GOOD FAITH IN CONTRACTS
31/05/2011
They don’t teach us in school how to perform contracts. In fact they don’t teach it anywhere. Presumably it is considered a matter of common sense: contracts set out what the parties are required to do and not do and the parties simply follow the directions.
But there’s more. At the margins it may be about how well the party performs their side of the bargain.
Some contracts go so far as to actually say that the parties must act in good faith toward one another. What does that mean and is a clause like that useful in a contract?
In the last few years there have been a number of important cases dealing with ‘good faith’ in contracts and we are now able to summarise these cases and produce a set of principles that currently apply in Australian contract law on the issue of contractual good faith.
In commercial contracts the parties are subject to an implied duty to act in good faith in the performance of the contract.
This implied duty can be excluded by a specific clause in the contract to the contrary (although it is unlikely that parties would ever agree to actually allow one another to act in bad faith)
The duty to act in good faith means the duty to act honestly and faithfully to the bargain (ie cooperatively to secure the objects of the contract).
The duty of good faith means that a party must in exercising a power or discretion have regard to the legitimate commercial expectation of the other party. Powers or discretions should not be exercised for improper or extraneous purposes, although this does not mean that a party must subordinate their interest to the interest of the other party.
If you include a duty of good faith in a contract it would be wise to spell out what it means, particularly whether it includes the duty to act both reasonably and honestly in respect of the exercise of contractual powers and discretions. Good faith clauses are subject to the same principles of contract interpretation as other clauses in the contract so the clearer they are the better.
If you have any questions in regard to this article, please contact TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.