[2013] HCATrans 050

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
		Melbourne			No M89 of 2012

B e t w e e n -

HEALTHSCOPE LTD (ACN 006 405 152)

First Applicant

AUSTRALIAN HOSPITAL CARE (LADY DAVIDSON) PTY LTD (ACN 079 309 550)

Second Applicant

and

SPECIALIST DIAGNOSTIC SERVICES PTY LTD (FORMERLY SYMBION PATHOLOGY PTY LTD) (ACN 007 190 043)

First Respondent

HCOA OPERATIONS (AUSTRALIA) PTY LTD (ACN 083 035 661)

Second Respondent

Application for special leave to appeal

FRENCH CJ
KIEFEL J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 15 MARCH 2013, AT 10.36 AM 

Copyright in the High Court of Australia

____________________

MR A.C. ARCHIBALD, QC:   If the Court pleases, in this matter I appear with my learned friend, MR J.M. ROSS, for the applicants.  (instructed by Allens Lawyers)

MR N.J. YOUNG, QC:   May it please the Court, I appear with my learned friend, MR A. J. McCLELLAND, for the first respondent.  (instructed by Herbert Smith Freehills)

FRENCH CJ:   Thank you, Mr Young.  Yes, Mr Archibald.

MR ARCHIBALD:   The first matter to deal with is the implication of the duty of good faith.

FRENCH CJ:   Was this not just an application of BP?

MR ARCHIBALD:   Well, no, in our respectful submission.  The BP test was employed, but avowedly and explicitly for the purposes of establishing a good faith obligation that was pleaded and pursued.  In any event, what the court did was impermissibly and inappropriately inject into the BP test a criterion of vulnerability which, in our submission, is alien to, foreign to that test and has never previously been employed.  We would say that insofar as one might employ, contrary to our primary contentions, notions of a BP test in connection with an issue of a duty of good faith, vulnerability in that area would be alien, in any event.

	The actual employment of vulnerability here is incongruous because at paragraph 87 of the judgment of the Court of Appeal, the court characterised the parties as commercial entities of equal bargaining power, so that what is then characterised as vulnerability is no more than what two parties of equal strength, equal commercial strength, voluntarily arrived at in a negotiation framework; so even the vulnerability criterion seems to give rise to difficulties in these circumstances.

KIEFEL J:   The Court of Appeal also said that the term was “necessary to give business efficacy”, which is at paragraph 91, following the BP Refinery test.

MR ARCHIBALD:   Yes.  Well, that is what the court was doing and we say that is where the court went wrong.  There are a number of issues here.  First, previous cases, not in complete harmony, but many previous cases, had characterised the implied obligation of good faith as being an implication at law, by way of law, not always implied in transactions, but in a commercial context often implied.  Burger King is an example of saying the source of the implied obligation is by way of an implication at law.  

	The attitude of the Court of Appeal here therefore involves a stark departure from those cases by treating the implied obligation as an implication of fact and, moreover, as your Honour Justice Kiefel observes, not just an implication of fact, but harnessing the precise test employed for purposes of implying business efficacy obligations.  The good faith obligation is not simply, in our submission, on the authorities and the jurisprudence simply an example of a business efficacy obligation.

KIEFEL J:   Some of the more controversial aspects of whether good faith principles in the performance of a contract are recognised by our common law do not seem to have been raised.

MR ARCHIBALD:   No, so the submission we make is that the way in which the Court of Appeal approached the implication of this obligation is not consonant with prior analysis in this country of the topic.  This Court has already said that the issue as to the scope and content and circumstances of implication of a “good faith” obligation is a matter of importance.  That is found in the Royal Botanic Gardens Case at paragraph 40.  Those observations of the Court were made more than 10 years ago.  The question has not been answered since and we say it is still ripe for answering by this Court and all the more ripe because of the departure embodied in the reasons of the Court of Appeal in addressing this question from the earlier analyses of the Australian cases.

KIEFEL J:   Well, it might be ripe and there might be good reason to look for an appropriate vehicle, but these matters were not really agitated, at least inferentially it seems so, reading the Court of Appeal’s reasons, the wider questions about the application of good faith principles.

