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How Good Faith Operates within Australian Contract Law

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The Operation of Good Faith within Australian Contract Law

The concept of good faith has a controversial and complicated history within Australian contract law. However, recent case law has evidenced that good faith has now been established as an effective doctrine for commercial law.

Elements of good faith

Whether as an expressed or implied term, good faith calls for the usual obligations of supporting a contractual bargain which are as follows:

1. acting honestly – the central element of good faith
2. acting with fidelity to the bargain, which means to contribute to the contractual benefits
3. not acting to undermine the agreement or the contractual benefit
4. acting reasonably and with fair dealing considering the interests of the parties and the objective of the contract.

The focus of good faith is on the conduct of the parties, not on the outcome of their conduct. A negative outcome resulting from an act carried out in good faith is unlikely to result in a breach.

The duty of good faith recognises that the interests of parties will conflict at times. It holds a lower standard than a fiduciary duty as the parties are not required to put the other side’s interests before their own, or minimise their self-interest.

Conduct that does not amount to good faith

1. capriciousness
2. dishonesty
3. unconscionability
4. arbitrariness
5. conduct that contradicts the contractual objective.

Identifying a breach in good faith

To identify a breach in good faith, you can look to identify conduct on the evidence that does not amount to good faith. This is known as a negative application of good faith. However, a negative application is not the only avenue for establishing a breach. Good faith can also impose positive obligations, such as an obligation to disclose information.

A breach of good faith is identified on a case by case basis. Behaviour that amounts to a breach in one case may not constitute a breach in another. The contractual, commercial and factual context of each matter must be considered.

Express clauses of good faith

If a contract contains an express good faith clause, it is more than likely enforceable. The clause will be construed to consider the terms of the contract and the surrounding circumstances at the time the parties entered into the agreement to determine if there has been a breach of contract.

There are two types of express good faith clauses:

1. General clauses – which require good faith to be exercised throughout the entire contract or during a specific part of the contract.
2. Narrow clauses- which only apply to the performance of the particular contractual obligation of negotiation in a dispute or the contractual power of termination of the contract.

Good faith implied by law

Good faith is not implied into every commercial contract. There is no clear answer of when it will be applicable. Certain factors lean towards good faith being implied, such as circumstances where cooperation and trust are required between the parties to a long-term contract.

The usual test for terms implied by fact into complete contracts is uncompromising, meaning good faith will rarely satisfy it. The test is less strict for an incomplete contract, however good faith has rarely been applied in such situations.

How can good faith affect you?

The application of good faith is becoming more prevalent and applicable to commercial law today. If you believe the other party to your contract has breached a term of good faith, or you require advice on how good faith affects your commercial contract, call us to get advice.

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