The Obligation Of Good Faith In The Proposed New Australian Standard As11000:2015

A new standard

In January 2015, Standards Australia released a draft of its revised conditions of contract, the proposed AS11000:2015, intended to supersede the current AS2124:1992 and AS4000:1997 forms of contract.

AS11000 will retain the basic risk allocation found in the current standard contracts, however, a number of key changes have been proposed, including the introduction of a good faith obligation.

This new good faith obligation is an overriding obligation which requires the parties "to act reasonably in a spirit of mutual trust and cooperation, and generally in good faith towards one another".

This change is significant as its express nature may impact on the rest of the contract, and change the inherent nature of commercial dealing. Whether such change is beneficial or problematic, is explored below.

Concept of good faith

As a concept, good faith plays a crucial role in the law of contract. Despite this, it still occupies a very grey area of law, as it has not yet been exhaustively or conclusively defined. Broadly speaking, good faith imposes a general standard of fair dealing between parties when negotiating, performing and resolving disputes about agreements, and is often synonymous with notions of reasonableness.¹

In Renard Constructions (ME) Pty Ltd v Minister for Public Works,² the New South Wales Court of Appeal held that the principal had a duty to act reasonably and honestly when exercising powers under a standard form government contract. Priestley JA stated there were strong arguments for the recognition of a duty of good faith and fair dealing in contractual performance.

Further, in Burger King Corp v Hungry Jacks Pty Ltd,³ it was stated that a duty of good faith and reasonableness ensures powers under a contract are only exercised to the extent necessary to achieve the parties' legitimate contractual interest.⁴

However, neither of these cases has been approved by the High Court. Further, dicta from the High Court has tended to suggest that a general duty of good faith may be problematic and should not be implied.⁵

Contractual obligations clearly arise from express terms of a contract, but may also be implied.

Implied obligation of good faith
If a term is not expressly provided in a contract, it may be implied, however only if such term is not inconsistent with the express terms of the contract.⁶

In the absence of an express term, the High Court has not recognised a general duty on parties to act in good faith while negotiating and performing obligations under contract.⁷ However, other courts have found this (or a similar) duty to be implied by law in certain classes of contract. For example, in Burger King Corporation v Hungry Jacks Pty Ltd,⁸ an obligation of good faith and reasonableness was implied into the performance of a franchise agreement. As a result, such obligations may be implied if they are reasonable and necessary for the effective operation of that type of contract.

In terms of the content of the duty, the New South Wales Court of Appeal held in Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd⁹ that an implied duty of good faith requires:

• the parties to cooperate in achieving the contract's objectives;
• honest conduct;
• reasonable conduct, having regard to the parties' interests; and
• parties to have regard to their own legitimate interests as well as those of the other party. This does not require parties to act in the other party's interests or to subordinate their own legitimate interests to those of the other party.¹⁰

Express obligation of good faith
An agreement may expressly provide for an obligation of good faith, for example that the parties will act with "utmost good faith". Such a term has been held to require the four factors outlined above in the context of the implied duty of good faith.¹¹

If an obligation of good faith is expressly provided in a contract but is not clearly defined, courts will, if possible, construe the provision in accordance with the principles of implied good faith outlined above. If this is not possible, the provision may be void for uncertainty.¹²

Potential issues regarding good faith in the new standard

The new good faith obligation in AS11000 provides an express obligation. Given the uncertainty around this term, it is important to carefully analyse whether this change works contractually, and successfully does what it is intended to do.

The first major issue with the good faith provision in AS11000 is that the expression "good faith" is undefined. Therefore the standards of behaviour to which the parties are bound, and the extent to which this obligation persists, are relatively unknown. Flowing on from this, if the standard is not defined, how can breach (and the consequences thereof) be established? These issues have the potential to trigger or exacerbate contractual disputes in this area.

Second, while an implied obligation must not be inconsistent with other terms of the contract, an express obligation such as express good faith, may affect the other terms of the contract. This may impact on commercial dealings between parties, and may change the dynamic particularly in negotiating the terms of the contract and in seeking to resolve contractual disputes. Major construction contracts are usually procured through a competitive bidding process which imports an adversarial approach, particularly given that the parties enter contracts for their own commercial benefit. AS11000 therefore raises the issue as to what extent this new obligation of good faith will require the parties to take into account the other party's legitimate business interests, and fetter their freedom to contract. Therefore it may create a tension between good faith and self-interest.

Conclusion

Conflicting views of the doctrine of good faith have led to its introduction into the new AS11000 as an express obligation. This obligation clearly raises a number of issues, however without proper definition and further consideration of its impact more broadly on the contract, it may merely continue to contribute to uncertainty, and potentially disputes.

If such good faith obligation remains, the parties who use the AS11000 will have to carefully consider whether the new form is appropriate for the commercial deal at hand, and if not, re-assess their procurement options in the light of the potential issues associated with it.

Authors: Lena Naris and Rhiannon Thomas

This article first appeared in Australian Construction Law Bulletin 2015/Volume 27 No 4 -- June 2015