TITLE OF COURT: SUPREME COURT OF TASMANIA (FULL COURT)

JUDGMENT OF: Tennent J, Buchanan JA and Mandie J

Contracts - General contractual principles - Construction and interpretation of contracts - Implied terms - Generally.

Broadcasting Services Act 1992 (Cth), s117(d), Pt 9

Radiocommunications Act 1983 (Cth), s24.

Radiocommunications (Licensing and General) Regulations (Amendment) 1986 (Cth), reg5B.

Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA 228; Service Station Association Ltd v Berg Bennett & Associates Pty Ltd [1993] FCA 445; (1993) 45 FCR 84; Asia Pacific Resources Pty Ltd v Forestry Tasmania [1997] TASSC 101; Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15;

BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266; Vroon BV v Fosters' Brewing Group Ltd [1994] VicRp 53; [1994] 2 VR 32; referred to.

Judgment Number: [2008] TASSC 86

2 That par1 of the judgment entered 12 February 2008 be set aside and, in lieu thereof, there be judgment entered for the appellants.

1 The second-named appellant ("Tasradio") operated two radio stations in Tasmania: 7HT in the south and 7EX in the north. The stations' broadcasts were principally devoted to horse racing. The Totaliser Agency Board ("TAB") was a body corporate created by the Racing and Gaming Act 1952. The objects of TAB included the promotion of the racing industry and the transmission of racing events to followers of racing. On 5 March 2001, the first named appellant succeeded to the contractual rights and obligations of TAB.

2 TAB paid a fee to Tasradio for broadcasting descriptions of races and programs concerning racing. In 1990, the owner of Tasradio informed TAB that it would not continue racing broadcasts. Consequently, TAB formed an alliance with Hunter Broadcasters Pty Ltd ("Hunter"), a company controlled by the respondents. TAB and Hunter each purchased half the issued shares in Tasradio.

3 Tasradio transmitted on medium frequency ("AM"). In the 1970s, radio stations began to transmit with a frequency modulation system ("FM"). AM transmission covers a greater area than FM, whereas FM permits better reproduction of music.

4 Licences to broadcast by radio were controlled by the Australian Broadcasting Authority ("the Authority"). In the middle of 1992, Tasradio applied to the Authority to convert its licence from AM to FM. At the same time, TAB applied for a licence to provide what were called open narrowcasting radio services, that is, services targeted at special interest groups. TAB proposed to use Tasradio's existing AM frequency to broadcast racing.

5 Hunter and TAB agreed to part company. The terms of their separation were contained in two agreements executed on 18 December 1992. By a share sale agreement, Hunter agreed to sell all its shares in Tasradio to TAB at a price of $250,000. By a licence sale agreement, the respondents agreed to purchase from Tasradio its FM licence and certain equipment at a price of $250,000.

6 The licence sale agreement was subject to two conditions precedent. The first was the completion of the share sale agreement. That condition was satisfied. The second condition was as follows:

"1.2 It is also a condition precedent to completion of this Agreement that the Australian Broadcasting Authority ('ABA') shall have granted to TAB or Tasradio a licence for an Open Narrowcasting Service ('the Narrowcast Service') which allows TAB or Tasradio to provide a broadcast program, which includes racing, to a standard acceptable to TAB. TAB and Tasradio shall use their best endeavours to obtain such a licence and shall make a decision within thirty (30) days of the date upon which they receive notification of the terms upon which ABA will grant such a licence as to whether or not those terms are acceptable to them."

7 This appeal is concerned with the construction of the condition precedent contained in cl 1.2 and whether the condition was satisfied.

8 At about the time that the December agreements were being negotiated, the regime covering AM and FM licences was in a state of transition. In October 1992, the provisions of the Broadcasting Act 1942 (Cth) concerned with limited licences were repealed and new provisions were enacted. The scheme of the new legislation was that limited licences that had been issued to individual broadcasters would be replaced by class licences for the operation of "open Narrowcast Services" of a kind specified in the class licence.[1] Before a broadcaster could provide an open narrowcasting service under a class licence, the broadcaster required a transmitter licence[2] and access to a suitable frequency band for the purposes of transmission. It was the grant of a transmitter licence that was the subject matter of cl 1.2 of the licence sale agreement.

9 On 12 January 1993, the director of the planning division of the Authority wrote to TAB in the following terms:

"I refer to your application for a transmitter licence to provide a racing service in Hobart.

I am pleased to advise you that the Australian Broadcasting Authority has recently released the AM frequency 108kHz, for open narrowcasting purposes. The frequency has been released on an interim basis until 31 December 1993 when its allocation may be reviewed.

