A general, unfettered and express power to terminate a contract at will is not subject to a duty of good faith, and even where a duty of good faith is implied into a contractual right to terminate, it will not impose obligations inconsistent with the terms of the bargain between the parties.  Contracting parties should consider carefully the terms of any termination rights and in particular, whether a general unfettered right to terminate without cause, unlimited by any implied good faith obligation, is appropriate for a transaction.

White Gum Petroleum Pty Ltd (White Gum), which traded under the name Peak, ran a system for the operation of convenience stores from service station sites (the Peak System).  In February 2008, Trans Petroleum (Australia) Pty Ltd (Trans Petroleum) leased a site on which there was a service station and convenience store to White Gum.  Contemporaneously by written agreement (Fuel Re-selling Agreement), White Gum granted a non-exclusive licence to Trans Petroleum to operate the convenience store on the site and to sell Peak’s petroleum products from the site.  Clause 3 of the Fuel Re-selling Agreement entitled either party to terminate upon 2 months’ written notice to the other party.

In March 2008, the sole shareholder of White Gum sold his shares to Gull Trading Pty Ltd which used a separate system for their licensed convenience stores.  Following a decision to phase out the use of Peak Systems (and instead use the Gull system) and the failure by the parties to negotiate a standard Gull franchise agreement, White Gum issued a notice terminating the Fuel Re-selling Agreement.

One of the issues raised on appeal was whether the Fuel Re-selling Agreement was within the class of contracts into which the law would imply an obligation to act in good faith.  Trans Petroleum argued that White Gum had terminated the Fuel Re-selling Agreement to avoid a daily fee cap of 12% of gross sales and had not therefore exercised its power to terminate subject to such implied obligation to act in good faith.  The Court reviewed existing case law and observed that:

  • while a duty of good faith may be implied into contracts, the necessity of implying such a duty in the context of a commercial contract is not universally accepted in Australia;
  • in the event such a term is implied, a party under a duty to act in good faith will be required to have “due regard” to the rights and interests of the other party, but would not be required to subordinate their own legitimate interests to those of the other party; and
  • an implied obligation of good faith does not impose obligations inconsistent with the terms of the bargain between the parties.

Ultimately, the Court refused to imply a duty of good faith to the exercise of the right to terminate under clause 3 of the Fuel Re-selling Agreement.  Specifically, the Court found that clause 3 gave the parties a general, unfettered right to terminate and it would be inconsistent with the terms of the bargain agreed between the parties to imply such a duty.

See the case.