MR ARCHIBALD:   I have to say now the court has delivered its reasons, the difficulty becomes apparent.  The Court will understand that before the Court of Appeal, Symbion, the respondents in this application, argued for a good faith doctrine to be introduced by way of law, implication at law.  In other words, their preferred argument was, consonant with the earlier cases; it is to be implied at law.  What the Court of Appeal arrived at was a different conclusion, namely, that it should be implied (a) in fact and (b) by reference to the BP test.  So these ramifications were not central to the framework within which the matter was argued.

	I should add that this approach to the implied obligation to good faith seems to be something that is peculiar to the Victorian Court of Appeal or perhaps some members of it.  This approach was first tentatively adumbrated in the Esso Case.  In Tote Tasmania Pty Ltd v Garrott the issue was agitated.  Because of the circumstances of Mr Garrott in that case, two members of the Victorian Court sat on the Tasmanian appeal and they are two of the members of the court who sat in this appeal.  

	Then in this case rather more firmly and definitively this approach to the good faith obligation emerged and we say it commands attention both on the good faith ground, but also by extrapolation to the BP ground because the question arises:  is the BP test for business efficacy now to be understood as having a vulnerability component, or is that something unique to a good faith obligation argument where somewhat different principles apply?

KIEFEL J:   Now, the implication of good faith that you are dealing with has regard to a particular restraint of trade clause 20.1(b).  That is the context for its implication and it is in that context that vulnerability was mentioned, was it not, that it was by way of acknowledging that that was the contractual approach of the parties?

MR ARCHIBALD:   Yes, but it does seem to be decisive because in the John Fawkner lease, vulnerability was said to be present and the term was implied.  In the Hills Private Hospital lease, where the activity involved adjoining premises, not the same premises, the court concluded that the lessee there was not especially vulnerable and it was held that the good faith implication would not occur.  So it does seem by inference on the approach of the court in this case that vulnerability has some dominating and decisive role in approaching either the BP test generally or BP in the environment of good faith.  Either way, the matter commands the attention of this Court.

KIEFEL J:   But you have got more work to do than just the implication of good faith issue, have you not?  Is there not a finding of an express breach of clause 20.1(b) and also a finding in relation to the geographical restraint in 20.1(a) – not geographical; the wider restraint?

MR ARCHIBALD:   Yes, your Honour is right.  Success on the good faith point will not assure us of success on the appeal.

KIEFEL J:   No.

MR ARCHIBALD:   In order to succeed on the appeal in relation to the Fawkner Hospital lease, we would need to succeed both on the good faith point or on the point as to whether we are bound by the lease at all, or on the restraint of trade point, and what your Honour refers to latterly really concerns that point.  We accept there are other issues in the case which we will need to address and upon which we need to succeed in order that the appeal generate a favourable outcome.  But the critical point is that the good faith issue is essential to our success.  It is not the case that we could win on some other point.

	We must win on good faith in order to win on the appeal, and the same in relation to the other relevant - most relevant lease, the Hill’s lease.  We need to succeed there on the “touch and concern” point, our other special leave point.  Success on that alone will not guarantee success but again it is imperative that we succeed on “touch and concern” there and therefore the special leave point is bound to be a component of a successful appeal.  If it were to be the case that we lose on some other point were special leave to be given, we submit that that does impart to these points a characterisation that makes this case an unsuitable vehicle for their being entertained by the Court.

	Might I return to one aspect of the good faith implication made by the Court of Appeal which I have not yet addressed?  As your Honour Justice Kiefel observed, the court concluded that the obligation should be characterised as an obligation of good faith on the landlord not to exercise powers over the building so as materially to alter the fabric of the building to the detriment of the lessee.  Such an implication gave to the good faith obligation a substantive operation additional to and discrete from other terms of the lease.

	Hitherto, in our submission, the jurisprudence has indicated and established that an implied good faith obligation is adjectival or auxiliary to express substantive terms of the lease, and that is apparent from the characterisation of this Court in Royal Botanic Gardens at the paragraph I mentioned, paragraph 40, and in other cases such as Alcatel which we put on our list.  So that what the court has done is to find as a good faith obligation some term which imparts a discrete good faith obligation of a substantive kind rather than one which goes in aid of and controls the exercise of rights, powers and obligations otherwise found in the lease.  To introduce an obligation of that kind is, in our submission, antithetical to the notion of good faith hitherto existing, involves an error, involves a matter of principle and commands the attention of this Court.

