What is “good faith”?
The principle of “good faith” in contract law has existed since the late 1800s, perhaps earlier. The acceptance of the principle of “good faith” in Australian common law first arose in 1992 in the case of Renard Constructions (ME) Pty Ltd v Minister for Public Works, in which case the court stated:
“… that people generally, including judges and other lawyers, from all strands of the community, have grown used to the courts applying standards of fairness to contract which are wholly consistent with the existence in all contracts of a duty upon the parties of good faith and fair dealing in its performance. In my view this is in these days the expected standard, and anything less is contrary to prevailing community expectations.”
Common law duty of good faith
In the case of Kelly v New Zealand Insurance Co, Kirby J stated that the common law duty of “good faith” encompassed notions of:
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- standards of decency; and
This is not to suggest that the application of the doctrine of good faith is unanimous or uncontroversial.
Good faith in negotiations
In the case of Walford v Miles, Lord Ackner stated:
“[T]he concept of a duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties when involved in negotiations. Each party to the negotiations is entitled to pursue his (or her) own interest, so long as he avoids making misrepresentations … A duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with the position of a negotiating party.”
Therefore, good faith in negotiations means to deal justly and honestly with each other and that each party will receive the benefits as negotiated.
How is good faith established?
The implied doctrine of good faith is not established clearly in Australian law. However, the following concepts are often linked to the implied duty of good faith:
Co-operation
Cooperation in contract law involves the idea that when a party enters into a contract, that party to the contract will do all such things as are necessary to enable the other party to enjoy the benefit of that contract.
Reasonableness
Reasonableness requires that a degree of fairness and justice be carried out by both parties in relation to their contractual relationship and that powers not be exercised arbitrarily.
Proper purpose
Proper purpose is the use of contractual rights in a way that is considered to constitute an implied duty of good faith (honesty or sincerity of intention).
Legitimate interest
Legitimate interest acknowledges that each party bound to the contract has an obligation to consider the other parties’ interest.
Uncertainty with good faith
Most contracts will generally not include an express duty of good faith. There are some exceptions to this rule, including franchise agreements and insurance contracts.
The Franchising Code of Conduct regulates franchising agreements and explicitly imposes the obligation of all parties to the contract to act in good faith towards one another. However, the code does not contain a particularised definition of “good faith” and instead relies on the definition of good faith as determined by caselaw.
Similarly, the Insurance Contracts Act 1984 (Cth) provides that a contract of insurance is based on the utmost good faith, requiring each party to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith.
Good faith in contract law
In Australia, in most other cases where there is no express contractual or statutorily imposed duty, courts may imply the term “good faith” into a contract or agreement. Whether courts ought to imply the term remains unsettled law and differs jurisdictionally.
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- The High Court evinces an unwillingness to consider whether a standard of good faith ought to be implied into all commercial contracts (Yousif v Commonwealth Bank of Australia (No. 2) [2009] FCA 656; Commonwealth Bank of Australia v Barker);
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- Victoria maintains that good faith should not be implied indiscriminately into all commercial contracts. Case law seems to suggest that implying “good faith” into an agreement should be assessed on a case-by-case basis (Androvitsaneas v Members First Broker Network[2013] VSCA 212); and
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- In New South Wales and Queensland, the case law does not provide any definitive position. However, recent decisions in the Supreme Court of Queensland have supported implying good faith in commercial contracts (Aurizon Network Pty Ltd v Glencore Coal Queensland Pty Ltd & Ors [2019] QSC 163; Lien & Anor v Clontarf Residential Pty Ltd & Anor [2018] QSC 94; Parkinson v Mackay Sugar Ltd [2018] QSC 168).
Therefore, it appears the position in Australia is that parties are left to argue about whether such an obligation should be implied. For a term to be implied in an agreement or contract, that term must generally:
- be equitable and reasonable
- be capable of clear expression;
- be necessary to give business efficacy to a contract; and
- not contradict the express terms of the contract.
Whether or not it will be appropriate to impose a duty of good faith will depend on the particular circumstances of each individual case.
The nature of the relationship attracting an obligation of good faith
There are four main types of legal relationships that are generally more likely to attract an obligation to act in good faith. These are:
- contractual relationships;
- relationships based on proximity;
- fiduciary relationships; and
- mixed relationships involving more than one of the preceding relationships between the same parties.
The principle of good faith may also be applied to other relationships, such as statutory relationships. For example, the statutory duties owed to a corporation by its officers and directors, or the duties owed by pension trustees to fund beneficiaries.
Failure to act in good faith
If an obligation of good faith is either expressed or implied by a contractual agreement, a failure to abide by that obligation will be treated as a breach of the contract similar to the breach of any other term of the contract. The party suffering loss as a result of a breach may seek compensation in the form of damages or other relief in the circumstances, including injunctive relief.
In cases involving franchising disputes, breaching the obligation to act in good faith under section 6 of the Franchising Code of Conduct is a civil penalty provision, and may result in the Australian Competition and Consumer Commission taking legal action against the offending party.
If you are a party to a particular contract or agreement, you may owe a duty of good faith to the other party to the agreement. Conversely, the other party to the agreement may owe you a duty to act in good faith as well. Precisely what “in good faith” might mean for you may require careful consideration of the particular circumstances of your agreement.
Contact Gibbs Wright for a confidential consultation with one of our contract dispute lawyers about your matter to discuss your legal options and rights.
