The meaning of ‘good faith’ in commercial contracts in Australia
“Good faith” is one of the most important underlying concepts of the law. The matter was last addressed in the 2002 case of Royal Botanic Gardens and Domain Trust v South Sydney City Council.
Good faith has been interpreted as where both parties are loyal to promises made
What is good faith?
Honourable Sir Anthony Mason, a former Chief Justice of the High Court of Australia provided the best explanation of what good faith is. He wrote that the duty of good faith consisted of three important components:
“an obligation on the parties to co-operate in achieving the contractual objects (loyalty to the promise itself);
compliance with honest standards of conduct;
compliance with standards of conduct which are reasonable having regard to the interests of the parties.”
What do the Courts say?
Various existing case law has mostly treated good faith as a malleable concept that changes depending on the given circumstances. In fact, current Australian law is very unclear on the matter of good faith as there is a wide range of views expressed in the cases. For the purposes of this article let us focus on what does good faith mean as related to commercials contracts.
The struggle of defining and understanding good faith in commercial contracts developed overtime through case law. Renard Constructions PTY Ltd v Minister for Public Works (1992) was the basis for the influential thought that there is a common law obligation of good faith in the commercial context and contractual performance. Later, in Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) the court refused to decide the issue of good faith because they deemed it unnecessary at that point. However, Kirby J in his dissent expressed a very important point, highlighting that an implied term in a commercial contract:
“appears to be inconsistent with the law as it has developed in Australia in respect of the introduction of implied terms into written contracts which the parties have omitted to include.”
In other words, his Honour was saying that there exists a principle of voluntary assumption of good faith, and therefore there was no need for the courts to decide what this meant for commercial contracts.
When does good faith matter?
As a general principle of contract construction;
As a term implied as a matter or law;
As a term implied as a matter of fact;
The latter two have been the centre of discussion by the Courts and have resulted in unclear outcomes, which is why even today we are discussing this matter.
Courts normally have considered good faith in the following instances where there is:
a) an express term implied into a contract;
b) an express term incorporated into a contract;
c) judges reason that good faith is to apply.
Applying good faith in commercial practice
This is the interesting part, how can such a vague concept the definition of which the courts have been shying away from be utilised effectively in practice? The courts have stuck to the comforting principles of contract interpretation when dealing with express terms incorporated into a contract. This allowed to bring some more clarity in the quest to find what is good faith, and what it is not.
Courts have found it particularly difficult to agree on whether it is appropriate to imply good faith into commercial contracts. The Court in BP Refinery (Westernport) Pty Ltd v Shire of Hastings outlined several requirements which would aid in making the decision on whether the term should be implied:
(1) “it must be reasonable and equitable;
(2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
(3) it must be so obvious it goes without saying;
(4) it must be capable of clear expression; and
(5) it must not contradict any express term of the contract.”
Priestly JA in the case of Renard, which has been previously mentioned here, was of the view that a special type of contractual relationship must exist in order for the term to be implied.
Conflicting judicial thoughts, due to the differing development of good faith and its of definition, has lead to differing views on implication of good faith into commercial contracts and numerous judicial opinions as whether it fitting to imply good faith and if it is, in what circumstances.
What Should I Do Next?
Contact us if you would like further legal advice on good faith that you think might be taken in commercial contracts. Our lawyers at You Legal will be happy to assist you in whatever way we can.
* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.