In Short
- Entering a contract in good faith often includes acting honestly, fairly, and with cooperation.
- Courts may or may not imply good faith obligations depending on the case specifics.
- Breaching good faith can lead to legal consequences like damages or an unenforceable contract.
Tips for Businesses
Include explicit good faith clauses in your contracts to provide more clarity, but be aware that these clauses can still be subject to interpretation. Since Australian law is unsettled in this area, seek legal advice when negotiating good faith terms to understand your obligations fully.
When you enter into a contract with someone, you will both typically agree to act in ‘good faith’. However, the concept of ‘good faith’ in Australian contract law is far from settled. While parties often agree to act in good faith when entering into a contract, the legal implications of this commitment remains unclear. This article explores the current understanding of good faith in contractual relationships, highlighting the uncertainty surrounding its application and the varying interpretations provided by Australian courts.
What is Good Faith?
Unlike some jurisdictions, Australian law has not definitively established a universal duty of good faith in all contracts. The High Court of Australia has yet to provide a conclusive ruling on the matter, leaving lower courts to grapple with the concept on a case-by-case basis.
Several significant cases have addressed the concept of good faith, each providing different perspectives:
1. Renard Constructions v Minister for Public Works (1992) 6 NSWLR 234
In this case, the New South Wales Court of Appeal suggested that good faith might be an implied term in all commercial contracts. Justice Priestley stated that good faith includes “reasonableness”, but this view has been questioned in subsequent cases.
2. Burger King Corp v Hungry Jack’s Pty Ltd (2001)
The New South Wales Court of Appeal held that there was an implied obligation of good faith in the performance of contractual obligations and the exercise of contractual powers. The court suggested that good faith might include:
- cooperation in achieving contractual objectives;
- compliance with honest standards of conduct; and
- compliance with reasonable standards of conduct regarding the interests of the parties.
Potential Elements of Good Faith
While there is no universally accepted definition, various court decisions have suggested elements that might constitute good faith:
- Honesty: Acting in a sincere and truthful manner, including full disclosure of relevant information.
- Fairness and Fidelity: Acting reasonably in negotiations, performance, and enforcement of contracts.
- Consideration: Not acting arbitrarily or impulsively with regard to how it would affect the contractual relationship and the other party.
- Cooperation: Enabling the other party to enjoy the benefits of the contract.
- Proper Purpose: Using contractual rights with honesty or sincerity of intention.
- Legitimate Interest: Considering the other parties’ interests.
However, it is crucial to note that these elements are not binding in all cases and may be interpreted differently depending on the specific circumstances and the court hearing the matter.
Continue reading this article below the formImplying Good Faith in Contracts
Given the uncertainty in Australian law, parties often must argue whether a good faith obligation should be implied. For a term to be implied, it generally must:
- be equitable and reasonable;
- be capable of clear expression;
- be necessary for the contract’s business efficacy; and
- not contradict the express terms of the contract
Courts consider each case’s specific circumstances when deciding whether to impose a duty of good faith.
Relationships Attracting Good Faith Obligations
Four main types of legal relationships are more likely to attract good faith obligations:
- contractual relationships;
- relationships based on proximity;
- fiduciary relationships; and
- mixed relationships involving more than one of the above.
Statutory relationships, such as duties owed by corporate officers or pension trustees, may also involve good faith principles.
Consequences of Failing to Act in Good Faith
If a contract includes an express or implied good faith obligation, failing to meet this obligation constitutes a breach. The affected party may seek damages or other relief, including injunctive measures.
Identifying a Breach of Good Faith
Courts identify breaches on a case-by-case basis. They may look for evidence of conduct that does not amount to good faith (negative application) or for failures to meet positive obligations, such as disclosure requirements.
Behaviour that breaches good faith in one case may not constitute a breach in another. The contractual, commercial and factual context of each matter must be considered.
Breaching the duty of good faith can have serious legal consequences. In addition to potential financial liabilities, a party found in violation of good faith principles may face damage to their reputation and, in some cases, the contract may be deemed unenforceable.
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Key Takeaways
The concept of good faith in Australian contract law remains complex and unsettled. While various court decisions have provided some guidance, there is no definitive, universally applicable definition or rule. Parties entering into contracts should be aware that:
- the application of good faith may vary depending on the specific circumstances of each case;
- courts may or may not imply a duty of good faith in a contract, depending on various factors; and
- explicit good faith clauses in contracts may provide more clarity, but their interpretation could still be subject to judicial discretion.
Understanding and incorporating good faith principles can foster integrity, transparency, and fairness in contractual agreements. However, given the ongoing legal debate, parties should seek legal advice to understand how good faith might apply to their specific situation and consider including explicit good faith clauses if desired. If you are uncertain about entering into a contract in good faith, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Good faith refers to acting honestly and reasonably in a contractual relationship. However, Australian courts have not universally defined good faith, and its application depends on the specifics of each case.
If a party breaches an express or implied good faith obligation, they may face legal consequences, such as damages or an unenforceable contract. The courts assess these breaches based on the unique circumstances of each case.
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