As you are aware, commercial radio station 7HT is presently operating on this frequency. When 7HT convert to the FM band later this year, the ABA will be in a position to process your application for the above service."

10 On 26 January 1993, the same persons were the directors of TAB and Tasradio. Those persons met on that day and considered the terms of the licence set out in the Authority's letter. The meeting was attended by Ms Hecksher, a solicitor. Minutes of a meeting of directors of Tasradio on that day recorded:

"Mr Morse reported that he had spoken with Mr Knowles who advised that it was most unlikely that the frequency would not be available beyond 31 December 1993. However, if extreme pressure was brought to bear over an extended period of time the ABA could be forced to call for expressions of interest."

The minutes recorded the decision of the board as follows:

"The Directors agreed that in the absence of a firm guarantee from the ABA that the 1080 frequency would be available for the Narrowcast Service for an extended period beyond 31 December, 1993 the terms were not acceptable."

11 On 4 February 1993, Ms Hecksher wrote to the solicitors for the respondents as follows:

"We refer to the Agreement dated the 18 December 1992 and made between our respective clients for the sale of an FM Licence and associated assets.

Pursuant to clause 1.2 of that Agreement we hereby notify you and your clients that the TAB was advised by letter dated 12 January 1993 and received 18 January 1993, from the Australian Broadcasting Authority of the terms of issue of a licence for an open narrowing service and we advise you and your clients that the terms of grant of that licence are not acceptable to our clients, TAB and Tasradio Pty Ltd.

Accordingly, by virtue of the non-satisfaction of the condition precent contained in clause 1.2 of the abovementioned Agreement, that agreement between our clients is now at an end."

12 The respondents brought proceedings against the appellants claiming damages for wrongful repudiation of the licence sale agreement. It was alleged that the appellants were obliged to exercise the power conferred by cl 1.2 in good faith, and honestly and reasonably, and had failed to do so. The Master ordered that the question of liability be tried separately from the question of damages.

13 The judge who determined liability held that it was an implied term of the licence sale agreement that the appellants were required to act in good faith, and to act reasonably and honestly, in determining whether the terms of the grant of the licence were acceptable to them. Somewhat confusingly, his Honour also held that it was not a term of the agreement that the appellants could not rely upon cl 1.2 capriciously, arbitrarily or in bad faith. His Honour determined that some or all of the appellant's obligations had not been met. He said:

"It is not necessary at this remove, to make findings as to the integrity of the officers or board members of the defendants as at 26 January 1993. It is sufficient to state the conclusion that they did not determine 'acceptability' of the terms in a manner required by the contract."

14 It would appear that the trial judge was of the opinion that the appellants breached the terms of the licence sale agreement because they knew, when they entered into the agreement, that the Authority would issue a licence limited to 12 months, but in fact likely to be extended thereafter. He said:

"Tenure was the only claimed basis for concern. That tenure must be viewed at least as a 'term' to be defined or interpreted in the light of the statutory and regulatory scheme as understood and accepted by the parties as of 18 December 1992. The allocation of 'limited tenure' of 12 months as a transitional mechanism was known to both defendants before and as at 18 December 1992. ... [H]ad it been raised for the first time and in the absence of the known development of a regulatory regime, its January disclosure might have been definitive."

"If the Court had concluded that the 12 month period stated in the licence had taken the board by surprise, had not been the subject of earlier planning and understanding, and was accepted by the authority, Tasradio and Tote Tasmania as simply part of the transitional process and extension, subject only to matters such as fraud, misconduct and the like, as but a procedural formality, the question of implied terms, best endeavours and commercial efficacy would be of little import. The finding of the Court ... is that both defendants knew through their officers and boards that the special licence, once issued, would be, subject to minor variations, extended into the foreseeable future."

15 The appellants appealed from this decision, contending that an obligation to act in good faith and reasonably should not be implied. It was submitted that TAB's power was one which could serve only the interests of TAB.[3]

16 In our opinion, an implied term of good faith is not a necessary legal incident of all commercial contracts. The obligation of good faith does not apply indiscriminately to all the rights and powers conferred by a commercial contract.[4] Whether a term requiring the exercise of good faith is to be implied depends upon the principles of ad hoc implication.[5]

