by JEANNIE MARIE PATERSON There is a range of well-recognised doctrines regulating the process of contract formation; for example, undue influence, unconscionable dealing and misrepreseotatioo. Once a contract has been validly formed, there are various specific doctrines that may rcstrict the conduct of one or other of the parties; these include election, estoppel aod relief against forfeiture. However, in Australian contract law there is. at least as yet, oo established duty of good faith and fair dealing applying generally to the performance of a contract.1 Nonetheless, some have suggested that the explicit recognition of such a duty would be beneficial and its development possible. Good faith has been raised, with varying success, in a number of recent eases.2 The new s5 LW of the iYade Practices Act 1974 (Cth) identifies, as one of the relevant factors to consider in deciding whether or not conduct is unconscionable contrary to the section, the extent to which the parties "acted in good faith", Some of the interest in an implied duty of good faith in Australian contract law may come from an increased preparedness to look beyond the authority of English law to the example of other countries and legal systems. The concept of good faith in contract law has historical origins in Roman law and an important place in civil law.2 In the US. a jurisdiction with closer similarities to Australia, a general implied duty of good faith has been recognised under the Uniform (`ommercial Code' and the Restatement (2d) Contracts,~ at least in the performance and enforcement of contracts. Good faith has been affirmed as a principle in the law of international sales.6 In this article I suggest that the development of a duty of good faith or fair dealing implied into all contracts in Australian law should he approached with considerable caution. This is not to say that egregious or opportunistic conduct in contracting should be condoned. Rather, I suggest that most, if not all, of the useful functions of a duty of good faith in precluding egregious conduct are already adequately performed by existing doctrines. As Gummow J has argued in Service Station Association v Berg Bennett: it requires a leap of faith to translate these well established doctrines and remedies into a new term as to the quality of contract performance." I \\`il I hri eflv consider the \`ari ous meanings attributed to an implied doty of good faith and then consider the usetul 5CO~~ of such a duty and its equivalent in implied terms. The broad parameters of any duty of good faith in contract performance in a common law system are fairly well agreed. At its highest. the duty is usually considered less slringent than fiduciary duties. The minimum content of the duty is generally agreed to require honesty fr( m contracting parties. 4105 commentators also consider that the duty of good faith should require compliance with an objective standard of conduct beyond mere honesty.s The difficulty arises in identifying the appropriate objective standard. Beyond honesty, there is no generally accepted explanation of the meaning which should he attributed to a common law duty of good faith performance. This indeed may he a barrier to its acceptance.' The various theories attempting to define the meaning of a duty of good faith may he classified into two broad groups. One group favours what might he called a "contractual" approach to good faith. Contractual approach to good faith This approach attempts to give good faith a meaning consistent with existing contractual doctrines by treating it as an implied term based on the parties' probable intentions or expectations.10 On this view, the implied duty of good faith supplements the express terms of the contract to prohibit one party from taking an opportunistic advantage which was unlikely to have been contemplated by the parties at the time they made the contract. In Australian law, this contractual approach to good faith would be consistent \vith the traditional category of terms implied in fact to give business efficacy to a contract.11 The contractual approach to good faith has been supported in a number of cases in the US. In particular, it has been used to justify the view that the parties can, through their contract, exclude or reduce the application of the implied duty of good faith. 12 Generalised moral standards of conduct approach The second group of theories base the duty of good faith on generalised moral standards of conduct. tJnder the US t'nitbrm Commercial Code, in contracts for the sale of goods, where the party subject to the duty is a merchant, good faith means "honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade".'~ More broadly, other commentators see good faith as requiring standards of neighbourhood responsibilities, loyalty and cooperation from contracting parties.'~ tJnder this approach, the measure of gnnd faith is not determined by reference to the parties. The standards suggested as the measure of good faith are based on some vision of desirable behaviour in a contractual relationship. In Australia, these types of morally based theories find some support in the approach of Priestley JA in Renard Constructions (ME) Pty Ltd c Minister for Public l4brks'~ and Finn J in Hughes Aircraft Systems International c Airservices Aastralia.