Good Faith in Australia Law

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Since the early 1990s, Australian judicial system has experienced a great flux revolving around the notion of good faith in the performance the enforcement of contracts. The leading case Renard Construction (ME) Pty Ltd v Minister for Public Works (Renard) along with Preistly JA’s judgment commenced the controversial introduction of universal obligation of good faith in all contracts. Such introduction was also confronted by the opposing force of the more conservative judgments, such as those of Meagher JA in Renard and Gummow J in Service Station Association v Berg Bennett & Associates Pty Ltd . In order to correctly assess the extent to which the High Court of Australia should recognize that in all contracts, parties have an implied obligation of good faith and fair dealing in the performance and enforcement of the contract, we need to observe the current state of law and judge the possible effect of universal implication of good faith in contract law against such jurisprudential background..

State of common law

Australia has long adopted the judicial role of gap filling in contracts through terms implied in law and in fact. When a term is implied in law, the terms are implied in all contracts of a particular class or description. Courts imply these general terms due to:

The concern of the courts that, unless such a term be implied, the enjoyment of the rights conferred by the contract would or could be rendered nugatory, worthless, or perhaps, be seriously undermined.

Secondly, implication of terms in fact provides a more specific implied terms based on the specific contract and its surrounding circumstances. For a term to be implied in fact, it must satisfy the 5 criteria set out by the Privy Council in BP Refinery (Westernport) Pty Ltd v Hasting Shire Council.

Apart from the doctrines of implying terms that are relevant with the duty of good faith in contract the court also held valid a number of other duties and obligations, such as the duty to cooperation. The High Court affirmed the duty to cooperation principal stated in Butt v McDonald in the more recent Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd :

[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.

The above passage was also quoted in Dawson J’s judgment in Hospital Products Ltd v United States Surgical Corporation , where Gibbs CJ was prepared to impose a duty of best efforts in performing discretionary obligations

Furthermore, the common law also forbids the exercise or non-exercise of discretionary power for an extraneous purpose as illustrated by Sheller JA’s comment in Alcatel v Scarcella :

The courts may interpret the [discretionary] power as not extending to the actions proposed by the party in whom the power is vested or, alternatively, conclude that the powers are being exercised in a capricious or arbitrary manner or for an extraneous purpose

Lastly, an implied duty to act reasonably is manifested through Renard, through the constructive analysis of the cl 44.1, where Handley JA concluded that clause has an implied degree of reasonableness in its exercise .

It is evident that without the universal recognition of good faith in all contracts, the judicial are decently armed in dealing with unconscionable and capricious performances and enforcements of contracts.

Possible Effect of Universal Good Faith

In Renard one of the key argument set out by Priestly JA in recognizing the a duty of good faith inherent in all contracts is based on the Restatement of the Law Second of Contracts (1981) of which section 205 stated ‘Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcements’.

However, we must be mindful of the different originality of the case...
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