1.1 Introduction
Good faith is arguably one of the most controversial, frustrating and poorly defined concepts in contract law. Judges and scholars have differing and contradicting views of the concept of good faith, in terms of both its operation and its meaning.1 The concept of good faith nevertheless is gaining recognition and continues to have an increasing influence on many types of contracts, in many contexts. In Australia, the concept of good faith was introduced by Priestley J in his obiter comments in Renard Constructions (ME) v Minister for Works .2 That case paved the way for the emergence of the concept of good faith in Australian contract law.
This research aims to examine the principle of good faith in the performance of contracts following the foundation laid down by Priestley J. The issue of good faith discussed in this research is timely and important. Despite Priestley J’s strong belief in the position of good faith in Australia, its application remains uncertain. There remains no High Court decision regarding the position of good faith in Australia. As a consequence, the precise role of the concept of good faith in Australian contract law remains unsettled. The unresolved issues were a key motivation for this research.
1.2 Background
Good faith is a ubiquitous but poorly understood concept in contract law. Two decades after Priestley J first introduced the concept in the Australian judicial agenda, good faith remains a confusing, nebulous and mutable concept. Good faith encompasses the theme that all parties to a contract owe a duty to each other beyond those expressly provided by the terms of the contract. In this context, it is expected that the contracting parties take into account other parties’ interests when exercising their contractual rights.3 The concept of good faith is pivotal to the contracting parties in two ways: (1) cooperation and fairness are achievable through the concept of good faith, and (2) in the absence of express terms in the contract to prevent unfairness, good faith is treated as an implicit expectation of the parties. Burrows further explained the function of good faith, stating that:
The concept of good faith is regularly invoked not only to condemn deception and lack of candour at the time a bargain is concluded but also to require a forthcoming attitude, to condemn chicanery and sharp practice in the carrying out of contractual obligations.4
In countries where civil law is the basis of the legal system, the concept of good faith is recognised as a general and pervasive principle, as illustrated in many of the European civil codes.5 Under common law, there is no overarching duty of good faith; nevertheless, it has a role in English law. English law takes a different approach to the concept of good faith, relying on a number of specific doctrines and achieving some of the same results as might be required by good faith without referring to that concept.
In English law, good faith is recognised in specific settings and legislation whereby the most common expression of good faith can be found in insurance contracts.6 In legislation, there is increasing recognition of good faith in specific instances.7 The general recognition of good faith as described by Lord Bingham is that it is ‘the most important contractual issue of our time’.8 It can be found in the landmark case of Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd, where Lord Bingham implied the concept of good faith when he held that:
In many civil law systems and perhaps most legal systems in the common law world, the law of obligations recognises and enforces an overriding principle that in making and carrying out contracts, parties should act in good faith. This does not simply mean that they should not deceive each other, a principle which any legal system must recognise; its effect is perhaps most aptly conveyed by such metaphorical colloquialisms as ‘playing fair’, ‘coming clean’, or ‘putting one’s card face upwards on the table’ … English law has, characteristically, committed itself to no such overriding principle but has developed piecemeal solutions in response to demonstrated problems of unfairness. Many examples could be given. Thus equity has intervened to strike down unconscionable bargains. Parliament has stepped in to regulate the imposition of exemption clauses and the form of certain hire-purchase agreements. The common law also has made its contribution, by holding that certain classes of contracts require the utmost good faith by treating as irrecoverable what purport to be agreed to estimates of damage but are in truth disguised as a penalty for breach, and in many other ways.9
A similar view is shared by other common law countries, such as Australia, New Zealand and Canada, where good faith is not recognised as an overriding obligation but is nevertheless recognised in other doctrines such as unconscionability and in specific statutory provisions. However, the approach of the US is different whereby the concept of good faith is entrenched in the Uniform Commercial Code10 and the Restatement (Second) of Contracts.11
The concept of good faith is widely employed at international levels, where many international trade instruments incorporate it.12 In the Nuclear Tests case (Australia v France), the International Court of Justice claimed that ‘One of the basic principles governing the creation and performance of legal obligations, whatever their source, is the principle of good faith’.13 An example of the adoption of good faith in an international trade instrument can be found in the United Nations Convention on Contracts for International Sale of Goods Article 7.1, known as the Vienna Sales Convention (CISG), which provides that:
… in the interpretation of the Convention, regard is to be had to its international character and the need to promote uniformity in its application and the observation of good faith in international trade.
1.2.1 Good Faith in Australian Contract Law
Good faith was put onto the agenda in Australia through obiter comments by Priestley J in the landmark case of Renard in 1992.14 In that case, Priestley J suggested the notion of good faith in his interpretation of Australian contract law. His Honour held that:
The kind of reasonableness I have been discussing seems to me to have much in common with the notions of good faith which are regarded in many civil law systems of Europe and in all states in the United States as necessarily implied in many kinds of contract. Although this implication has not yet been accepted to the same extent in Australia as part of judge-make Australian contract law, there are many indications that the time may be fast approaching when the idea, long recognised as implicit in many of the orthodox techniques of solving contractual disputes, will gain explicit recognition in the same way as it has in Europe and in the United States.15
Nevertheless, the concept of good faith had a significant impact on Australian contract law, with many other cases following Priestley J’s opinion.16
There are two means by which a general term of good faith is recognised in contract law: implication and construction. There are two types of implication: the term ‘implied in law’ and the term ‘implied in fact’. A term ‘implied in law’ is based on the test of necessity in a particular class of contract. A term ‘implied in fact’ is based on the judge’s view of the actual intention of the parties. Peden argues that ‘construction’ is the best approach for incorporating good faith in contracts.17 The New South Wales Court of Appeal in Burger King Corporation v Hungry Jack’s Pty Ltd held that:
There … appears to be increasing acceptance … that if the terms of good faith and reasonableness are to be implied, they are to be implied as a matter of law.18
There are instances however in which the concept of good faith is not accepted, especially in commercial contracts, where the parties have the freedom to decide on the terms of their contract. In GSA Group Pty Ltd v Siebe Plc, Rogers CJ commented that:
Against a trend toward a general obligation of good faith, fairness or reasonableness, there have been judicial comments to the effect that the court should be slow to intrude into the commercial dealings of the parties who are quite able to look after their own interests. The courts should not be too eager to interfere in the commercial conduct of the parties, especially where the parties are all wealthy, experienced, commercial entities able to attend to their own interests.19
In contrast to the position, the concept of good faith is receiving particular attention in relational contracts such as franchising. In the context of franchising, good faith is now considered to be an implied duty owed by the franchisor to the franchisee to curb unethical conduct where there is an imbalance of power between them. In Far Horizons Pty Ltd v McDonald’s Australia, Byrne J emphasised the need for an implied term of good faith to ensure a successful relationship between the franchisor and franchisee. His Honour made the following comments:
I do not see myself as at liberty to depart from the considerable body of authority in this country whi...