~~ Thus, in Renard Jeannie Marie Paterson flLAW INSTITUTE JOURNAL The notion of an implied duty of "good faith and fair dealing" in contract law is increasingly raised in Australian case law. Should this duty be explicitly recognised in Australian law for the performance of contracts? Priestley IA suggested that certain standards of "fairness" in contract performance may be demanded by prevailing community expectations.'~ Theories of good faith based on generalised moral standards find less explicit support in the US cases. They may be used to explain decisions where the duty of good faith has been given a broad interpretation, in particular by substantially qualifying the exercise of apparently clearly expressed contractual rights, is Considering these differing theories, the best way to assess the proper meaning and scope of a duty of good faith is by considering some of its potential applications. It has sometimes been suggested that the various doctrines regulating the conduct of negotiating parties would be simplified by recognising a unifying principle of good faith in pre-contractual negotiations.is The application of a duty of good faith to a pre-contractual context raises different issues from a contractual duty of good faith performance and will not be discussed in this article. What is relevant in this context is the possibility of the parties themselves contractually regulating the negotiation process. It is possible that parties concerned about the risks associated with negotiations might provide some protection for themselves by entering into a preliminary contract to negotiate in good faith. Such a contract would not bind the parties to reach an agreement. It would merely require them to conduct their negotiation according to the specified standard. In the US, contracts to negotiate in good faith have been recognised and enforced in a number of jurisdictions,2o although Farnsworth notes that the approach has nut been consistently favourable.2i In England, the Court of Appeal22 and the House of Lords23 have denied the possibility of a contract to negotiate in good faith. In Australia, there is some potential for judicial recognition of a contract to negotiate in good faith, with at least the possibility of such a contract being acknowledged in Coal Cliff Collieries P4' Ltd v Sijehama P4' Ltd.24 Objections to the concept of a contract to negotiate are, in I he opinion of most commentators, misplaced. The courts should respect the freedom of parties to make the contracts of their choice. A breach of the duty to negotiate in good faith may. consistently with its contractual nature, be assessed by considering the obligation likely to have been intended by the parties. Generally, the contract to negotiate may require the parties actually to negotiate with each other, to keep within the scope of any preliminary agreed terms, to have a legitimate reason for terminating and possibly to keep each other informed of the state of the negotiations.25 The type of obligation commonly imposed by the duty of good faith in the US is familiar to Australian law through implied terms requiring cooperation in the performance of a contract.26 Thus, in Secured Income Real Estate fAustralia) Ltd c St Martins 1w `estments P4' Ltd, 27 the High Court of Australia affirmed the principle stated by Griffith Ci in Butt a McDonald: "It is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract."~' Courts in a number of cases have commented on the similarity between this duty of cooperation in contract performance and the duty of good faith recognised in the US.-~" The implied duty to cooperate has proved particularly pcrtinent where there is a condition precedent to the contractual obligations of one or both of the parties to a contract. For example, in Butts i' O'Dwyer,~° the court was of the opinion that, where a transter of property was subject to the minister's consent being obtained, there was an implied obligation on the part of the transferor to do all things reasonable to obtain that consent.3i There will often he little difficulty in attributing this type of duty to cooperate to the presumed intentions of the parties. Parties enter into a contract with the intention of it being performed. At the time of contracting, the parties are rarely likely to intend the contract to be thwarted through the inaction or, still worse, positive interference of one or other of them. The implied duty of cooperation might also alternatively be justified by reference to notions of fairness, neighbourhood or cooperation in contracting. However, such standards provide little guidance to the proper content of the implied duty. Whether a duty to cooperate should he implied and, importantly, what that duty will require is better determined by reference to the circumstances of the particular case and the expectations of the parties in question. It may be noted that the duty to cooperate only requires steps from the party, subject to the duty, which are reasonable in the circumstances. A