contract-law australia
What is the status of &#39;Good Faith&#39; in Australian contract law?
<p>Answers from other jurisdictions (particularly <a href="/questions/tagged/united-states" class="post-tag" title="show questions tagged &#39;united-states&#39;" rel="tag">united-states</a> and <a href="/questions/tagged/europe" class="post-tag" title="show questions tagged &#39;europe&#39;" rel="tag">europe</a>) state that there is an implied duty of good faith in contracts. Is this the case in Australia?</p>

<blockquote>
  <p>Answers from other jurisdictions (particularly united-states and europe) state that there is an implied duty of good faith in contracts. Is this the case in Australia?</p>
</blockquote>

<p>Yes, the duty of good faith <em>is</em> implied in Australian law.</p>

<p>The strawman argument for refuting the covenant of good faith in UK or Australian law entails the mistaken assumption that <em>good faith</em> means something in the sense of "<em>altruism toward the counterparty</em>". But in reality, under contract law, the notion of <em>good faith</em> is not antithetical to the notion of <em>self-interest</em>.</p>

<p>Take a look at <a href="http://www5.austlii.edu.au/au/journals/MurUEJL/2004/22.html" rel="nofollow noreferrer">one of the links</a> in the <a href="https://law.stackexchange.com/questions/48718/what-is-the-status-of-good-faith-in-australian-contract-law/48719#48719">answer</a> you posted shortly after posting your own question. The conclusion in that source reflects that <em>the only reason</em> why there is no implied duty of good faith in contracts is that:</p>

<blockquote>
  <p>The fundamental principles which constitute good faith such as cooperation, reasonableness, legitimate interest and proper purpose <strong>are already implied in law</strong>. Good faith implied as a separate definitive doctrine would only cover the principles <strong>already established in law</strong>.</p>
</blockquote>

<p>(emphasis added)</p>

<p>Adding a synonym (namely, <em>good faith</em>) for fundamental principles already implied in law would only be redundant.</p>

<p>Furthermore, the excerpt reflects that fundamental principles <em>such as</em> those listed (cooperation, reasonableness, legitimate interest and proper purpose) encompass the <em>entire</em> meaning of <em>good faith</em>. In the author's words, they constitute <em>good faith</em> even if the list given is not exhaustive.</p>

<p>For there to be a need or reason to incorporate <em>good faith as a distinct or separate doctrine</em> in contract law, one would need to attach to that term other attributes or principles without rendering it redundant.</p>

