Implied fetters on the exercise of discretionary contractual powers

Abstract

Long-term commercial contracts commonly grant one of the parties a discretionary power to vary the contract in particular respects. In Australia, the exercise of discretionary contractual powers may be fettered by a general duty of good faith in contract performance. In England, the exercise of discretionary contractual powers may be fettered by a number of more specifi c implied duties. This paper considers the content of these duties. The paper argues that the substance of the duty of good faith implied by Australian courts is similar to the specifi c duties implied in England. It argues that the duties need not be unduly disruptive to commercial certainty or party autonomy. In fettering the exercise of discretionary contractual powers, courts have drawn on principles governing the judicial review of administrative action, namely requirements that a discretionary power should not be exercised for an ‘extraneous’ purpose or unreasonably. Moreover, Australian courts have repeatedly recognised that the implied duties fettering the exercise of discretionary contractual powers will not prevent parties from acting to preserve their legitimate interests. Courts have also been cautious in applying the duties to fetter the exercise of contractual powers to terminate.