The 'Good Faith' Controversy in Australian Commercial Law: A Survey of the Spectrum of Academic Legal Opinion

Article excerpt

In academic debate the question is frequently asked as to whether the implied obligation of good faith has any place within the common law of contract in Australia, and if so, does it apply to all commercial contracts or only to some? For example, recent contributions to the good faith debate include a speech given in 2006 by Mr Justice Robert McDougall of the New South Wales Supreme Court on The Implied Duty of Good Faith in Australian Contract Law. (1) Another recent survey is a paper by Geoffrey Kuehne published in the University of Western Australia Law Review on Implied Obligations of Good Faith and Reasonableness in the Performance of Contracts: Old Wine in New Bottles. (2)

In the speech given by Mr Justice McDougall, he argues that the contractual duty of good faith is here to stay 'barring avulsive change on the part of the legislature or the High Court' (3) and that 'it is likely to be developed by accretion over the years, as our understanding of the concept--both as to its contractual source and its content--deepens through further decisions'. (4)

As to the source of the obligation, His Honour regards the question of whether it is derived by implication in fact or law or by means of construction as 'being to some extent a matter of semantics'. (5) Regarding the meaning of good faith, His Honour prefers Sir Anthony Mason's classic definition, namely:

(1) An obligation on the parties to co-operate in achieving the contractual objects (loyalty to the promise itself).

(2) Compliance with honest standards of conduct.

(3) Compliance with standards of conduct that are reasonable having regard to the interests of the parties. (6)

However, as to whether 'reasonable conduct' is objective or subjective, His Honour leaves that to be decided in each case depending of the proper construction of the intention of the parties.

Geoffrey Kuehne, on the other hand, takes a different tack in his survey of the notion of good faith in Australian contract law. He begins with an examination of the traditional methods of controlling contractual performance, (viz. the implied term of cooperation, as well as equitable remedies) and then examines good faith in foreign jurisdictions, followed by a survey of the major Australian cases on good faith. The conclusion Kuehne draws is that:

   Examination of the decisions in Renard and Burger King reveals that
   the results wrought by the application of good faith or
   reasonableness could have been achieved by the application of the
   implied obligation of co-operation, complemented by traditional
   equitable restraints on the exercise of contractual powers. (7)

Kuehne draws support for his position from the opinion of Gummow J in Service Station Association Ltd v Berg Bennett & Associates Pty Ltd (8) where, as Kuehne points out, 'His Honour observed that the origins of the term [good faith] did not appear to differ from those of another implied term more familiar to Australian law, namely the implied obligation of co-operation'. (9)

As a result, Kuehne takes the view that:

   Gummow J's observation that the obligations of co-operation and
   good faith had shared origins might well be matched by the
   conclusion that, many years later, they have arrived at the same
   place. Indeed it might be concluded that implied obligations of
   good faith and reasonableness amount to little more than old wine
   in new bottles. (10)

The contributions by Mr Justice McDougall and Geoffrey Kuehne exemplify a tendency in the secondary literature to take positions either in favour of the development of good faith in contact law (McDougall) or against it (Kuehne, following the lead of Gummow J). There are many such examples, some of which will be examined here. The problem is that the commentators cannot agree on much, so there is an impasse in the academic debate. Given the absence of a High Court ruling on the place of good faith in Australian contract law, this only adds to the confusion. …