The Implied Duty of Good Faith in Australian Contract Law

THE IMPLIED DUTY OF GOOD FAITH IN AUSTRALIAN CONTRACT LAW

by

ROBERT McDOUGALL

1

existence of a duty of good faith in the performance of contractual obligations, but on a number of

ancillary, although nonetheless important, questions. These include:

(1) Does the duty arise by implication or as a matter of construction?

(2) If the duty arises by implication, does it arise by implication in fact, implication in law or some other

process?

(3) Is the duty universal, or an incident of particular contracts or classes of contract?

(4) To what extent may the duty be negated by express provision or necessary implication?

There is also a more fundamental issue: one of policy rather than practicality or theory. It is: to what

extent should the courts interfere in the bargains of parties, by imposing terms that the courts think

to the process of implication?

Antecedent and related obligations

As long ago as 1864, Cockburn CJ said in Stirling v Maitland (1864) 5 B&S 840, 852; 122 ER 1043,

1047:

“[I]f a party enters into an arrangement which can only take effect by the continuance of a

certain existing state of circumstances, there is an implied engagement on his part that

he shall do nothing of his own motion to put an end to that state of circumstances, under

which alone the arrangement can be operative.”

Some years later, Lord Blackburn in Mackay v Dick (1881) 6 App Cas 251, 263, said that where:

remains current today.

Lord Blackburn’s statement of principle was reformulated by Griffith CJ in Butt v M’Donald (1896) 7

QLJ 68, 70-71 as follows:

“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 to have the benefit of

the contract.”

It will be observed that his Honour, whilst avoiding specification of the source of the obligation, framed

The duty identified by Cockburn CJ is a negative one: not to prevent the existence or continuance of

that which is necessary to enable the contract to be fulfilled. However, the contractual duty of co-

operation may include a positive element. Where performance of a contract is conditional on some

contingency that is (to a greater of lesser extent) within the control of a party, that party must do what is

reasonably necessary to enable the condition to be fulfilled, so that the usual remedies for breach of

contract – including damages, specific performance and termination – may become available upon

breach. See Perri v Coolangatta Investments Pty Limited (1982) 149 CLR 537 (as to damages);

Catholic Church for the Archdiocese of Sydney (1993) 31 NSWLR 91, in which Mason P said at 93

that, despite his lack of enthusiasm for the principle, he was bound by what had been decided in

Renard. As the later cases to which I will refer show, there has been no retreat from that position.

Certainly, since the decision in Burger King v Hungry Jack’s Pty Ltd [2001] NSWCA 187, it has been

clear – at least in New South Wales – that a duty of good faith in the performance of obligations, and

the exercise of rights, may be imposed by implication on the parties to a contract. In New South Wales,

the remaining issue is as to the limits of the doctrine.

In Overlook Management BV v Foxtel Management Pty Ltd [2002] NSWSC 16, Barrett J said at para

underlying point – that a duty of good faith exists – is valid.

The doctrine appears also to have found favour (after some initial wavering) in the Federal Court of

Australia: see (by way of example only) Hughes Aircraft Systems International v Air Services Australia

(1997) 76 FCR 151 and Pacific Brands Pty Ltd v Underworks Pty Ltd [2005] FCA 288.

The doctrine has been recognised in Victoria: see, for example, Esso Australia Resources Pty Ltd v

Southern Pacific Petroleum N L [2005] VSCA 228. In that case Buchanan JA, who gave the leading

judgment, appeared to accept that an obligation of good faith could be implied into some contracts.

However, his Honour at para [25] expressed reluctance “to conclude that commercial contracts are a

In the result, his Honour did not need to consider whether such a term should be implied into the

agreement under consideration because, as he said at para [27], “even if such an obligation was

imposed…it was not breached.”

In the same case Warren CJ who agreed with Buchanan JA but made some additional observations,

acknowledged at para [2] that “there has been clear recognition of the doctrine of good faith”. However,

she pointed out, “courts have, more often than not, decided these matters on other bases and thereby

avoided the conceptual difficulty than can attend a concept of a duty of good faith.”

It is perhaps unlikely that an intermediate appellate court in Australia would come to a contrary

Source of the duty

As I have indicated, there is some controversy as to the source, in the case of a particular contract (or

class of contract) of a contractual duty of good faith. Some, such as Dr Peden, source the duty in

construction. That is to say, they regard the duty as one that arises (if at all) on the proper construction

of the contract. (In Dr Peden’s case, this would seem to reflect her view (Good Faith in the

Performance of Contracts (Lexis-Nexis Butterworths, 2003) at [6.30]) that “implication in fact is a rule of

construction”.)

