What does ‘Good Faith’ mean?

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In recent decades, Australia has seen an increase in the number of disputes involving parties alleging that there has been a breach of an obligation of ‘good faith’ that has resulted in loss or damage. But what exactly is good faith? Australia has not yet committed itself to a definitive principle on good faith in contract law, despite the concept being one of considerable discussion. As such, it can often be difficult to determine what an obligation of good faith might entail, and consequently, whether such an obligation has been breached.

What is Good Faith?

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.”

How is Good Faith Established?

The implied doctrine of good faith is not clearly established in Australian law. However, the following concepts are often linked to the implied duty of good faith:

Cooperation

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 on his or her part to enable the other party to enjoy the benefit of that contract.7

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.8

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).9

Legitimate Interest

Legitimate interest acknowledges that each party bound to the contract has an obligation to consider the other parties’ interest.10

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 Conduct11regulates franchising agreements and explicitly imposes the obligation of all parties to the contract to act in good faith towards one another. However, the Franchising Code of Conduct 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 Act12 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. In most other cases where there is no express contractual or statutorily imposed duty, the parties are left to argue about whether such an obligation should be implied. Generally, for a term to be implied in an agreement or contract, that term must:
  1. Be equitable and reasonable;
  1. Be capable of clear expression;
  1. Be necessary to give business efficacy to a contract; and
  1. 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

There are four main types of legal relationships that are generally more likely to attract an obligation to act in good faith. These are:

  1. Contractual relationships;
  1. Relationships based on proximity;
  1. Fiduciary relationships; and
  1. 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. In the event that a party fails to act in good faith where the obligation to do so exists, the injured party suffering loss as a result may seek compensation in the form of damages or other relevant 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 accordingly, the breach of this provision may result in the Australian Competition and Consumer Commission taking legal action against the offending party.

Contact Gibbs Wright Litigation Lawyers

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 this obligation might mean for you may require careful consideration of the particular circumstances of your agreement.

Call Gibbs Wright Litigation Lawyers today for a free and confidential consultation about your matter to discuss your legal rights and options.

[1] McKay v Dick (1881) 6 App Cas 251

[2] (1992) 26 NSWLR 234, at 268, per Priestley

[3] CGU Insurance Ltd v AMP Financial Planning Pty Ltd [2007] HCA 36

[4] CGU Insurance Ltd v AMP Financial Planning Pty Ltd (2007) 235 CLR 1, 77 [256]

[5] Kelly v New Zealand Insurance Co Ltd (1996) 130 FLR 97

[6] Walford v Miles [1992] 1 All ER 453

[7] Mackay v Dick (1881) 6 App Cas 251; Butt v McDonald (1896) 7 QLJ 68; Secured Income Real Estate (Australia) Ltd v St Martins Investment Pty Ltd (1979) 144 CLR 596

[8] Above n2

[9] Burger King Corp v Hungry Jacks Pty Ltd (2001) NSWCA 187 [185]

[10] Burger King Corp v Hungary Jacks Pty Ltd (2001) NSWCA 187 at [165]; Renard Constructions v Minister for Public Works (1992) 26 NSWLR 234 at [263]; BP Refinery (Westernport) Pty Limited v President, Councillors and ratepayers of the shire of Hastings (1977) 180 CLR 266

[11] Schedule 1 of the Competition and Consumer (Industry Codes—Franchising) Regulation 2014 (Cth)

[12] s.13(1) Insurance Contracts Act 1984 (Cth)

The content of this publication is intended as general commentary only and may not be suitable or applicable to your personal circumstances. It is not intended to replace independent legal advice. You can contact us at our Brisbane Office for a free consultation on a range of litigation matters on (07) 3088 6364.
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