What does ‘Good Faith’ mean?

To act in “good faith” with respect to negotiations and general contract law is often  understood to simply mean the just and honest dealings between parties. The principle of ‘good faith’ in the context of contract law has existed since the late 1800s, if not even earlier.¹ 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,² 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.”

The Court in the case of CGU Insurance Ltd v AMP Financial Planning Pty Ltd emphasised the point made in Renard Constructions (ME) Pty Ltd v Minister for Public Works by accentuating that utmost good faith may require any person to act with due regard to the legitimate interests of others as to its own interests.³ Callinan and Heydon JJ stated the following:

“At the outset we should say that we agree with the Chief Justice and Crennan J that a lack of utmost good faith is not to be equated with dishonesty only. The analogy may not be taken too far, but the sort of conduct that might constitute an absence of utmost good faith may have elements in common with an absence of clean hands according to equitable doctrine which requires that a plaintiff seeking relief not himself be guilty of tainted relevant conduct. We have referred to the doctrine of clean hands because, as with another equitable doctrine, that he who seeks equity must do equity, it invokes notions of reciprocity which are of relevance here”.⁴

In the case of Kelly v New Zealand Insurance Co,⁵ Kirby J stated that the common law duty of ‘good faith’ encompassed notions of fairness, reasonableness, standards of decency and fair dealing.

This is not to suggest that the application of the doctrine is unanimous or uncontroversial. In the case of Walford v Miles,⁶ 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.”