	In relation to the second special leave point, may we make these short oral submissions?  The dispositive point in the area of learning and decision concerned with covenants that touch and concern the land has long been, and we say still is, whether the covenant is collateral to the subject matter of the lease.  A collateral covenant cannot touch and concern the land, and that formulation has been evident ever since Thomas v Hayward, if not before the decision in Thomas v Hayward was given.  We mention Thomas v Hayward because it was particularly pertinent before the Court of Appeal for its facts were facts which we submit were on all fours with the facts in the instant case.  

	In Thomas v Hayward, Baron Channell, for example, held and stated that a covenant touches and concerns the land only if it directly affects the land.  That is in the report at page 312 at point 4 on the page.  Put in the converse, an indirect covenant is collateral to the subject matter of the lease and cannot touch and concern the land.  Yet here – and this is the critical vice in the conclusions of the Court of Appeal – yet here at paragraph 201, page 185 of the application book, the court expressly held that the covenant was indirect, but nevertheless touched and concerned the land.  The court said that the covenant “indirectly and not merely ‘collaterally’” affected the land.

KIEFEL J:   What do you say about the approach of the Court of Appeal to Symbion being a beneficiary of the trust of the promises?

MR ARCHIBALD:   That point arises independently of the “touch and concern” argument.

KIEFEL J:   Yes.

MR ARCHIBALD:   The court said it discerned in clause 42.6 of one of the leases and clause 8.2 of one of the other leases a provision which operated for the benefit of the lessee and operated in circumstances to show an intention by the purchaser of the land that the vendor of the land should hold for the lessee the benefit of those elements, and that in the purchaser’s hands the purchaser held the land as trustee for the – or subject to all the rights of the lessee.  That is based on Bahr v Nicolay and we say, while Bahr v Nicolay is unexceptional as finding in the case of a repurchase agreement that the relevant provision was for the benefit of the lessee, here clauses 42.6 and 8.2 were not and could not have been for the benefit of the lessee.

	They were standard provisions in a sale of land subject to a lease inserted for the benefit of the vendor, for upon the sale the vendor remained still liable contractually under the lease so that if the purchaser breached the lease, the vendor would be liable, and these clauses in transactions of this kind protect the vendor.  They are not there for the benefit of the lessee.  So the orientation of clauses of this kind is exclusively, in our submission, towards the vendor and not towards the purchaser.

	One sees that squarely, in our submission, in Snowlong, the case after Bahr which applied Bahr and referred to heavily by the Court of Appeal here.  In Snowlong, there was a sale subject to the lease.  The provisions of the sale as shown in the report of that case included not only terms of the kind we are concerned with here, but more – and it is the more that made the difference – the more concerned a covenant to enter into a deed of assumption directly with the lessee and a covenant if requested to enter into a substitute lease directly with the lessee.  So one case see in the most analogous case, Snowlong, why in Snowlong one would find a Bahr v Nicolay trust but reject a Bahr v Nicolay trust here, because those vital additional elements were missing.

	It is also to be observed that in Bahr v Nicolay the matter which was found to create the personal equity in favour of the third party was the circumstance that, in addition to clauses in the transaction between the vendor and the purchaser, there was direct communication with and undertakings given to the third party.  One sees that in the report of the case at page 638 in the reasons of Mr Justice Wilson and Justice Toohey at point 7 on the page.  “Clause 4” that is in the transaction between the vendor and the purchaser:

may have been, of itself, insufficient for that purpose but the second respondents’ letter of 6 January 1982 and their two offers of 8 January 1982 put beyond doubt their acknowledgement of their obligation to the appellants.

The letter is at 626 and the offers are at 634 and they were specific undertakings by the purchaser direct to the third party, creating the equity which established the trust.  So we accept we have to overcome the findings against us in the Court of Appeal based on Bahr v Nicolay, but we are not devoid of significant prospects of success for those reasons and therefore it cannot be said in this case that the grant of leave would be futile because we would lose in any event.