In New South Wales, it is clear from the decisions of the Court of Appeal to which I have referred that

the duty is regarded as one arising by implication. However, the nature of the implication has been

The distinction between implication and fact, implication in law and construction is not always easy to

state, and may be to some extent at least a matter of semantics. In Castlemaine Tooheys Ltd v Carlton

& United Breweries Ltd (1987) 10 NSWLR 468, Hope JA at 486-487 discussed and differentiated

implication in fact and implication in law. His Honour explained that implication in fact was undertaken

where the implied term is necessary to give business efficacy to the contract, whereas implication in

law occurs where the implied term is viewed as a legal incident of a particular class of contract. Prima

facie, implication in law has the result that the term is implied into all contracts belonging to that class;

but the implication may, nonetheless, be excluded having regard to the express terms of a particular

contract and the factual matrix in which it was made.

The distinction between implication in fact and implication in law was recognised by the High Court in

Their Honours continued by recognising the proposition “that what would now be classified as terms

implied by law in particular classes of case had their origin as implications based on the intention of the

parties, but thereafter became so much a part of the common understanding as to be imported into all

transactions of the particular description.” They cited with approval a passage from Halsbury’s Laws of

England referring to “ambiguous terminology” and the shift from implication based on presumed

intention to implication as an incident of the class of contract.

In Breen v Williams (1996) 186 CLR 71, Gaudron and McHugh JJ expressed a similar view as to the

shift from implication in fact to implication in law in a particular class of contract.

This analysis suggests that the process of implication may be not dissimilar to, or may have some

common relationship with, the imposition of terms by business usage through commercial notoriety:

see Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160

CLR 226.

of a commercial contract.” At para [190] his Honour noted an overlap between that process and

implication in fact, in circumstances where the question for decision is “whether for the first time a term

should be applied in a particular class of contract.”

Hughes Aircraft Systems has been seen as one such case, although I think that his Honour’s analysis

By contrast, it seems to be reasonably clear from what Priestley JA said in Renard that his Honour

regarded the duty as arising (if at all) by implication in fact: ie, implication based on the test expounded

by the Privy Council in BP Refinery (Westenport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, at

282-283 and adopted on many occasions since: perhaps most notably by Mason P in Codelfa

Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337; in particular, relying on the

need to give “business efficacy” to the contract.

Vodafone – seem to show that it is not possible to be dogmatic. That is so firstly because of the

evolution from implication in fact in a particular contract to implication in law in contracts of the class to

term, it cannot stand in the face of contrary contractual intention (either express or derived by

necessary implication from the contract as a whole considered against its factual matrix). (Of course, I

exclude the case of terms implied by statute where the statute itself forbids their exclusion.)

If the real question is not so much whether an obligation of good faith is to be imposed (to use a neutral

term) but, rather, the content of the particular term (ie, the particular incidents of good faith that are

sought to be imposed) then, necessarily, one needs to understand the content of the term before one

can address the process of implication (assuming, as the cases to which I have referred seem to show,

Content of the duty of good faith

The concept of good faith is one that is found in many areas of legal discourse: ranging from trust law

through administrative law to statutory provisions protective of decision makers (and this list is in no

way comprehensive, or even, I suspect, illustrative). In Secretary, Department of Education,

Employment, Training and Youth Affairs v Prince (1997) 152 ALR 127, Finn J referred at 130 to the

In Renard, Priestley JA equated the concept of good faith to that of reasonableness (26 NSWLR at

258), and this approach has found favour in subsequent decisions of the Court of Appeal, Alcatel and

Burger King.

In Esso, Buchanan JA at [2005] VSCA para [28] gave some consideration to the content of an implied

contractual duty of good faith (picking up what he had said earlier at para [24]). He referred to Priestley

JA’s equation in Renard (26 NSWLR) at 263 of good faith with reasonableness; and to the view of

Finkelstein J in Garry Rogers Motors Aust Pty Ltd v Subaru (Aust) Pty Ltd (1999) ATPR 41-703, where

in connexion with its exercise.