party is not required to incur unreasonable expense or to disregard its own interests. These limits are illustrated in the recent decision in Alcetel v Scarcella. ~2 In this case the lease between the parties obliged the lessee to comply with any requirements imposed by the local council and to indemnify the lessor against any liability in respect to those requirements. The lessee argued that the lessor had breached its duty to cooperate by pressing the council to impose strict fire requirements on the premises, thus subjecting the lessee to what it considered to be unreasonable expense. The NSW Court of Appeal accepted that a duty of good faith could he implied as a part of the lease but did not consider that the duty had been breached. The lessee had not demonstrated that the requirements of the fire order were unreasonable. Sheller JA explained that: "In a commercial context it cannot be said, in my opinion, that a property owner acts unconscionably or in breach of an implied duty of good faith in a lease of the property by taking steps to ensure that the requirements for fire safety advised by an expert fire engineer should he put in pIace."~~ It is in the context of the exercise of cuntractual rights, particularly the right to terminate, that the differences between the various approaches to the duty of good faith are most dramatically illustrated. An approach based on broad moral standards fairness, reasonableness or cooperation - will be more inclined to intervene than an approach which treats good faith as an implied term based on the probable intentions of the parties. Renerd Constructions (ME) Ptg Ltd a Minister for Public Works3~ concerned a iCLY 2000fl clause providing the principal under a construction contract with the power to cancel the contract and take over the work in the event of default of specified provisions by the contractor. Before exercising any of these powers, the principal was required to call on the contractor to show cause to the satisfaction of the principal as to why the powers should not be exercised. Priestley and Handley hA, the majority on this point, held that the exercise of the powers under the clause was qualified by two obligations of reasonableness.:is First, the principal was required to give honest and reasonable consideration to the question of whether or not the contractor had failed to show cause to the principal's satisfaction against the exercise of the powers in the clause. Second, the principal was required to give reasonable consideration to the question of whether or not the powers should he exercised. The second obligation of reasonableness recognised in Renerd, not being dependent on a clause requiring satisfaction, may have general application to the exercise of contractual rights. Thus, in Gerry Rogers Motors (Aust) Pty Ltd a Suberu (Aust) Pty Ltd,~' Finkelstein I thought there was no reason why "prima facie at least, that the obligation of good faith and fair dealing would not act as a restriction on a power to terminate a contract, especially if that power is in general terms", He suggested that such a duty would require a party "not to act capriciously". The duty would he satisfied provided the party acted "reasonably in all the circumstances".~~ In Renerd, Priestley IA suggested that the implied duty to act reasonably recognised in that case had " ... much in common with the notions of good faith which are regarded in many of the civil law systems of Europe and in all States in the United States as necessarily implied in many kinds of contract".~° Decisions in the US on the application of a duty of good faith to contractual rights are not consistent. Some US courts have been prepared to apply good faith to qualify the exercise of express contractual rights. Particularly controversial decisions in this regard have involved the reading down of express rights to terminate a franchise contract~° or to demand repayment of a loan.~° Other US courts have accepted that an implied duty of good faith will rarely trump the express terms of a contract.4i I believe that the latter approach is preferable. The content of a duty of good faith based on generalised moral standards of fairness, reasonableness or cooperation is exceedingly vague. It is also not at all clear that it is a good thing to impose standards of conduct considered desirable by law-makers or commentators without regard for the probable preferences of the parties themselves. If parties have included in their contract a clear right for one party to terminate in certain circumstances, then it is quite likely that the parties have meant what they appear to have said: that is, to confer a broad right to terminate on the party in question. In this context, an approach which qualifies the parties' intended contractual rights by reference to moral standards of fairness or reasonableness is merely likely to increase the cost of contracting. Contracting parties who are aware of the risk of a broad duty of good faith being implied into their contract to qualify express contractual rights are likely to take steps to reduce the impact of that duty, either by increasing the price of the contract or refusing to contract at all. Discussion of the role and meaning of good faith in Australian law seems likely to continue. While this discussion should not be stifled, I suggest that some confidence should be placed in the ability of traditional doctrines in Australian contract law, and particularly implied terms based on the parties' presumed intentions, to deal with problems of uncooperative behaviour. Conversely. caution should be shown before embracing a broad and amorphous notion of good faith in contract performance. S Notes Jeannie Marie Paterson is a lecinrer in contract iaw at ihe Faculty of Law, Monaah University. 