<h2>No</h2>
<blockquote>
<p>The doctrine of good faith in Australia remains largely a construct of common law, with the obligation to act in good faith being implied either by a Court at the pleading of an applicant, or otherwise included as an express term in a contract.</p>
</blockquote>
<h2>What is 'good faith'?</h2>
<p>There is no universally settled law on what 'good faith' is in Australia - different jurisdictions have applied different standards at different times including:</p>
<ul>
<li>to cooperate to achieve the outcome agreed in the contract,</li>
<li>having regard to fairness in the consideration of another parties’ interests,</li>
<li>to comply with honest standards of conduct, or</li>
<li>to comply with standards of conduct that are reasonable having regard to the interests of the other parties.</li>
</ul>
<p>Recent case law suggests that it might be better to view good faith as a norm underlying and shaping other duties, such as a duty to act honestly in dealings.</p>
<p>What is clear is that the obligation of good faith <strong>does not</strong> require a party to act against its own interests.</p>
<p><em>Masters Home Improvement Pty Ltd v North East Solutions Pty Ltd [2017] VSCA 88</em> spelled out the current position in <a href="/questions/tagged/victora" class="post-tag" title="show questions tagged &#39;victora&#39;" rel="tag">victora</a>:</p>
<blockquote>
<ul>
<li><p>an obligation to act honestly and with fidelity to the bargain</p>
</li>
<li><p>an obligation to not undermine the agreed bargain or the substance of the contractual benefit bargained for, and</p>
</li>
<li><p>an obligation to act reasonably and with fair dealing, having regard to the interests of the other party (but not to the extent of subordinating their own interests) and the provisions, aims and purposes of the contract (which are to be objectively ascertained).</p>
</li>
</ul>
</blockquote>
<h2>'Good faith' in contracts</h2>
<p>A duty of good faith can be:</p>
<ol>
<li>explicitly imposed on any or all of the parties to the contract,</li>
<li>explicitly excluded on any or all of the parties to the contract,</li>
<li>implied by statute,</li>
<li>implied by the Court on the pleading of one of the parties.</li>
</ol>
<p>No 1. is relatively straightforward, if a contract imposes a duty of good faith on a party (either generally or in specific circumstances) then they have such a duty. For example, it is common in dispute resolution clauses to require the parties to &quot;negotiate in good faith&quot; - this requires them to exercise good faith in such negotiations but does not extend to general conduct under the contract.</p>
<p>No 2. is also relatively straightforward -  if a contract expressly excludes an obligation of good faith then it doesn't exist. Note that the exclusion of 'good faith' does not allow the parties to act with 'bad faith' - there is a whole slew of behaviors that are neither good nor bad faith. However, excluding good faith could fall foul of the unfair contract provisions of the Australian Consumer Law where applicable.</p>
<p>No 3. applies where the legislature has imposed a duty of good faith on certain classes of contracts, for example, insurance contracts.</p>
<p>No 4. will only apply where there is no express provision and will follow normal common law principles about the court implying terms into a contract. As a general concept, an implied term must:</p>
<ul>
<li>be reasonable and equitable,</li>
<li>be necessary to give business efficacy to a contract,</li>
<li>be so obvious it goes without saying,</li>
<li>be capable of clear expression, and</li>
<li>not contradict the express terms.</li>
</ul>
<p>Most attempts to imply a duty of good faith will founder because it probably isn't &quot;necessary to give business efficacy to a contract&quot; nor &quot;be so obvious it goes without saying&quot; - most contracts will work just fine without requiring good faith.</p>
<blockquote>
<p>Some courts have suggested that an implied obligation of good faith may arise where one of the parties to a contract is at a substantial disadvantage to the other in the context of the situation. This position has been narrowed in Victoria, with authority suggesting that an obligation of good faith should not be implied indiscriminately into all commercial contracts. This restrictive notion (of not implying a duty of good faith indiscriminately into commercial contracts) is more widely accepted with the Federal Court finding the terms and context of the contract must be examined before an obligation of good faith can be implied.</p>
</blockquote>
<p>It is clear that arguing that a contract has an implied term requiring good faith is a tough sell.</p>
<h2>There <em>is</em> an implied duty of co-operation in Australian contract law</h2>
<p>In <em>Butt v M’Donald</em> (1896) 7 QLJ 68, Griffith CJ said (the Butt formula):</p>
<blockquote>
<p>It 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.</p>
</blockquote>
<p>This is stated as a positive covenant but it can also be stated as a negative one: &quot;not to hinder or prevent the fulfilment of the purpose of the express promises” contained in the contract (see, for example, Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126, per Gleeson CJ, Gummow, Kirby and Hayne JJ).</p>
<p>Such a duty is not implied where it would be contrary to the express terms of the contract and where it does apply it is limited to acts or omissions that are necessary only for the <em>fundamental</em> purposes of the contract and is limited by reasonableness. In particular, if there are several methods of achieving the fundamental purpose of the contract, an act that is only necessary for one of those methods is not a necessary act under the duty.</p>
<h2>References</h2>
<ul>
<li><a href="https://www.mccullough.com.au/2017/12/07/the-good-the-bad-and-the-uncertain-good-faith/" rel="nofollow noreferrer">https://www.mccullough.com.au/2017/12/07/the-good-the-bad-and-the-uncertain-good-faith/</a></li>
<li><a href="http://www5.austlii.edu.au/au/journals/MurUEJL/2004/22.html" rel="nofollow noreferrer">http://www5.austlii.edu.au/au/journals/MurUEJL/2004/22.html</a></li>
<li><a href="http://www.awbrisbanelawyers.com.au/good-faith-in-contracts-australian-contract-law-breach-commercial-law-business-litigation-lawyers-brisbane-solicitors.html" rel="nofollow noreferrer">http://www.awbrisbanelawyers.com.au/good-faith-in-contracts-australian-contract-law-breach-commercial-law-business-litigation-lawyers-brisbane-solicitors.html</a></li>
<li><a href="https://www.lexology.com/library/detail.aspx?g=01e50b87-59f4-4434-9ec5-36f033d5d1ed&amp;utm_source=Lexology+Daily+Newsfeed&amp;utm_medium=HTML+email+-+Body+-+General+section&amp;utm_campaign=Australian+IHL+subscriber+daily+feed&amp;utm_content=Lexology+Daily+Newsfeed+2021-09-10&amp;utm_term=" rel="nofollow noreferrer">https://www.lexology.com/library/detail.aspx?g=01e50b87-59f4-4434-9ec5-36f033d5d1ed&amp;utm_source=Lexology+Daily+Newsfeed&amp;utm_medium=HTML+email+-+Body+-+General+section&amp;utm_campaign=Australian+IHL+subscriber+daily+feed&amp;utm_content=Lexology+Daily+Newsfeed+2021-09-10&amp;utm_term=</a></li>
</ul>
