Matters of principle
82 As to the question of the principles to be applied in determining whether a term is to be implied in the oral contract between the appellants and the agencies, these foundational principles should be noted:
(1) When a court is called upon to determine the implication of a term, the court is engaged in an exercise in interpretation although not an "orthodox instance" of interpretation: Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 ("Codelfa"), Mason J at 345.
(2) The reasoning carefully and sequentially developed by Mason J in Codelfa (Stephen J and Wilson J agreeing) was concerned with an implied term necessary to give business efficacy to a "particular contract", not of an implied term which is a legal incident of a "particular class of contract". As to the latter, an implied term is based "upon more general considerations": Mason J at 345-346.
(3) With implication, the term is one which it is "presumed that the parties would have agreed upon had they turned their minds to it - it is not a term that they have actually agreed upon": Codelfa, Mason J at 346.
(4) The more detailed and comprehensive the contract the less ground there is for supposing that the parties have failed to address their minds to the question in issue: Codelfa, Mason J at 346.
(5) One difficulty of implication of a term is "identifying with any degree of certainty the term which the parties would have settled upon had they considered the question": Codelfa, Mason J at 346.
(6) Thus, courts "have been at pains to emphasise" that it is not enough that it is "reasonable" to imply a term; it "must be necessary to do so to give business efficacy to the contract", or put more emphatically, it "must be clearly necessary": Codelfa, Mason J at 346; Bell v Lever Brothers Limited [1932] AC 161 at 226.
(7) The conditions necessary to "ground the implication of a term" when the question is whether a term should be implied to give business efficacy to a contract (Codelfa, Mason J at 347), are those summarised in the well-known observations of the Privy Council majority in B.P. Refinery (Westernport) Pty Ltd v Shire of Hastings (reported at) (1977) 180 CLR 266 ("B.P. Refinery") at 283 in these terms:
(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.
(8) See also the observations of French CJ, Bell and Keane JJ in Commonwealth Bank of Australia v Barker (2014) 253 CLR 169 at [21]-[23] where their Honours describe such implication as a term implied "in fact or ad hoc". As Mason J observed in Codelfa (see (1) above), implication of a term in fact in a contract in order to give business efficacy to it raises issues as to the "meaning and effect" of the contract although implication is not an orthodox exercise in interpretation. Their Honours, French CJ, Bell and Keane JJ, observe at [22] that it is nevertheless an exercise in construction, quoting Lord Hoffmann in Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988 at 1994, [22].
(9) Although evidence of surrounding circumstances is admissible in aid of the construction of the agreement, the evidence is restricted to the factual background known to the parties at or before the date of the contract, including evidence of the "genesis" and objectively of the "aim" of the transaction: Codelfa, Mason J at 348; Prenn v Simmonds [1971] 1 WLR at 1383-1384. As to surrounding circumstances, evidence is admissible where the words in a contract are susceptible of more than one meaning, so as to show the "facts which the negotiating parties had in their mind": Codelfa, Mason J at 350.
(10) In this case, the evidence was, of course, admissible for the purpose of establishing the elements or terms of the oral agreement between the appellants and the agencies before turning to a consideration of all the surrounding circumstances to determine the question of implication and to address the problem of "identifying with any degree of certainty the term which the parties would have settled upon had they considered the question". The five factors in B.P. Refinery "ground the implication" of a term because it is satisfaction of those factors which identifies, with any degree of certainty for the court, the term which the parties would have settled upon had they considered the question.
(11) In Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 ("Electricity Generation Corporation") at [35], French CJ, Hayne, Crennan and Kiefel JJ said this (omitting the very extensive footnote citations):
The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating". As Arden LJ observed in Re Golden Key Ltd [[2009] EWCA Civ 636 at [28]], unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption "that the parties … intended to produce a commercial result". A commercial contract is to be construed so as to avoid it "making commercial nonsense or working commercial inconvenience".
(12) This statement of principle from Electricity Generation Corporation at [35] has been recently affirmed in Rinehart v Hancock Prospecting Pty Ltd; Rinehart v Rinehart (2019) 267 CLR 514 ("Rinehart"), Kiefel CJ, Gageler, Nettle and Gordon JJ at [44].
(13) See also the observations of French CJ, Nettle and Gordon JJ at [46]-[49] in Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 256 CLR 104 ("Mount Bruce Mining"). In Mount Bruce Mining, their Honours also said this at [50]-[52]:
50 Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties' statements and actions reflecting their actual intentions and expectations [footnotes omitted].
51 Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption "that the parties … intended to produce a commercial result" [footnotes omitted]. Put another way, a commercial contract should be construed so as to avoid it "making commercial nonsense or working commercial inconvenience".
