Contractual Duty of Good Faith

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Australia has not yet committed itself to a definitive principle of good faith in contract law. Unlike the legal systems in Europe and the United States, Australia does not demand an explicit legal prerequisite of good faith to form a contract.[1] Decisions in different jurisdictions have however considered the validity of the values identified in the doctrine of good faith within contract law, such as loyalty, honesty and cooperation. Good faith is valuable because it provides confidence in the formation of contracts between two parties. However there are conflicting views and criticisms of the doctrine of good faith. The “pragmatic theory of cooperation” [2] underlines the effectiveness of the common law system and emphasizes that there is not a need for a clearly defined doctrine of good faith. Economic theory (the “repugnancy thesis of self interest”) goes further and criticizes the ability the doctrine holds to oppressively “constrains the pursuit of self interest.”[3] Although the doctrine may be valuable, the ramifications and effects that such a doctrine would create, need to be analyzed and evaluated. In addition this essay will explore how established the doctrine of good faith is within Australian contract law. Although discussion of the implication of a contractual duty of good faith is often sourced to the judgment of Priestley JA in Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234, it is clear that closely related doctrines have formed part of English and Australian law for well over 100 years. Speaking today, it is possible to say that the debate centers not so much on the existence of a duty of good faith in the performance of contractual obligations, but on a number of ancillary, although nonetheless important, questions. These include: (1) Does the duty arise by implication or as a matter of construction? (2) If the duty arises by implication, does it arise by implication in fact, implication in law or some other process? (3) Is the duty universal, or an incident of particular contracts or classes of contract? (4) To what extent may the duty be negated by express provision or necessary implication? There is also a more fundamental issue: one of policy rather than practicality or theory. It is: to what extent should the courts interfere in the bargains of parties, by imposing terms that the courts think necessary? This is a concern particularly in relation to fully negotiated commercial contracts between parties of equal standing. If the “one size fits all” approach to implication of a duty of good faith is inappropriate, how then (if at all) should the courts approach contracts that are not so negotiated, between parties of unequal standing? Are there other appropriate sources of right or remedy? Or is the concern relevant to the process of implication? Antecedent and related obligations

As long ago as 1864, Cockburn CJ said in Stirling v Maitland (1864) 5 B&S 840, 852; 122 ER 1043, 1047: “[I]f a party enters into an arrangement which can only take effect by the continuance of a certain existing state of circumstances, there is an implied engagement on his part that he shall do nothing of his own motion to put an end to that state of circumstances, under which alone the arrangement can be operative.” Some years later, Lord Blackburn in Mackay v Dick (1881) 6 App Cas 251, 263, said that where: “it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect.” It will be observed that Cockburn CJ spoke in terms of “implied engagement”, whereas Lord Blackburn spoke in terms of “construction”: foreshadowing a debate that, in relation to good faith obligations, remains current today. Lord Blackburn’s...
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