything of value but did advance the legitimate interests of SPP by bestowing a material benefit upon SPP's creditors. To refrain from winding up SPP would be to subordinate the interests of the creditors of SPP to the interests of Esso, indeed to deny a tangible benefit to the creditors in order to promote nothing but the shadow of a benefit to Esso. The duty of good faith, unlike the duty imposed upon a fiduciary, is not a duty to prefer the interests of the other contracting party, but rather to have due regard to the interests of both parties and the benefits afforded by the contract.[22]

30 Nor do I think that the proposed assignment is caught by article 27 of the joint venture agreement. The trial judge, it will be recalled, disposed of the point by resort to the introductory words of the article, "subject to this agreement." As the assignment was permitted by article 24.01(a) it could not be prohibited by article 27. Esso's response was to draw a distinction between the assignment itself and the steps taken to attract the application of article 24.01(a). The former was permitted; the latter was not. In my view, the distinction has no merit. The assignment permitted by article 24.01(a) was an assignment to a corporation which was or had become a related corporation. It was not limited to assignment to a corporation that answered the description of a related corporation before the desirability of attracting the operation of the article arose. In any event, I do not consider that article 27 was intended to impose on the participants to the joint venture the onerous duties of fiduciaries.

31 For the foregoing reasons I would dismiss the appeal.

32 I also agree with the reasons of Buchanan, J.A. and would dismiss the appeal.

[1] See, for example, Renard Constructions (ME) Pty Ltd v. Minister for Public Works (1992) 26 N.S.W.L.R. 234 at 263-264; also, Service Station Association Ltd v. Berg Bennett & Associates Pty Ltd [1993] FCA 445; (1993) 45 F.C.R. 84 at 96.

[2] See, for example, Secured Income Real Estate (Australia) Ltd v. St Martins Investments Pty Ltd [1979] HCA 51; (1979) 144 C.L.R. 596 at 607; CSS Investments Pty Ltd v. Loprion Pty Ltd (1987) 76 A.L.R. 463; Adelaide Petroleum NL v. Poseidon Ltd (1988) 98 A.L.R. 431; Australian Mutual Provident Society v. 400 St Kilda Road Pty Ltd [1990] VicRp 56; [1990] V.R. 646. In addition, see, H.K. Lucke, "Good Faith and Contractual Performance" in P. Finn (ed.), Essays on Contract (1987) at 155ff.

[3] See, for example, Hughes Aircraft Systems International v. Airservices Australia [1997] FCA 558; (1997) 146 A.L.R. 1, 36; Alcatel Australia Ltd v. Scarcella & Ors (1998) 44 N.S.W.L.R. 349 at 369; Far Horizons Pty Ltd v. McDonald's Australia Ltd [2000] V.S.C. 310.

[4] Eg. Forklift Engineering Australia Pty Ltd v. Powerlift (Nissan) Pty Ltd [2000] V.S.C. 443 at [91] and [94].

[5] ibid.

[6] See, for example, Playcorp Pty Ltd v. Taiyo Kogyo Ltd [2003] V.S.C. 108 at [267].

[7] See Electronic Industries Ltd v. David Jones Ltd [1954] HCA 69; (1954) 91 C.L.R. 288 at 297.

[8] See N.C. Seddon & M.P. Ellinghaus_, Cheshire & Fifoot's Law of Contract,_ (8th ed., 2002) at 428, 10.48.

[9] Jowitt v. Callahan (1938) 38 S.R.N.S.W. 512 at 516 - 7 per Jordan, C.J.

[10] Overlook Management B V v. Foxtel Management Pty. Ltd. [2002] NSWSC 17 at [62] per Barrett, J. See also Burger King Corporation v. Hungry Jack's Pty. Ltd. [2001] NSWCA 187; Renard Constructions (M E) Pty. Ltd. v. Minister for Public Works (1992) 26 NSWLR 234 at 268 per Priestley, J.A.; Hughes Bros. Pty. Ltd. v. The Trustees of The Roman Catholic Church for the Archdiocese of Sydney (1993) 31 N.S.W.R. 91; Alcatel Australia Ltd. v. Scarcella (1998) 44 N.S.W.L.R. 349 at 369 per Sheller, J.A.; Hughes Aircraft Systems International v. Airservices Australia [1997] FCA 558; (1997) 76 F.C.R. 151 at 192 per Finn, J.; Far Horizons v McDonalds Australia (2000) V.S.C. 310 at [120] per Byrne, J.; Garry Rodgers Motors Aust. Pty. Ltd. v. Subaru (Aust.) Pty. Ltd. (1999) ATPR 41 - 703 at 43014 per Finkelstein, J.; Asia Television Ltd. v. Yau's Entertainment Pty Ltd. (2000) 48 RPR 383; Livingston v. Roskilly [1992] N.Z.L.R. 230 at 237 per Thomas, J.

[11] Overlook v. Foxtel, above at [67] per Barrett, J.

[12] Cf_. Vroon BV v. Fosters' Brewing Group Ltd_ [1994] VicRp 53; [1994] 2 V.R. 32 at 95 - 6 per Ormiston, J.

[13] 716 F Supp. 1504, 1517 (S.D.N.Y., 1989).

[14] Cf. Riggs National Bank of Washington v. Linch, [1994] USCA4 2070; 36 F 3d 370, 373 (3rd Cir, 1994) per Harvey, J.: "[A]n implied duty of good faith cannot be used to override or modify explicitly contractual terms."

[15] Cf. Vodafone Pacific Ltd. v. Mobile Innovations Ltd. [2004] NSW CA 15 at [191] per Giles, J.A.

[16] (1977) 180 C.L.B. 266.

[17] Above at 263.

[18] Above at 43014.

[19] Nabisco, above at 1517 per Walker, J.

[20] Far Horizons, above at [120] per Byrne, J.; Alcatel, above at 368 per Sheller, J.A.

[21] Esso did not challenge the trial judge's finding that "the financial position [of SPP] is such that its guarantee would be worthless."

[22] Overlook, above at [67] per Barrett, J.