	Might I return briefly to some further aspects of the “touch and concern” point?  The Court of Appeal at the paragraph I referred to, paragraph 201, seemed to conclude that the combination of indirectness and collaterality somehow or other yielded the result that the covenant did touch and concern the land.  But in Thomas v Hayward collaterality and absence of directness was said to preclude the characteristic of a covenant touching and concerning the land.  Each is a disqualifying feature.  We submit shortly, putting together two disqualifying features cannot convert the covenant into one which does qualify.  That is what in substance their Honours did.

	In relation to paragraph 201, their Honours further identified two matters which they said distinguished Thomas v Hayward.  The first was what they called an “integrated scheme of the leases”, but when one looks 

at what the court said about the integrated scheme, it consists of no more than interweaving covenants which bear upon the business, not upon the premises.  They go back to what is to be conducted on the premises and what is not to be conducted away from the premises.  The second point is – it is the last sentence on page 185 of the application book.

	They say that the issue whether the covenants affected “the value of the demised premises” was not considered in Thomas v Hayward.  But if one looks at the reasons of Baron Cleasby, I think, the third member of the court, at the foot of page 312, value was considered there and it was identified as value of the trade, not value of the premises.  That is the same point as applies here.  In those circumstances, in our submission, these points are worthy of leave.  They are necessary to be decided.  They are not sufficient, but the other points are not such that we must lose in any event.

FRENCH CJ:   Thank you, Mr Archibald.  Yes, Mr Young.

MR YOUNG:   The first special leave question concerning the implied term does not raise any question of principle or general importance.  It relates to an implication that was avowedly based by the Court of Appeal on the tests in BP Refinery.  That appears at the application book 153 to 154.  The actual term implied is in paragraph 88 effectively.  It was implied term that the landlord would not:

exercise its powers over the building containing the leased premises so as to materially alter the physical form of the hospital to substantially deprive the tenant of the benefit of clause 20.1(b).

That is the implied term.  It is labelled “an obligation of good faith” in the next paragraph, but that was unnecessary to the court’s reasoning and to the tests that it applied.  The label does not matter.  The actual tests applied were the tests governing the implication of the term in fact.  Our learned friend fastens on the reference to vulnerability, but the reason why that is referred to is that it is relevant to the BP tests relating to business efficacy.  The Court of Appeal explained why in paragraph 92 it “was material to the benefit received under” the lease that the premises not be physically altered.

	The lease itself required a particular business to be conducted and related agreements imposed service standards on the business operator.  That appears at paragraph 8 earlier in the judgment at page 131, to obtain the benefit of the lease in circumstances where the tenant was compelled to conduct a particular business in a particular way, effectively servicing the hospital that created a need for business efficacy, reasons to imply the term.  It was the obligations to conduct a particular business that generated the business efficacy, and vulnerability is simply an aspect of that business efficacy.  There is nothing alien in the concept in the context of the facts of this case where there were interrelated obligations concerning the premises and the business.

FRENCH CJ:   Is there any more content being given to the term “vulnerable” there than the existence of a circumstance described in the rest of paragraph 89 that the benefit received “depended upon a use ancillary” ‑ ‑ ‑

MR YOUNG:   No, your Honour, and that is what is explained a little further in 92.  The Court of Appeal’s reasons do not expose for consideration the wider questions concerning the implication of an obligation of good faith as a matter of law into a class of contracts.  That is not addressed at all in this case in the judgment, nor does it deal with the content of a general obligation of good faith in such circumstances.  This is really a precise implied term, implied as a matter of fact, not to alter the physical form of the premises for business efficacy reasons.

	As your Honour Justice Kiefel observed, the good faith implied term was one of three ways in which liability could arise.  It was an alternative to the allegation of direct breach of clause 20.1(b) and a direct breach was found on the facts.  That appears at paragraph 43 at page 141.  There was another head of liability, a third alternate position, which was that if there were no implied term and no direct breach, in any event the doctrine of derogation from grant applied to found liability.  That is addressed at page 165 of the application book, paragraph ‑ ‑ ‑

KIEFEL J:   That really does not take it any further though, does it?

MR YOUNG:   No, but it is an alternative basis for implying exactly a substantially similar term founded on a different legal doctrine, but it does mean, your Honour, that ‑ ‑ ‑

KIEFEL J:   It is not a strong point, I do not think.

