Good faith obligations



There has been much discussion, in courts around the world, as to the possible obligations that parties might owe to one another to act in good faith. Although the courts have been hesitant to define what 'good faith' is, it largely involves notions of fairness and honesty. Some courts have taken the view that it is easier to think of whether an action is in 'bad faith' in considering if a party is at fault.

Whether a good faith obligation exists in a contract differs between countries. Australian courts have not been in a hurry to hold that there is always such a duty between parties to a contract. For example, the High Court in Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45 noted that to imply into a contract an obligation to act in good faith may be inconsistent with the notion of caveat emptor (buyer beware) and other common law principles outlining the circumstances in which a term may be implied into a contract. In Sundararajah v Teachers Federation Health Ltd [2011] FCA 1031 the Federal Court held that an obligation of good faith will not be implied into a commercial contract unless it is reasonable, necessary and consistent with the other terms of the contract. This is consistent with the approach to implied terms in BP Refinery (Westernport) Pty Ltd v Hastings Shire [1977] 180 CLR 266.

However, this is an area of the law which is undergoing regular review by the courts and there is a clear trend, by Australian courts, to more often conclude that there is a duty between parties to a contract to behave with good faith. In particular, the courts will consider the nature of the relationship between the parties and the activities in which they are engaged.

As well as there being some uncertainty as to the circumstances in which a party must behave in good faith, there is also debate as to what it means to behave in good faith. There is a general duty seen as an obligation to act honestly and to co-operate, in achieving the objectives of the contract. In Sundararajah v Teachers Federation Health Ltd [2011] FCA 1031, Foster J stated that 'generally speaking, if a contract contains a requirement that the parties act in good faith, they must act honestly, not capriciously, and reasonably'. However, the duty does not require a party to act in the interests of the other contracting parties nor subordinate its own legitimate interests to those of the other contracting parties.

The following case demonstrates the potentially far-reaching effect of the duty of good faith in commercial dealings. Notably, the NSW Court of Appeal extended the scope of the duty to require a party to positively disclose information in contractual dealings that might differ from the expectation of the other party.

CASE STUDY



Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service

[2010] NSWCA 268



Facts


  • The appellant engaged the respondent for the development of a private hospital on land situated within the Royal Prince Alfred Hospital precinct. The agreement provided for the parties to act with the utmost good faith in the performance of their duties.
  • The respondent undertook a strategic plan which did not involve a development consistent with the agreement. Notably, the plan did not suggest the hospital be situated near the district as proposed.

Result


  • The Court of Appeal held that the obligation to act in good faith was enforceable.
  • Though good faith does not require parties to disregard their own interests, they must co-operate in a reasonable way to implement the contract.
  • In these circumstances, an obligation of good faith required the respondent to disclose the departures from the agreement to the appellant. Failure to disclose the information was a breach of the respondent's duty to act in good faith insofar as it would have substantially altered the appellant's expectations of the agreement.

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