52 These observations are not intended to state any departure from the law as set out in [Codelfa] and [Electricity Generation Corporation] …
(14) In Heydon on Contract, Lawbook Co. 2019, the author, J D Heydon, observes at [10.700] that Australian law appears to have adopted a "sharp bifurcation" between formal contracts in relation to which all five of the B.P. Refinery tests must be satisfied and informal contracts in relation to which those tests remain relevant but are not thought to be decisive. The author contends that in the case of informal contracts, what is decisive is whether "the implication of the term is necessary for the reasonable or effective operation of the contracts in the circumstances of the case", citing Byrne v Australian Airlines Limited (1995) 185 CLR 410 at 442 ("Byrne"), McHugh and Gummow JJ. That view is thought to derive from the observations of Deane J in Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 at 121 ("Hospital Products") and Hawkins v Clayton (1988) 164 CLR 539 at 571-572 and 572-573. In Hospital Products at 121, Deane J said this:
In a number of recent cases, this Court has accepted the summary of the majority of the Privy Council in [B.P. Refinery] of the criteria which must be satisfied before a term will be implied in a contract. Those cases in this Court, like the B.P. Refinery Case itself, were concerned with the question whether a term should be implied in a formal contract which was complete upon its face and care should be taken to avoid an over-rigid application of the cumulative criteria which they specify to a case such as the present where the contract is oral or partly oral and where the parties have never attempted to reduce it to complete written form. In particular, I do not think that a rigid approach to the requirement "that it must be necessary to give business efficacy to the contract" should be adopted in the case of an informal and obviously not detailed oral contract where the term which it is sought to imply is one which satisfies the requirement of being "so obvious that it goes without saying" in that if it had been raised both parties would "testily" have replied "of course" … As a general rule, however, the "so obvious that it goes without saying" requirement must be satisfied even in the case of an informal contract before the courts will imply a term which cannot be implied from some actual statement, from previous dealings between the parties or from established mercantile practice.
[emphasis added apart from B.P. Refinery Case]
(15) In Hawkins v Clayton, four years later, Deane J repeated his Honour's observations from Hospital Products and said this of the comparison between formal and less formal contracts at 571-572:
In such cases, the insertion of an additional term effectively involves an alteration to what the parties have formally accepted as the complete written record of the [contract] between them. As the judgment of Mason J in Codelfa … clearly indicates, the cumulative criteria [B.P. Refinery] formulated or accepted in such cases cannot be automatically applied to cases such as the present where the parties have not attempted to spell out all the terms of their contract but have left most or some of them to be inferred or implied. Where that is so, there is no question of effectively altering the terms in which the parties have seen fit to embody their agreement; the function of a court is, as Lord Wilberforce pointed out in Liverpool City Council v Irwin [citation omitted]: "simply … to establish what the contract is, the parties not having themselves fully stated the terms". In the performance of that function, considerations of what is "reasonable", "necessary to give business efficacy to the contract" and "so obvious that 'it goes without saying'" … may be of assistance in ascertaining the terms which should properly be implied in the contract between the parties. There will not, however, be the need or the justification for the law to refuse to imply any imputed term which does not clearly satisfy all such requirements.
[emphasis added]
(16) Deane J also said this in Hawkins v Clayton at 572-573:
… [T]here are sound reasons for resisting the temptation to attempt to formulate a precise mechanical test for determining what terms, if any, should be implied in a case where the parties have not sought to spell them out. Such a precise mechanical test would introduce an element of inflexibility which would be likely to lead to injustice in the circumstances of particular cases and would preclude proper observation of Lord Tomlin's sensible admonition [Hillas & Co. Ltd v Arcos Ltd [citation omitted]] "so to balance matters that without violation of essential principles the dealings of men [and women] may as far as possible be treated as effective and that the law may not incur reproach as being the destroyer of bargains …". The most that can be said consistently with the need for some degree of flexibility is that, in a case where it is apparent that the parties have not attempted to spell out the full terms of their contract, a court should imply a term by reference to the imputed intention of the parties if, but only if, it can be seen that the implication of the particular term is necessary for the reasonable or effective operation of a contract of that nature in the circumstances of the case. That general statement of principle is subject to the qualification that a term may be implied in a contract by established mercantile usage or professional practice or by a past course of dealing between the parties.
[emphasis added]
(17) In Byrne, Brennan CJ, Dawson and Toohey JJ observed at 422 that the five criteria in B.P. Refinery are recognised as involving "a degree of overlap" and accepted Deane J's observations that the B.P. Refinery criteria had been applied in the High Court in cases where there was "a formal contract, complete on its face". Their Honours accepted the point made by Deane J that "a rigid approach should be avoided" in cases (such as Byrne) "where there is no formal contract" and "[i]n those cases the actual terms of the contract must be inferred before any question of implication arises". Thus, the proper process is to reach findings or conclusions as to the "actual intention of the parties" before considering any presumed or imputed intention. Their Honours then adopted the test formulated by Deane J in Hawkins v Clayton at 573 quoted at (16) above.
