Play Nice – Good Faith in Australian Contract Law

Courts in the USA and UK impose the duty to act “in good faith” on parties entering commercial contracts. “Good faith” is an obligation to “play nice.” Both parties must cooperate to fulfil the objectives of the contract and behave with honesty and integrity.

 

In Renard Constructions v Minister for Public Works, a contract between the two parties for construction was cancelled by the Minister on the basis that Renard was taking too long to finish the job. However, the Minister had actually failed to supply Renard with the materials needed to get the job done. The NSW Court of Appeal found the Minister had acted in bad faith and therefore was in breach of contract.

 

In Australia, the concept of “good faith” is in a state of flux. Lower courts – State courts and the Federal court have made decisions leaning towards implying a good faith obligation, however the High Court is yet to make a conclusive statement either way.

 

This lack of clarity has implications for businesses as it means there is an absence of guidance on what may or may not be seen as a breach of contract under the law. Until the High Court has ruled on whether the doctrine applies or not there is no certainty but it seems likely that it will uphold the approach the lower courts have taken.

 

On this basis, businesses should keep the doctrine of good faith in mind when negotiating and performing contracts. Parties should:

–      Act reasonably, with honesty and integrity.

–       Co-operate so as to fulfil any contractual obligations.

–       Act in pursuit of legitimate interests.

–       Not exercise contractual powers flippantly or for an unrelated or trivial purpose.

 

Although not yet settled law in Australia, ignoring these issues puts the party at risk of a legal challenge to the contract on which they are relying.

 

Please contact Bayston Group for further information.