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Developments in Good Faith

Jul 19, 2014

Australian courts have started to develop a range of fairness-based legal limits on business behaviour.  In different ways, these developments all focus on requiring commercial enterprises to have regard to the interests of others, at least to some degree, rather than simply acting in their own financial self-interest or otherwise resting on whatever rights they have locked up in a contract drafted in their favour.  For example, many of the consumer protection provisions in Australia-wide trade practices and fair trading laws have this effect.  Standard banking, insurance, and other business contracts usually are not completely neutral and evenly balanced documents, because they are drafted to protect the position of the business, whatever other concessions or benefits for the customers might be enshrined in them.  Some cases have raised the possibility that notions of fairness, reasonableness, and good faith might even dictate how parties exercise their contractual rights, so that they must always exercise those rights for good rather than ulterior, capricious, or opportunistic reasons.  In other words, no matter how good the drafting or what kind of consent is signed, the law might condition the exercise of contractual rights so that they are exercised fairly or at least not in exploitative ways.[49]

In Garry Rogers (Aust) Pty Ltd v Subaru (Aust) Pty Ltd,[50] Finkelstein J conflates issues of good faith, reasonableness, and legitimate interests, and also equates ‘unconscionability’ (under section 51AC of the Trade Practices Act) with ‘unfairness’ in a way which is vague but not completely open-ended:

In my view, a term of a contract that requires a party to act in good faith and fairly, imposes an obligation upon that party not to act capriciously.  It would not operate so as to restrict actions designed to promote the legitimate interests of that party. That is to say, provided the party exercising the power acts reasonably in all the circumstances, the duty to act fairly and in good faith will ordinarily be satisfied. ...I do not regard the refusal by the first respondent to withdraw its notice of termination as unconscionable conduct.  I take as the measure of unconscionability, conduct that might be described as unfair.

That last sentence should not be taken literally or out of context, as there is not yet any blanket rule in law that unfairness simply equates to unconscionability, although undoubtedly fairness-related doctrines inform both statutory and judge-made notions of unconscionability. Of course, broad standards of fairness are informing other regulatory moves too.  For example, one recommendation from the recent review of the banking code of practice suggested incorporating a promise to act fairly and reasonably towards consumers and small business in banking transactions.

Australian law has started to imply obligations to treat another party fairly and in good faith in a wide variety of commercial situations ranging from franchises and motor dealerships to public tenders and national sporting competitions, although the High Court is yet to rule definitively on this development.[51]  High Court Justice Ian Callinan has labeled as ‘far-reaching’ the legal contentions ‘whether both in performing obligations and exercising rights under a contract, all parties owe to one another a duty of good faith; and the extent to which, if such were to be the law, a duty of good faith might deny a party an opportunistic or commercial exercise of an otherwise lawful commercial right’.[52]  Still, Australian courts below the level of the High Court are also starting to apply laws regulating unconscientious conduct to situations where a stronger commercial party exploits the weaker position of another commercial party who is disadvantaged by the combination of legal, financial, and informational circumstances in which they find themselves.[53]

Be aware of the cross-over between good faith and unconscionability in both the Trade Practices Act and now the ASIC Act too, in their provisions regulating small business (ie s51AC of the Trade Practices Act and s12CC of the ASIC Act).  Both include notions of good faith in their statutory indicia of unconscionable conduct.  It is unclear whether these statutory references to ‘good faith’ mean exactly the same as ‘good faith’ in contract law.  After all, these small business provisions already extend the indicia of unconscionability beyond its meaning under the general law.  It is possible that the ‘good faith’ obligation might apply to post-execution conduct too.  To what extent can notions of unconscionability, good faith, reasonableness, and other fairness-based doctrines condition the exercise of contractual rights and powers across the public and private sectors?[54] Future corporate and commercial litigation will test the boundaries of that possibility too.

Moreover, the linkage between good faith and what goes beyond a party’s legitimate interests as indicia of statutory and non-statutory forms of unconscionability has some resonance with the latest judicial thinking on implied terms of good faith, with strong implications for novel arguments about the outer boundaries of contractual and non-contractual causes of action.[55]

In plain English, you can be at risk of having the law say you are acting in bad faith, unfairly, or unconscionably if:[68]

Your conduct amounts to more than simply striking a hard bargain and more than just ‘sharp’ conduct, but falls on the wrong side of the latter; You engage in or facilitate (as a professional adviser) sharp business practices which do more than strike a hard bargain and which exploit other parties in some way;  You have someone over a commercial barrel and you make them an offer they can’t really refuse; You treat some people differently from others without good reason; You use your stronger bargaining position to extract a concession which is commercially valuable to you but which is either commercially irrelevant to the particular transaction (and hence beyond your legitimate expectations) or else relevant but ‘over the top’; You exercise a legal right or discretion which you clearly have but you do so with an ulterior motive;[69] You act in a way which won’t put you in breach of contract, strictly speaking, but which is designed to cause another party to terminate or fail to renew the agreement because you want to be rid of them; You ‘stack the deck’ against someone in commercial decision-making or otherwise set them up for a fall; You are involved in a joint enterprise with others and set up guidelines or criteria which look neutral on their face but which will really disadvantage one of the parties involved in the joint enterprise; You refuse to negotiate at all over your standard terms and conditions; or You have knowledge which, if the other party knew it too, would make them think twice about signing up.


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