In Renard Construction (ME) Pty Ltd v Minister for Public Works (“Renard”), Priestley JA’s judgement created controversy in the legal world through the introduction of a universal obligation to act in good faith in all contracts. The concept of good faith in both the enforcement and performance of contracts has been an integral part of the Australian judicial system since the early 20th Century.
In Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL (“Esso”), Warren CJ asserted a broad definition of good faith as a standard of conduct that should be met in contractual relationships. The courts apparent enthusiasm to recognise good faith leads us to question to what types of contracts it should be, and is applicable. This paper will endeavour to answer this question in three parts, utilising case law to support the importance of recognising the principle of good faith.
Part I will outline definitions of good faith and determine what actions constitute good faith. Additionally, bad faith will be considered as a means to support the implementation of good faith in contractual relationships. Part II will consider when good faith is, and should be, recognised in enforcing a contract in addition to determining what types of contract can best utilise good faith. Finally, part III will examine cases which support the need for a principle of good faith to be enforced in contracts.
Part III will also look at how good faith can be applied to regulate or prevent certain behaviour which can be considered as acting in “bad faith”. Part I. What is Good Faith? When handing down his judgement in Renard, Mason J suggested that the concept of good faith revolved around the principle of good faith being an implied term in constructing contracts. These ideals were affirmed by Anthony Mason who implied that good faith centred on three notions.
Firstly, the contracting parties have an obligation to ‘co-operate in achieving the contractual objectives’. Secondly, the honesty of the parties is vital for the ‘standards of conduct’. Finally, the conduct of the parties must be reasonable with respect to the parties’ interest. Therefore, we are able to conclude that the central concepts of good faith are co-operation, honesty and reasonableness. However, these concepts can only be inferred throughout a contract through the judicial role of gap filling in contracts through implied terms.
When the courts impose an implied term of good faith to a specific contract, it acts as precedence to contracts of a similar class. The courts imply good faith in order for the parties to confer their rights and not undermine the nature of the contract itself. For a term to be successfully implied in fact, it must satisfy the five criteria set out by the Privy Council in BP Refinery. Further to implied terms, the courts have established a need to validate other duties and obligation such as co-operation.
The High Court affirmed the need for a duty of co-operation to exist within contracts in Secured Income. In his judgement for the aforementioned case, Mason J affirmed the need for a duty of co-operation. He reaffirmed what was stated by Griffith CJ in Butt v McDonald in that co-operation ‘is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract’.
This statement was also utilised in Hospital Products where Gibbs CJ expressed his desire to impose a duty of “best efforts” when contracting parties are performing discretionary obligations. However, in contradicting the above “discretionary power”, common law prescribes the exercise of this power for any extraneous purpose as was the case in Alcatel Australia Ltd v Scarcella. Furthermore, the courts assert an implied duty to act reasonably.