Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349
Contract; contents; universal terms; duty of good faith; pursuit of legitimate interests.
Facts: Alcatel Australia leased a new seven-storey building from Scarcella for 50 years. The lease stipulated that Alcatel should maintain the building and pay for any work on the building required by order of the local government authority. After some years, Scarcella asked the local authority to inspect the building for fire safety and, as a result of the inspection, the local authority ordered that the stairwell in the building be insulated against fire. Alcatel believed that it was not obliged to meet the costs of complying with this order because, Alcatel argued, Scarcella had caused the local authority to impose unreasonable safety requirements.
Issue: Was a term implied into the contract by law, requiring Scarcella to act in good faith and ensure Alcatel was not subjected to the expense of an unreasonable fire order?
Decision: A duty of good faith may be implied by law as part of a contract. Such a duty prevents a contractual power being exercised in a 'capricious or arbitrary manner or for an extraneous purpose'. However, seeking a fire safety inspection was not an unreasonable exercise of Scarcella's power and there was no breach of the duty.
Reason: In a commercial context it is not contrary to good faith for a lessor to take steps to ensure that fire safety requirements are carried out. Scarcella had a legitimate right to ensure the building was properly protected against fire, and Alcatel had no grounds for avoiding its obligations under the lease.