1. A duiy of good faith may arise in specific coniexis, in pariicniar, in contracts of insnrance nnder the Insurance Contracts Act 1984 (Cih), v13, and circamsianceo where ihe parties are in a fiduciary relationship. 2. See in particular: coal cliff collieries Pty Ltd v Sijeharna fly Ltd (19911 24 NSWLR 1; Renard Construrfioos (ME) fly Lfd v Minister for Publir Works (19921 26 NSWLR 234; Hughes Aircraft Sys ferns lnternafional V Airservires Australia (1997) 146 ALR 1; Alcafel v Scarrella 119981 44 NSWLR 349; Garry Rogers Motors (Aust) fly Lfd v Sobaro (Aust) fly Ltd 119991 FCA 903 (2 inly 1999)). Bni compare: GSA Group Lfd v Siebe (1993) ATPR 41,240 at 41,260; Service Station Association v Berg Bennetf & Associates fly Lfd (19931 [1993] FCA 445; 117 ALR 393. 3. See R Powell, "Good faith in coniracis" (1956) 9 CLP 17. 4. Seciion 1-203. 5. Seciion 205. 6. See ihe United Nations convention on contracts for the International Sale of Goods, an 7. 7. [1993] FCA 445; (1993) 117 ALR 393 at 406. 8. See LA Farnsworth, Farnaworfh on Contracts, Vol II, 1990, Liitle Brown & Co, p331. 9. Bat compare Hughes Aircraft Sys ferns International v Airservices Australia, noie 2 above, at 37. 10. See, for example: R Povoer, Economic Analysis of Law (4th ed), 1992, Little Brown & Co, p93. Also SI Borion and EG Anderson, "The world of a coniraci" (1990) 75 iowa Law Reeiew 861. 11. Compare Service Station Associafion v Berg Bennett, note 2 above, at 406. 12. See section in ibis article titled "Termination". 13. Section 2 - 103(1)(b). 14. For enample: R Brownsword, "Two concepts of good faith" (1994) 7 Joornal of contract Law 197; HK Locke, "Good faith and coniractoal performance" in PD Finn led), Essays on Contract 1987, Law Book Cs, p155; PD Finn, "The fiduciary principle" in TG Yoadan led), Eqoity, ridociaries and Trusts, 1989, Law Book Co, pit. Compare I Siapleion,"Good faith in private law" (1999) 52 corrent Legal Problems 1. 15. (1992) 26 NSWLR 234 at 270. 16. (1997) 146 ALR 1 at 37. 17. (1992) 26 NSWLR 234 ai 270. 18. See oeciion in ibis artide titled "Termination". 19. Compare 1W Caner and NP Fnrmston, "Good faith and fairness in the negoiiation of coniracis" (1994-5) 8 Journal of contract Law93 at 119. 20. See generally EA Farnsworth, "Preconiracioal liability and preliminary agreemenis: fair dealing and failed negotiaiions" (1987) 87 colambia Law Review 217. 21. See EA Farnoworib, "Good faith in contract performance", in I Bealson and 0 Friedmann )eds), Good Faith and Faoft in contract Law, 1995, Clarendon Press. 22. courtney aod Fairbairn Lid v Tolaini Brothers (Hotels) Ltd 119751 1 WLR 297. 23. Walford v Miles 119921 2 AC 128. 24. (1991) 24 NSWLR 1. See also Aiton v Transileld 119991 NSWSC 996 (1 October 1999) (good faith in agreemenis relaiing to dispute resolution). 25. See farther IN Paterson, "The contract to negoiiate in good faith"' (1996) 10 Journal of contract Law 120. 26. See generally: IF Borrows, "Contractual cooperation and the implied term" (1968) 31 Modern Law Review 390. 27. 11979) [1979] HCA 51; 144 CLR 596 at 607 per Mason I, wiih whom ihe rest of ihe Court agreed. 28. (1896) 7 QLJ 68 at 70-71. 29. See: Australian Mutual Provident Society v 400 St Kilda Road Pty Ltd 119911 2 VR 417 at 655: Renard constructions (ME) r Minister for Public Works, note 2 above, at 263; Service Station Association v Berg Bennett, noie 2 above, at 402-403; Hughes Aircraft Systems International Airsereices Australia, note 2 above, ai 37. 30. [1952] HCA 74; (1952) 87 CLR 267 at 280. 31. See also, for example: Meehan vJones [1982] HCA 52; (1981-1982) 149 CLR 571; Booker tndustries fly Ltd v Wilson Parking (Qid) fly (1982) 149 CLII 600; CSS Investments fly Ltd v Lopiron (1987) 76 ALR 463. Also Service Station Association Ltd Berg Bennett noie 2 above, at 409. 32. 119981 44 NSWLR 349. 33. Note 33 above, at 369-70. 34. 11992) 26 NSWLR 234. 35. Note 34 above, at 257 and 263; 279. 36. 119991 FCA 903 (2 tuly 1999). 37. See also Aicatel v Scarceila 119981 44 NSWLR 349 ai 368. 38. Noie 2 above, at 263. 39. See LA Ran, "Implied obligaiiono in franchising: beyond terminaiions" (1992) 47 The Business Lawyer 1053. 40. See IN Paiervon, "Limits on a lender's righi io demand repaymeni" (1998) 26 Australian Business Law Review 258. 41. For example: Tymshare v Coveil 727 F.2d 1145 (DC Cir 1984); Domed Stadium Hotel v Holiday Inns [1984] USCA5 704; 732 F.2d 480 (5th Cir 1984); The Original Great American Chocolate Chip Cookie Co v River Valley Cookies Ltd [1992] USCA7 952; 970 F.2d 273 (7th Cir 1992). ~~aLAW INSTITUTE JOURNAL