(18) In Byrne, McHugh and Gummow JJ also accepted a distinction between an implication where there is a formal written contract complete upon its face and a less formal contract. As to a less formal contract, their Honours said at 442 that two consequences arise. First, "this species of implication is concerned with the particular circumstances of the particular case". Second, where the contract is not in writing and is oral or partly oral or it appears that the parties did not reduce their agreement to a complete written form, "caution is required against an automatic or rigid application of the cumulative criteria identified in BP". In such cases, their Honours observed that the "first task" is to consider the evidence and "find" the relevant express terms. Their Honours then said this at 442:
Some terms may be inferred from the evidence of a course of dealing between the parties. It may be apparent that the parties have not spelled out all the terms of their contract but have left some or most of them to be inferred or implied. Some terms may be implied by established custom or usage, as described above. Other terms may satisfy the criterion of being so obvious that they go without saying, in the sense that if the subject had been raised the parties to the contract would have replied "of course". If the contract has not been reduced to complete written form, the question is whether the implication of the particular term is necessary for the reasonable or effective operation of the contract in the circumstances of the case; only where this can be seen to be true will the term be implied.
[emphasis added; citations omitted]
(19) In Breen v Williams (1995) 186 CLR 71 at 90-91, Dawson and Toohey JJ observed that in the case of a formal contract complete on its face, it may be said in general that no implication arises unless it is necessary or obvious, that is, necessary in the sense of being required to give business efficacy to the contract or obvious in the sense that it goes without saying. Their Honours observed that where there is no formal contract, the actual terms of the contract must be inferred (found) before any question of implication can arise. Their Honours then adopted the test formulated by Deane J in Hawkins v Clayton at 573 as quoted at (16) above. Their Honours then said this at 91:
That is to say, no question of there being an obvious implication arises in such a case because that which is obvious will be a term of the contract as a matter of inference. Moreover, the line between inference and implication will not always be easy to draw.
[emphasis added]
(20) Breen v Williams is an authority in which the contractual relationship in question was an informal doctor/patient relationship. As to those circumstances, Gaudron and McHugh JJ said this at 102-103:
Given the informal nature of the relationship, however, a contract between a doctor and a patient rarely contains many express terms. Because that is so, the courts are obliged to formulate the rights and obligations of the parties to the contract. As Lord Wilberforce has put it, in cases where the parties to a contract have not attempted to spell out all the terms of their contract, the function of the court is "simply … to establish what the contract is, the parties not having themselves fully stated the terms". The court does so by implying terms in the contract in accordance with established legal principles.
The common law draws a distinction between terms which are implied in fact and terms which are implied by law. Leaving aside terms that are presumed to apply because of the custom of a trade or business, the courts will only imply a term in fact when it is necessary to give efficacy to the contract. A term implied in fact purports to give effect to the presumed intention of the parties to the contract in respect of a matter that they have not mentioned but on which presumably they would have agreed should be part of the contract. A term implied by law on the other hand arises from the nature, type or class of contract in question.
[emphasis added; citations omitted]
(21) It follows from all of these authorities that a coherent approach emerges to the essential principles to be applied in determining whether a term is to be implied in an agreement where the agreement is oral or partly (perhaps substantially) oral rather than where the agreement is formal and complete on its face such as large scale infrastructure contracts, joint venture deeds and similar such contracts which might be regarded as institutional documents.
(22) The principles can be put in these terms.
(23) The cumulative five criteria identified in B.P. Refinery form the well-recognised essential foundation for the implication of a term as a question of fact. The five criteria have been repeatedly affirmed by the High Court. However, the five criteria are not to be applied rigidly as if some sort of checklist. Nevertheless, they must all be properly addressed according to the circumstances of the case as they all remain relevant but perhaps, in their own terms, not all equally decisive of implication. One or more of the criteria might engage more decisively with the particular circumstances of the transaction having regard to the objective circumstances surrounding the transaction and thus caution is required against a rigid or formulaic application of the five criteria. In Codelfa, Mason J recognised that the more detailed and comprehensive the contract, the "less ground" there is for supposing that the parties have failed to turn their minds to the question in issue and it seems to follow that the more informal the agreement the greater the likelihood that the parties have failed to turn their mind to the question in issue.
