Implied Duty of Good Faith in Commercial Contracts

Type : Focus Paper

Introduction In an earlier article, we looked at the meaning and usage in commercial contracts of an express obligation to “negotiate in good faith”. This article examines a different aspect of the law on good faith, namely, when a requirement of good faith will be implied into a contract. We also identify the kind of obligations that good faith imposes on contracting parties, and consider whether you can expressly exclude these obligations from your contract.

Is There an Implied Duty of Good Faith? While this question has not been examined by the Australian High Court,1 in NSW at least, the case law indicates that a duty of good faith will be implied into contracts in certain circumstances. However, when it has been implied, courts have adopted different approaches to defining what the duty entails. As indicated below, the most common context in which a duty of good faith has been considered is in relation to the termination of a contract.

The Position in NSW

The implication of a contractual duty of good faith is often traced to the judgment of Priestley JA in the seminal case of Renard Constructions (ME) Pty Ltd v Minister for Public Works.2 The case involved a building contract clause that empowered the principal to take over the work or cancel the contract upon the contractor's default, if the contractor failed to show cause as to why the contract should not be terminated. Default occurred and, despite the contractor's response that it was willing and able to complete the contract within a reasonable time, the principal purported to terminate the contract and take over the construction. The contractor sued for repudiation of the contract, arguing that the principal's conduct was unreasonable and lacking in “good faith”.

The NSW Court of Appeal held that the power conferred on the principal under the termination clause must be exercised reasonably. Priestley JA construed the clause as containing an implied term that the principal would give reasonable consideration to the question of whether the contractor had failed to show cause and, if the principal had reasonably concluded so, to the question of whether any power should be exercised.3 His Honour also discussed in great depth the development of an implied duty of good faith in the performance of contracts under Australian law.

Handley JA held that there was a requirement of reasonableness implied in the power to terminate, and concluded that the principal's...