Reasonableness is considered to be the middle doctrine where both honesty and fiduciary duties are not applicable. It is determined by what the parties legitimately expected from the contract and is behaviourally set by the community. An implied duty to act reasonably was asserted in Renard. Through an analysis of clause 44. 1, embedded in the contract in question in Renard, Handley JA stated that the clause allowed for a degree of reasonableness to be exercised by the parties bound by the contract.
The above information expresses a need for the principle of good faith to be implied in all contractual relationships. However, it is restricted in that its implication must be consistent with the express terms of a contract. In contrast to good faith, it has been argued that in Australia, identifying “bad faith” in contract law is much easier to prove than good faith. Bad faith can be simply defined as the polar opposite of good faith. This principle is based on the malicious motives of a contracting party.
When attempting to prove that a party has acted in bad faith, the opposing party or the court must believe that the contract has been performed through an abuse of the power of the law. If a party can successfully prove that the opposing party has acted in bad faith, it would severely hinder their ability to rely on contractual remedies that they could otherwise depend upon. It is often easier to prove acts of bad faith by first identifying the elements of good faith and then excluding them. Whilst bad faith is an important principle of contract law, it requires more in depth research and is beyond the scope of this paper.
Therefore, this paper must resume its orientation towards the principle of good faith and why it should be recognised in the law of contract. Part II. When should good faith be recognised and to what types of contracts it applies? With the above information proposing how good faith has been recognised by the courts, attention must now turn towards when good faith should be recognised by the courts and to what specific classes of contracts good faith should apply. Literature and case law alike have tended to lean toward enforcing good faith in employment and insurance contracts.
Conversely, courts and businesses have been reluctant to impose a requirement of “upmost” good faith in commercial contracts. This notion is supported by Giles JA in Vodafone Pacific Ltd v Mobile Innovations Ltd who stated that good faith should not be applicable to commercial contracts as they ‘are a class of contracts carrying implied terms as a legal incident’. A fundamental case which asserts the position of good faith in employment contracts is Russell v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney & Anor.
Whilst this case was held and decided by a single judge, and does not therefore set a precedence for the superior courts in Australia, the outcome of the case is likely to be followed nationwide due to its relevance for employers around Australia. In this case, the plaintiff had his employment terminated and sought to prove that the defendants, the church, had breached their implied duty of good faith. In his judgement for this case, Rothman J concluded that ‘a contract of employment would be unworkable without an implied duty of good faith’ and that an employment contract ‘should not be treated any differently to any other form of contract’.
He further purported that adopting the principle of and implied duty of good faith in all contracts is reasonable and equitable and would promote business efficacy. The reasoning behind the decision has been applied to other cases involving employment contracts which will be discussed further in part III. In addition to employment, insurance contracts are entrenched in an implied duty for the parties to act in the utmost good faith.