Proctor : August 2018
16 PROCTOR | August 2018 Good faith in Australia Good intentions are just the beginning Since its inception in Australian contract law, good faith has been a controversial and complicated subject. The law has progressed considerably since Renard Constructions1 and Burger King,2 arguably reaching a point of manageable practicality. This article summarises the current state of the law on good faith and gives practical guidance on its operation. Good faith, as both an express and implied term,3 requires conduct that supports the contractual bargain, the usual obligations of which are:4 a. acting honestly (the undisputed central element to good faith) b. acting with fidelity to the bargain, that is, co-operating to achieve the contractual benefits c. not acting to undermine the bargain entered into or the substance of the contractual benefit bargained for d. acting reasonably and with fair dealing having regard to the interests of the parties (which will, inevitably, at times conflict) and to the provisions, aims and purposes of the contract, objectively ascertained. The proper focus of good faith is the quality of a party’s conduct (the performance of contractual obligations or exercise of contractual powers) and not the outcome of the conduct.5 It does not import a tortious duty to exercise reasonable care and skill or to produce a reasonable outcome. If an act is carried out honestly and in good faith, an unfortunate outcome is likely irrelevant. In the case of Virk,6 the Full Court considered the good faith requirement to act reasonably. Pizza Hut franchisor YUM! was sued by several franchisees after it exercised its contractual power to reduce the price of the franchisees’ pizza. The reduction was part of a new strategy to reverse diminishing profits, but it had a seriously detrimental effect on the financial performance of the franchisees. YUM! was found to have acted honestly and with great care, having modelled potential outcomes, considered its strategy in similar markets and tested the strategy on a small scale. On appeal, the franchisees argued that the reduced sale prices and the methodology used to determine the price were objectively unreasonable. The Full Court of the Federal Court, finding against the franchisees, determined that reasonableness was not akin to a tortious obligation of due care and skill but was concerned with the quality of the decision-making. Good faith imposes a lower standard of conduct than a fiduciary duty as it does not require a contracting party to prefer the interests of the other contracting party, or to subordinate its self-interest. 7 Ifanactis permissible by the law of fiduciary duties, it will likely accord with good faith.8 A party may reasonably promote its legitimate interests.9 The following characterisations of conduct are said to fall below the standard of good faith:10 a. capriciousness b. dishonesty c. unconscionability d. arbitrariness e. conduct for purposes at odds with the object of the contract.