MR YOUNG:   No, it does mean that good faith is simply an alternative method of analysis if it was, in fact, adopted as a method of analysis rather than simply BP.  We do say that the point does not arise - it is certainly not ripe for decision – as to whether there is any general obligation of good faith and what it means in a class of contracts on this decision.  Nor is it a suitable vehicle because of the other issues that the Court would have to address that attend this question of liability.

KIEFEL J:   What do you say about the “touch and concern” land point?

MR YOUNG:   I was coming to that immediately, your Honour.  Our learned friend submits that there was some error in the application of legal principle by the court.  The court applied the prevailing authorities, that is, Swift, which was adopted by this Court in the Gumland decision.  That is clear at page 184, paragraph 199.  The very old case of Thomas v Hayward that used the word “collateral” to describe a set of facts is not a rival test.  That was simply an adjectival description of a set of facts in that case, which are very different facts from the facts in this case.  What the later cases do, in particular Gumland, is to give content to the test.  The question is whether the covenants affect the nature, quality or mode of user of the demised premises, and there are three ways of testing that spelled out in Gumland.  That provides the content.

	Our learned friend appeals effectively to an adjectival description of a particular set of facts, so there is no point of principle raised.  The Court of Appeal applied the High Court authority, they applied it to the facts and they gave three reasons, quite separate reasons, as to why these covenants did “affect the nature, quality or mode of user of the demised premises”.  That is at paragraph 201.  The first was the integrated scheme of the leases and the business services agreement.  It is quite clear that a covenant that prevents alteration of the premises or the use of premises in a particular competing fashion does affect the nature of use of premises which the tenant is compelled to use for a particular business to service particular clients or patients of the hospital.  That does affect the use of the premises.  That is the first reason.

	The second reason is that the analysis is stronger in relation to 20.1(b) because that covenant prevented the grant of a licence to occupy any part of the premises, so it directly affects the premises in question.  The third consideration was that there was direct unchallenged evidence that the covenants affected the value, given the evidence that a lesser rental would have been paid had they not been provided.  So, in our submission, it is a straightforward application of established authority to the facts of the case, it raises no question of general importance and, as your Honour Justice Kiefel again observed, “touch and concern” was one of three alternative ways in which the applicant would be bound by the lease.

	The others were a Bahr v Nicolay trust which was found against the applicant, and there was a third one which was trust of a promise in the Wilson v Darling Island Stevedoring and Trident sense.  The actual contract of sale provision was clearly one intended to operate for the benefit of the lessee from time to time.  It is extracted at the top of page 187 of the application book, paragraph 207.  The beneficiary will always be outside the privity relationship in this kind of case of “touch and concern”.  But 8.2(a) of the contract for the sale of land obliged the purchaser to:

perform all the Vendor’s covenants and obligations under the Tenancies, whether or not those covenants touch and concern the Land –

That must be directed to benefiting the lessee.  The vendor does not need to say anything about touch and concern to get the benefit of this provision.  He gets it contractually.  This aspect makes it clear that it was aimed at protecting the interests of the tenant.  That is why it founds a Bahr v Nicolay trust and that is why the Court of Appeal was right to say that had they needed to consider it, they would have been disposed to find that there was a trust of a promise.  That is the last passage of the judgment at page 190.  

	So in our submission, there is no issue of principle in this respect.  It is an application of the facts of the case and when one goes to Bahr v Nicolay, it is a straightforward application of Bahr v Nicolay.  In that case, all judges would extend the principle to include a trust designed to protect the third party or a promise to protect the third party’s interests, whether those interests are a real property interest or not.  That was explicitly said by Justice Wilson and was also said by Chief Justice Mason and Justice Dawson in that case.

	True it is that Bahr v Nicolay concerned a repurchase obligation conveying some kind of equitable interest in the land, but the judgment is not so confined, and it was applied more wide in Snowlong.  For those reasons, in our submission, there is no question of principle of general importance and this case would not be a suitable vehicle for considering the questions that are asserted.  If the Court pleases.

FRENCH CJ:   Thank you, Mr Young.  Yes, Mr Archibald.

