Good faith is an obligation frequently included in agreements used in a major project. For instance:
The documentation and issues in major projects are complex and good faith obligations often find their way into the agreements as well-intentioned compromises or a ‘quick fix’.
One common and simple use of the term ‘good faith’ is when it is applied to a right for the principal to set-off money from amounts otherwise due to a contractor. For example:
The Government may, acting reasonably and in good faith, set off from any amount due to the Contractor any amount due or which may become due to the Government under this Contract.
What does it mean?
Despite the long history of good faith, we still do not know for sure what ‘good faith’ is. In the absence of a definition, and given ‘good faith’ has been and is still being considered by the courts of various jurisdictions in Australia and within a variety of contexts, there is a broad range of meanings attributed to the term. However, it seems that ‘good faith’ likely involves elements of:
In terms of an agreement to negotiate in good faith, the courts have said:
An example in practice
So what does that mean for the government party in the set-off example above? We suggest it means:
The last point is interesting, given fairness and reasonableness are elements of good faith. However, in Diab Pty Ltd v. YUM! Restaurants Australia Pty Ltd, the Federal Court of Australia decided that a discretionary power could be exercised by YUM! Restaurants, in the manner in which it was exercised, even though to do so would cause financial hardship for its franchisees.
Back to our example, also in support of the Government setting off both the amounts due and those which may become due, is “that it is not for the courts to re-write the parties’ bargain for them”.
Of course, what court decisions also tell us is that in the presence of an express obligation of good faith, the additional obligation (in our example) to act reasonably becomes redundant. This is because good faith includes more than just acting reasonably.
What if our example did not include the obligation on the Government to act in good faith but only referred to an obligation to act reasonably? The modified clause would be:
The Government may, acting reasonably, set off from any amount due to the Contractor any amount due or which may become due to the Government under this Contract.
Would an obligation to act in good faith be implied?
We cannot say for sure whether good faith would be implied into a contract which does not expressly require the parties to act in good faith. The “question whether a standard of good faith should be implied generally to contracts has not been resolved in Australia”.
If there are to be any indications drawn from decisions, however:
It is also difficult to identify, with any material degree of certainty, any general circumstances under which good faith will be more likely to be implied.
Therefore, in our modified example with the obligation to act in ‘good faith’ removed, the obligation to act reasonably becomes important. This is because we cannot be assured a court would imply an additional obligation on the Government to act in good faith.
So, what is the moral of the story? Like anything in a contract, if you want something to be clear, make it clear. If a party or parties are to act in good faith, then say so. Of course, you should then define what good faith is to mean.
Our example clause should read as follows:
The Government may, acting in Good Faith, set off from any amount due to the Contractor any amount due or which may become due to the Government under this Contract.
A definition for the term ‘Good Faith’ would be included in the contract.
Authors: David Harley
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