It is a well-recognised and firmly entrenched principle of the common law in Australia that contracts contain an implied obligation on the contracting parties to do all that is necessary on their part to enable the other party to have the benefit of the contract. Where the parties have agreed that something will be done which cannot be done unless the parties both cooperate in achieving it, the Courts will imply a term that each party will do all that is necessary to achieve their mutual contractual aim – even though there may be no express words requiring cooperation.
The essence of the implied duty to cooperate is that the parties are obliged not to prevent or hinder performance by the other party. It is a duty which is, again, well-recognised. In construction contracts, application of the implied duty to cooperate most frequently arises in the context of notice provisions and, in particular, conditions precedent.
As an example, all standard form construction contracts contain mechanisms by which the principal can direct the contractor to undertake variations to the works under the contract and by which the payment for that varied work is to be valued. It is not uncommon for the valuation mechanism to contain a provision that receipt by the contractor of a written variation direction is a condition precedent to its entitlement to payment for the varied work.
If the principal or superintendent verbally directs the contractor to undertake a variation, but refuses to issue a written variation direction, the terms of the contract provide that the contractor has no entitlement to payment.
In these circumstances, satisfaction of the condition precedent to payment for the variation (that is, issue of the written variation direction) lies entirely within the control of the superintendent or principal. The contractor will only be entitled to payment for the variation if the superintendent or principal ‘cooperates’ by providing a written variation direction.
The principles applicable to the implied duty to cooperate are set out in a decision of the Supreme Court of South Australia in Alstom Ltd v Yokogawa Australia (No. 7) [2012] SASC 49:
‘(1) 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.
(2) Where, in a written contract, both parties have agreed that something shall be done which cannot be effectually done unless both concur in doing it, the proper construction of the contract is that each party agrees to do all things necessary to be done on its part to enable that, even though there are no express words to that effect.
(3) Where the performance of obligations under a contract requires cooperative acts, the parties must have mutual duties to comply with the reasonable request for performance made by the other. What is reasonable will depend on the circumstances.’
The courts have acknowledged limitations on this implied duty. The primary limitation is that the scope of required cooperation must be informed by what has been promised under the contract. This is because the duty requires performance of acts that are necessary to preserve the ‘benefit of the contract’, rather than the benefit of one party.
This limitation was explored in Famestock Pty Ltd v The Body Corporate for No. 9 Port Douglas Community Title Scheme [2013] QCA 354, which concerned a contract between an owners’ corporation and a letting manager. A term of the contract required that the letting manager would obtain all licences required by it to enable it to conduct the business of letting the units. Two years after commencement of the contract, it was discovered that the letting manager had failed to renew its real estate licence and was, therefore, operating unlawfully.
The letting manager lodged an application for a new licence with the Office of Fair Trading and, as part of that application, was required to demonstrate that it had body corporate approval to carry on the business of letting units in the building complex. The letting manager requested the owners corporation to provide confirmation of that approval, but the owners corporation refused to do so. The letting manager argued that the owners corporation was a breach of its implied duty to cooperate.
The Court of Appeal upheld the finding of the trial judge that the owners corporation had not breached its implied duty to cooperate. Whilst the Court observed that the duty to cooperate may have required the owners corporation to assist the letting manager in maintaining the currency of existing licences, that duty was not so broad as to require the owners corporation to assist the letting manager in remedying its own breach of contract in failing to ensure that it had all licences enabling it to lawfully carry on business as a letting agent.
This case illustrates that, whilst a duty to cooperate may be implied into contracts as a matter of law, its scope will be informed by the bargain struck by the parties under the contract. It will not operate to protect the interests of only one party, particularly where that party has failed to uphold its end of the bargain.
Water authorities bear this in mind where if they are seeking to rely upon conditions precedent as a basis for denying a contractor its entitlements under a contract. Depending on the terms of the contract, the implied duty to cooperate may function to require the water authority to take steps to allow the contractor to have the benefit of the contract.
