Good Faith in Contracts

1. Introduction

The question put forward is; to what extent the High Court of Australia should acknowledge an implied obligation of good faith and fair dealing into the performance and enforcement of all contracts. In answering this, we look at the concept of good faith. Subsequently, we examine the benefits and drawbacks of its recognition. Lastly, a conclusion is drawn based on the merits of the arguments.

2. What is Good Faith?

Sir Anthony Mason, in Contract, Good Faith and Equitable Standards in Fair Dealing, 2000[1] suggested that the concept of good faith consisted of at least these three elements:

An additional definition of good faith can be found at ss1-201(b)(20) of the Uniform Commercial Code[2] (UCC) of the United States. It defines good faith as honesty in fact and the observance of reasonable commercial standards of fair dealing.

Within case law, in Renard Constructions (ME) Pty Ltd v Minister for Public Works[3], a duty of reasonableness was implied into the contract. Here, the NSW Court of Appeal associated a duty of reasonableness with a duty of good faith. This view was reinforced in Burger King Corporation v Hungry Jacks Pty Ltd[4] by the joint judgement of Sheller, Beazley and Stein JJA, whom stated that the Australian cases make no distinction of substance between the implied term of reasonableness and that of good faith.

Good faith can also be seen to mean to exclude a variety of types of conduct characterized as involving bad faith because they violate community standards of decency, fairness or reasonableness.[5]

From these definitions, it can be seen that the term good faith varies in meaning, but the concepts of honesty and reasonableness are underlying. Presently, there is no universally accepted definition of the term, and it is in the difficulty of attaining a definition that part of the solution to our question may be found.

3. Should Good Faith be implied by the High Court?

The ultimate hope and benefit in recognising good faith and fair dealing, is that greater coherence and unity in the area of contract performance would be brought about.[6] In this pursuit, how then is good faith to be recognised and is it practical to do so? To resolve the question, an assessment of the benefits, drawbacks and difficulties of implying a duty of good faith must be undertaken.

3.1. Benefits

Priestley JA in Renard Constructions (ME) Pty Ltd v Minister for Public Works compares good faith in Europe and in the United States with Australia, and states that there are many indications that the time may be fast approaching when the idea will gain recognition in the same way. [7] He then goes on to state that s22 of the NSW Commercial Arbitration Act[8] makes it impossible to argue that the inclusion of ex aequo et bono clauses in contracts could be against public policy. Further comparisons of Australia with the position in the United States were then made with the arguments that[9]:

Priestley JA concluded this point by stating that when the broad similarity of economic and social conditions in Australia and the United States is taken into account the foregoing matters all seem to me to argue strongly for recognition in Australia...[10]

Another promoter of the recognition of a good faith duty is Finn J. In Hughes Aircraft Systems International v Airservices Australia[11] he said I consider a virtue of the implied duty to be that it expresses in a generalisation of universal application, the standard of conduct to which all contracting parties are to be expected to adhere...[12]

3.2. Drawbacks and Difficulties

In implying a duty of good faith into all contracts, one drawback is that if the term was fixed, such as in the UCC, it impacts upon the freedom of parties to form a contract as they wish. The implied term cannot be contradictory to the express language in the contract, hence the language used would have to be written with regards to the implied duty, or another term would have to be included which expressly excludes the duty. Consequently, if a good faith term is to be excluded, would good faith have to be defined within the contract? This would bring about the aforementioned difficulty of definition. Conversely, does the implied duty of good faith override and annul any contradictory express terms within the contract?

Exploring the complexities in defining good faith, how would the level of honesty or reasonableness required by the duty be determined? A question of whether the test of good faith performance is purely subjective or whether it has an objective component[13] was asked by Farnsworth when discussing the issues in the United States. An objective standard broad enough to cover all contracts might merely reiterate the already existing definition of reasonable. On the other hand, a subjective standard would be difficult to delineate. Further, how and in what circumstances would the duty arise? A framework for classification of circumstances and the appropriate subjective or objective standards would have to be developed.

Another difficulty in implying the duty is, as Gummow J states in Service Station Association v Berg Bennett, there is already a degree of artificiality in forcing the wide range of contractual activities encountered in the community into the framework required by the standard contracts texts.[14] Furthermore, implication of a term by operation of law, applicable across the whole spectrum of the law of contract is a major step.[15]

The policy in applying a duty of good faith would also have to be examined. In the formation of a contract between private parties, how much power does the High Court have to intervene? Does the extent of this power vary, and in what circumstances?

Lastly, how is a breach in the duty of good faith determined, and if there has been a breach, what are the penalties involved? Can this breach be an independent cause of action?[16]

4. Conclusion

The notion of good faith has been regarded by the United States and various civil law systems in Europe.[17] Its use within these jurisdictions may be seen as successful, in that no detrimental effect has been felt as Priestley JA mentioned in point IV above. However, the success of other jurisdictions does not necessarily mean that it is appropriate for implementation in Australia.

In NSW the duty of good faith is recognised to be implied within the context of Burger King Corporation v Hungry Jacks Pty Ltd.[18] However, the terms use varies in other states. If the High Court was to imply the duty into all contracts, the lower courts would be bound. Is the meaning of good faith thus to be uniform across the states, and if so, would it work with equal efficacy across Australia? In not tackling this issue, the High Court has left the area open. Perhaps this was deliberate, and may indicate that adoption of the term is not yet suitable.

Furthermore, implication of the doctrine in the lower courts contrasted with its absence in the High Court may be the ideal solution. The High Court may feel the need to reserve the discretion of implying the duty or not. They are thus free to apply the duty as they see fit in the future. Additionally, there already exists in the law remedies for misrepresentation or unconscionable conduct that serve to address dishonesty in contracts. Why should an extra term be adopted if there is already adequate coverage?

Finally, even if a solution to the difficulties was found, and a framework of usage developed, the overarching policy question still remains. In a private agreement between parties, how much power should the High Court have to intervene? I am of the opinion that the freedom to form a contract as parties so wish should not be intruded upon. If this duty was implied into all contracts, there would no longer be the freedom to specify the extent of the duty parties wish to commit to, or even to exclude it if desired.

For these reasons, I deem that the High Court should not imply a duty of good faith into all contract performance and enforcement.

[1] Contract, Good Faith and Equitable Standards in Fair Dealing (2000) 116 LQR 66.

[2] The American Law Institute and the National Conference of Commissioners on Uniform State Laws, Uniform Commercial Code (2001).

[3] Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234.

[4] Burger King Corporation v Hungry Jacks Pty Ltd [2001] NSWCA 187 at [169].

[5] The American law Institute, Restatement of the Law, Second, Contracts (1981) SS205 at (a).

[6] A.F Mason, Contract, Good Faith and Equitable Standards in Fair Dealing (2000) 116 Law Quarterly Review 66 at 94

[7] Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 264.

[8] Commercial Arbitration Act 1984 (NSW) s22.

[9] Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 267.

[10] Ibid.

[11] Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1.

[12] Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1 at 37.

[13] E Allan Farnsworth, Good Faith in Contract Performance in Jack Beatson and Daniel Friedmann, Good Faith and Fault in Contract Law (1995) At 163.

[14] Service Station Association v Berg Bennett (1993) 45 FCR 84 at 92.

[15] Ibid.

[16] E Allan Farnsworth, Good Faith in Contract Performance in Jack Beatson and Daniel Friedmann, Good Faith and Fault in Contract Law (1995) At 163.

[17] Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 263.

[18] Burger King Corporation v Hungry Jacks Pty Ltd [2001] NSWCA 187.

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