17 Whether a power conferred upon a party to a contract is fettered by a duty of good faith depends upon the terms in which the power is expressed. Without purporting to compile an exhaustive list, there are at least three types of contractual powers which suggest different results. One is a provision conferring a power in an agreement, such as a partnership agreement, which is concerned with co-operation between the parties to produce a result which benefits all the parties to the contract. In such an agreement, a court might readily imply an obligation to act in good faith in that the party upon whom the power is conferred must have regard to the interest of all the parties to the agreement.[6] Another type of provision is one which confers a power if the donee of the power considers that a certain state of affairs or condition exists. In this case, a court may well hold that the power can only be exercised by an honest decision that the state of affairs or condition does exist, but the honest exercise of the power will not be reviewed by the court. Yet another type of provision is one conferring a power that is quite unqualified. Here, a court may conclude that the power can legitimately be exercised in the interests of the party upon whom it is conferred and that party is to be the sole judge of where its interests lie and may exercise the power for any reason it sees fit.

18 We think the power in the present case falls into the second category. TAB was required to determine whether the terms of the licence were acceptable. TAB could not invoke cl 1.2 for any other reason, for example, because it wanted to extract a higher price for the FM licence.[7] But as long as TAB did determine that the terms of the licence were unacceptable, that decision could not be set aside because a court might think it unreasonable or one which served only the interests of TAB.

19 In any event, we are of the opinion that the board of TAB did act in good faith, reasonably and honestly in exercising the power conferred upon TAB by cl 1.2.

20 The trial judge appears to have found that TAB did consider that the terms of the licence were unacceptable, but held that approach was unreasonable because the terms were no better than TAB expected when it entered into the agreement. There was but little evidence that TAB knew, when it entered into the licence sale agreement, that it would receive a one year licence that would be renewed. While the regulatory framework for the grant of licences was in the process of being established, there was no real certainty. The trial judge referred to an address by a member of the Authority, which was supplied to the board of TAB in November 1992, in which the member stated:

"The Authority has a discretion to allow frequencies to be available for allocation for providers of open narrowcasting services while the ABA has not commenced or completed planning and allocation processes.

The tenure on these frequencies may be limited until the planning process has been completed. Where there is a scarcity of frequencies and conflicting demands from potential narrowcast providers - which is potentially a problem in the capital cities - we may consider shorter than 12 months' transmitter licences to ensure a fair allocation of a limited availability of frequencies.

If the planning process has been completed and there is available spectrum for use of narrowcast services, the ABA may be able to give a narrowcast service longer than one year tenure on a frequency. ... Even though a price is paid for the use of the spectrum, a narrowcast service still does not have the same tenure of a free to air broadcasting service."

21 The regulatory regime in existence at the date of the licence sale agreement did not limit transmitter licences to a term of 12 months. The Radiocommunications (Licensing and General) Regulations (Amendment) 1986 (Cth), reg5B, provided that "The period of two years is prescribed in relation to all transmitter licences." The 1991 amendment to the same regulations again specified two years. Subsequent amendments did not reduce this period.

22 The trial judge did not refer to the evidence of the two members of the board of TAB who were called as witnesses. Both said that they did not know, before 18 December 1992, that narrowcast licences were limited to a term of 12 months. One of the directors said that if he had known that narrowcast licences were limited to 12 months, he would not have been a party to the licence sale agreement. His Honour did not make any findings adverse to the credit of the witnesses.

23 The evidence did not establish that there was any certainty that a 12 month narrowcast licence would be extended. A manager employed by the Authority, who was involved with applications for limited narrowcast licences, when asked as to the prospect of the licence being renewed after 31 December 1993, said:

"[T]here is a reasonable chance, I would think, that some tenure might be possible but that really required some formality and as a true bureaucrat I wouldn't have committed myself."

Later, he agreed with the proposition that "there was a reasonable expectation that a licence would be available again after 31 December 1993, but that could not be guaranteed".

24 In our opinion the evidence established that the directors of TAB determined that the Authority's grant of a transmitter licence limited to a term of 12 months was not acceptable. They did not invoke cl 1.2 for any ulterior purpose. We do not think the Court is at liberty to set aside that decision as unreasonable. In any event, the evidence did not sustain the finding upon which the conclusion that the decision was unreasonable was based, namely, that TAB expected to obtain no more than a 12 month licence at the time it entered into the agreement with the respondents.

25 Counsel for the respondents sought to uphold the trial judge's conclusion that the appellants were not entitled to rely upon cl 1.2 by advancing two further arguments. The first was that as a matter of construction, cl 1.2 was concerned only with the standards of racing broadcasts, not the terms of the licence issued by the Authority. The second argument was that in fact the board of TAB did not decide that the terms of the licence were unacceptable.