(24) Where the parties have not spelled out all the terms of their contract, some terms may have to be inferred or implied according to a particular touchstone such as the notion that the term is so obvious that implying the term goes without saying. The "so obvious" criterion remains, however, particularly important and, according to Deane J in Hospital Products (see (14) above), the "so obvious" consideration, as a general rule, must be satisfied even in the case of informal contracts. In Byrne, McHugh and Gummow JJ, at 446, said this in the context of the less formal contract then before their Honours:
In contracts of this nature, apparently lacking written formality and detailed specificity, it is still necessary to show that the term in question would have been accepted by the contracting parties as a matter so obvious that it would go without saying. That cannot be postulated here.
(25) One question that seems to operate in a reductionist way in relation to the five criteria governing implication in the case of informal contracts is this: Is implication of the term necessary for the reasonable or effective operation of the contract in the circumstances of the case? See McHugh and Gummow JJ, Byrne, (18) above. What is, or is not, reasonable in the objective circumstances of the transaction is determined by what a reasonable businessperson would have understood the terms of the agreement (such terms having been found before turning to implication) to mean against the background of the observations in Electricity Generation Corporation, Mount Bruce Mining and Rinehart (see (11), (12) and (13) above) as an exercise in attributing meaning and effect to the contract. An oral commercial agreement must, notwithstanding the oral informal character of the contract, be construed and interpreted in seeking to frame an implied term (which it is "presumed that the parties would have agreed upon had they turned their minds to it"; Mason J, Codelfa at (3) above; or that which is "taken" to have been the intention of the parties or the "latent unexpressed intention of the parties", Byrne, McHugh and Gummow JJ at 447), on the assumption that "the parties … intended to produce a commercial result", rather than "working commercial inconvenience".
83 As to inferred terms, there is some degree of overlap with the principles governing implication but important differences arise. The most notable point of distinction is that in considering whether a term is to be inferred, the Court asks itself this question: "What, if any, are the terms which can properly be inferred from all the circumstances as having been included in the contract as a matter of actual intention of the parties?" [emphasis added]. In the case of implication, the Court seeks to identify a term as a matter of presumed or imputed intention or the expression of the "latent unexpressed intentions of the parties". One approach (inferring a term), seeks out the actual intention whereas implication seeks to adopt a presumed construct reflecting imputed intention on the assumption that had the parties addressed the relevant matter, they would have agreed it should be part of the contract: Breen v Williams, Gaudron and McHugh JJ at 102-103. The extent to which the principles might be thought to be difficult to differentiate can be seen in this sense. Where, for example, the "so obvious" criterion is engaged which suggests a particular term reflecting the actual intention of the parties, no question of "obvious implication" is said to arise because that which is obvious will be a term of the contract as a matter of "inference" and thus the "line between inference and implication will not always be easy to draw": see 82.
84 As mentioned earlier, there seem to be four versions of the proposed term which might be either inferred or implied as a term of the oral agreement as between the appellants and the agencies. One difficulty is that there is considerable confusion about the text of the term said by the respondents, over time, to be the term inferred or implied in the contract. The evidence before the primary judge on this topic consisted of an affidavit sworn by Ms Agrita Cliff on behalf of RPD which exhibits as ACC-4 a document described as "Terms & Conditions - Residential ("Customer Terms")". This document bears the subheading: "Applicable to customers holding residential subscriptions with realestate.com.au". There is also an affidavit affirmed by Mr Rechtman on behalf of REA which exhibits at AMR-10 the same document. Thus, in terms of the affidavit evidence, the respondents identify a document which they say contains the terms and conditions applicable to customers who have entered into a "Subscription Agreement" with REA. That agreement contains, at clause 5(a), the term quoted by the primary judge and set out at [10] of these reasons.
85 However, the letter from the solicitors for RPD dated 9 April 2014 upon which so much emphasis was placed in relation to the subsequent 20 transactions, quoted a significantly different term which is set out at 68 of these reasons. That version of the relevant term is the version of the grant said to have been given by the agencies to REA of which the appellants were said to be on notice from 9 April 2014. That version was said to govern the state of knowledge of the appellants when entering into the 20 contracts with the agencies as the basis of the licence said to have been granted by the agencies to REA and which, in turn, governs the scope of the "authority" granted by the appellants to the agencies. Accordingly, there were two versions of the relevant term, one asserted by REA and another by RPD's lawyers, although by the time of the trial the respondents agreed, by their evidence, that the relevant term was the term set out at clause 5(a). It seems that the term quoted by RPD's solicitors in the 9 April 2014 letter is a term which does not apply to parties holding a Subscription Agreement with REA. That term applies to ad hoc non-subscription users who access the REA site. That version of the term quoted in the 9 April 2014 letter could never have been part of the arrangements between the appellants and the agencies as the agencies only ever engaged with the REA platform through a Subscription Agreement, as the primary judge observes.