MR ARCHIBALD:   The implied term founded on by the Court on BP Refinery (Westernport) Pty Ltd v Shire of Hastings was pleaded as a good faith obligation, argued as a good faith obligation and treated by the Court as a good faith obligation.  One sees the latter point from paragraph 86 of the reasons at page 153 of the application book where the court said:

We do not accept that an obligation of good faith should be implied indiscriminately into all commercial contracts.

The two cases that they rely upon, Tote Tasmania and Esso, were both good faith cases and not cases of a kind concerned with the term as implied here.  Similarly, at paragraph 102 of the reasons, page 156 the court addressed the matter on the footing as to whether there should be an:

implication of an obligation of general good faith extending beyond the building as defined under the lease –

So the matter was approach on that footing and the vulnerability integer loomed large, as I have submitted before, but at paragraph 101 became a notion of special vulnerability which shows, in our submission, because this part relates to the other lease, that it was not merely a way of describing the effect of the particular terms of the Fawkner lease.  It seems to be a matter of substance and principle unexplained by the Court of Appeal, where it originates, how it gets into this analysis, and that component of the court’s reasoning alone, in our submission, generates a matter ‑ ‑ ‑

FRENCH CJ:   Well, you are saying there is some unexpressed content?

MR ARCHIBALD:   Yes.  The court does not say where it comes from but it is not, in our submission, simply describing or characterising the factual circumstances of the instant case.  As to touch and concern`, we accept of course that this Court in Gumland has adopted the Swift working test.  My friend sought to describe the notion of collaterality as some archaic hangover from the 19th century, but in Swift at page 640, letter G, the House of Lords endorsed the notion of collaterality relying on the Rogers v Hosegood decision in 1900, extracting in their Lordships’ speeches the statement in that case that:

the covenant must either affect the land as regards the mode of occupation, or it must be such as per se, and not merely from collateral circumstances, affects the value of the land.

So collaterality survives.  This Court’s adoption in Gumland and Swift did not discount it and hence it is part of the analysis commanded today.  Swift described four limbs of a working test, so the Swift elements are guidelines, not mandatory or dispositive elements.

	In relation to Bahr, we observe – I am sorry, I go back a point.  My friend referred to the trust of a promise aspect of the issue as to whether Healthscope is or is not bound.  As to trust of a promise, the Trident point, we succeeded on that at first instance.  It was not dealt with in the Court of Appeal and so as things stand at the moment, it is our learned friends who have to dislodge a favourable finding.  The other limb, as has been canvassed, is the Bahr limb.  

	We have already made our submissions as to why a conclusion here should be reached that there is no Bahr trust, but even if there were, that does not spell loss on the appeal for our part.  If we succeed on good faith and we succeed on restraint of trade, then we succeed even if the Bahr finding against us survives.  So Bahr is not dispositive of our arguments and 

one observes that in relation to Bahr, the features of the clauses in question here - 42.6 and 8.2 - are bereft of the element that was decisive in Bahr.

	Not much has been said about the restraint of trade point, but our basic proposition is the primary judge was correct to apply Butt v Long in the analysis of the similarity test .  The Court of Appeal was wrong not to apply Butt v Long.  The court did not even apply Drew v Guy which was relied upon.  They did not go to the competition test.  They wrongly elided the question of the type of business issue with the reasonableness of the covenant issue, so we have reasonable prospects there.  If the Court pleases.

FRENCH CJ:   I will ask Justice Kiefel to deliver the disposition of the Court.

KIEFEL J:   In this matter, the Court of Appeal of the Supreme Court of Victoria held the first applicant liable for breaches of a restraint of trade clause.  

	The point of principle sought to be addressed, if leave were granted, concerns the implication of a term of good faith.  It may be accepted that some controversy may attend aspects of good faith in the law of contract, but this was not the subject of argument below.  The issue ventilated was whether a term should be implied in a particular restraint of trade clause.  It was said to relate to an obligation of good faith, but also gave effect to the terms of the clause.  Moreover, the Court of Appeal held the clause to be breached in its express terms and in more than one respect.  There are other matters which the first applicant would need to overcome in order to succeed.  

	This matter is not a proper vehicle for the ventilation of any question concerning the operation of good faith principles.  The application for special leave should be refused with costs.

FRENCH CJ:   I agree.

AT 11.17 AM THE MATTER WAS CONCLUDED