26 In construing cl 1.2 the respondents concentrated upon the words "provide a broadcast program ... to a standard acceptable to TAB." They contended that the only circumstance in which the condition could fail was that the broadcasting standard permitted by the licence was not acceptable to TAB. The period for which the licence operated was distinct from the standards relating to the broadcasting of racing. Counsel for the respondents referred to radio program standards promulgated by the Authority pursuant to the provisions of the Broadcasting Services Act 1992 (Cth), Pt9, which applied to all class licences and, for example, prohibited programs which incited violence and presented as desirable the misuse of drugs, and required programs to present news accurately.

27 Clause 1.2 is hardly a model of clarity. The first sentence states that the broadcast program allowed by the licence is to be to a standard acceptable to TAB. The second sentence contemplates that both TAB and Tasradio are to decide, not the acceptability of the standard of a broadcast permitted by a licence, but rather the acceptability of the terms upon which the Authority will grant a licence. We would resolve the ambiguity by preferring the view that the parties intended to confer a power of decision upon TAB and that the subject matter of that power was the acceptability of the terms of the licence, including its tenure. The evidence showed clearly that TAB, to the knowledge of the respondents, was vitally concerned with the terms attaching to the transmitter licence, including the period of the licence.[8] Racing broadcasts were vital to TAB's business. The standards laid down by the Authority applied to all broadcasting. TAB displayed no interest in those standards, but was concerned with the particular conditions applicable to the terms upon which it could broadcast programs. We agree with the trial judge that cl 1.2 dealt with the acceptability to TAB of all the terms of the licence offered by the Authority, but further, for the reasons we have stated, TAB was entitled to rely upon that clause and did so. Accordingly, the condition was not satisfied.

28 The second argument depended entirely upon the minutes of meetings of the boards of Tasradio and TAB on 26 January 1993. The minutes recorded that the board of Tasradio met at 10 am and resolved that "the agreement for a sale of the FM licence and associated equipment ... should not proceed." The board of TAB met at 12.15 pm. The minutes did not mention the radio licence or the licence sale agreement. The respondents submitted that the trial judge's finding, that the board of TAB met on 26 January 1993 and decided that the terms of the licence were not acceptable, was incorrect.

29 We are not disposed to depart from the conclusion reached by the trial judge. In our opinion, it is probable that the minutes were inaccurate and ought to have recorded a resolution by the boards of both TAB and Tasradio that the terms of the licence were not acceptable.[9] The company with an immediate interest in the terms of the licence was TAB. On 4 February 1993, Ms Hecksher sent a facsimile to persons she identified as a director and the secretary of TAB, seeking instructions to send the letter set out in par11, above. In his evidence, the secretary confirmed that the letter was approved. A file note made by the solicitor after attending the TAB board meeting on 26 January 1992 stated:

"General view of the TAB is that they would not be happy to give up an FM licence with only a 12 month narrowcast licence and no guarantee of its renewability. Advising them that we should therefore respond to Garrott and Blyton advising them that the terms of issue of the Narrowcast licence are unacceptable."

30 There can be no doubt that the directors of TAB decided formally or informally that the terms upon which the Authority was prepared to grant a licence were unacceptable to TAB.

31 For the foregoing reasons we would allow the appeal. In our opinion TAB was entitled to, and did, invoke cl 1.2 to terminate the licence sale agreement. Accordingly, par1 of the judgment entered 12 February 2008 should be set aside and, in lieu thereof, judgment should be entered for the appellants.

[1] Broadcasting Services Act 1992 (Cth), s117(d).

[2] Radiocommunications Act 1983 (Cth), s24.

[3] Compare Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA 228.

[4] See Service Station Association Ltd v Berg Bennett & Associates Pty Ltd [1993] FCA 445; (1993) 45 FCR 84; Asia Pacific Resources Pty Ltd v Forestry Tasmania [1997] TASSC 101, 9 (Underwood J); compare Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15, [191] (Giles JA).

[5] See BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266.

[6] See Vroon BV v Fosters' Brewing Group Ltd [1994] VicRp 53; [1994] 2 VR 32, 95-6 (Ormiston J).

[7] The trial judge did say at one point in his judgment that the appellants "were beguiled by" the terms of an offer made by a third party for the licence, but he did not decide that that factor played any part in TAB's decision invoking clause 1.2.

[8] The first-named respondent in evidence agreed that "it was very important to TAB that radio broadcasting be provided on a long term basis."

[9] The person who had been the secretary of TAB in 1992 gave evidence that where a matter affected both TAB and Tasradio, the boards of the companies did not discuss the matter twice and said "It'd probably be dealt with at the TAB board".