Thus, I do not think that it is fruitful to enquire, in some a priori way, as to the content of the concept of

“good faith” in a contractual context. It is necessary to look at the particular contract, to see what might

be comprehended as a particular expression of the general concept of good faith, and then to enquire

In Vodafone, Giles JA concluded that the terms of the particular contract were inconsistent with the

implication of an obligation to act reasonably in good faith. In Tomlin, I considered that the terms of the

particular contract meant that the defendant could exercise a particular power according to its own

completion is subject to a condition precedent such as the obtaining of finance or the obtaining of

development approval: in those circumstances, it is usual (and, I would add, desirable) to specify that

the party for whose benefit the condition is inserted, must use all reasonable or practicable endeavours

to bring about its satisfaction.

Negativing the implication

In Vodafone, Giles JA considered whether the relevant contractual powers were fettered by an implied

obligation of good faith and reasonableness. He concluded that they were not. Firstly, ([2004] NSWCA

15 at para [195]), he noted that the power “was emphatically described as a sole discretion”, stating

that “the point of “sole” lay in the exclusion of any constraint.” That point was reinforced by other

One issue in Tomlin concerned the right of the defendant (bailor) to determine the true wholesale value

of bailed vehicles, and its right to terminate the Bailment Agreement. The plaintiffs argued that those,

and other rights, were conditioned by an obligation that the determination or decision be made in good

faith. I concluded (although obiter, having regard to my finding that there was no relevant bad faith) that

However, I reserved the question, whether the exercise of those powers might be vitiated by the

existence of actual bad faith: ie, an exercise for some ulterior and unlawful purpose. In this context, the

doctrine of fraud on a power may have some surviving relevance; it is clear, as I said in Tomlin at para

[120], that the doctrine is of broad application and not limited to the exercise of fiduciary powers:

Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46, 52-53 (Handley JA, with whom Mason P

and Beazley JA agreed).

Freedom of contract

Her Honour dealt with the policy issues in [2005] VSCA 228 at paras [3] and [4]. She pointed out the

role of the law of contract in “achieving certainty in commerce”, noting that the difficulty of achieving

precision in the definition of good faith (or in the incidents of a duty of good faith) is not consistent with

certainty. Thus, her Honour concluded, the courts would be wary of interfering, by imposing and

enforcing a duty of good faith, in a situation where the parties are of equal bargaining strength. She

said:

“3. There has also been consideration of the capacity of a contractual party

to look after itself and its own interests rather than turn to concepts of good

faith for relief. These approaches, more aptly described as judicial

with the vagueness and imprecision inherent in defining commercial

morality. The modern law of contract has developed on the premise of

achieving certainty in commerce. If good faith is not readily capable of

definition then that certainty is undermined. It might be that a duty of good

faith is no more than a duty to act reasonably in performance and

enforcement, a long established duty. Of course, some commentators have

regarded the duty to act reasonably as properly subsumed within the duty of

good faith.

4. Ultimately, the interests of certainty in contractual activity should be

interfered with only when the relationship between the partis is unbalanced

difficult to see why the latter should have greater protection than that

If I may say so, I think that there is much to be said for the view expressed by her Honour. In general,

fully informed parties having adequate bargaining power and negotiating at arms length should be free

to settle in detail upon the terms of their bargain; and the courts should be slow to impose their own

view of what it was that those parties should have sought to achieve in their bargain. In many cases,

certainty is of at least as much significance as morality: at least, in the context of commercial dealings.

There are adequate remedies in the law to deal with misrepresentation (or worse) in the course of

negotiation; and, as Warren CJ pointed out, there are remedies available to deal with unconscionable

considering the “obvious” and “business efficacy” criteria; and perhaps more generally, as part of the

approach to the question of implicit inconsistency.

Express exclusion of obligation of good faith

There are at least two ways of doing this. One, relying on what Giles JA said in Vodafone, is, in words

derived from the language of the contract there considered, to exclude, so far as the law permits, and

otherwise than as set out in the contract, any implied terms. The other way is to grasp the nettle and

exclude, in express words, any obligation of good faith either in the performance of any contractual

I note in passing that in Hart, Griffith CJ said at 421 that the implied term “arises by necessary

If there is no express exclusion either of implied terms generally or specifically of an implied obligation

of good faith, then negation of a duty of good faith would depend on necessary implication from all the

There are very real practical difficulties with this concept. One difficulty lies in identifying breach.

Another lies in identifying damages. (Both of those difficulties were examined, although obiter –

because it was held that there was no failure to negotiate in good faith – in Coal Cliff Collieries.)

However, statutory requirements for good faith negotiations are becoming increasingly common (in

contexts ranging from consumer protection to native title) and, particularly in the native title context, the

content of the statutory duty is being elucidated: see Western Australia v Taylor (1996) 134 FLR 211;

Walley v Western Australia (1996) 67 FCR 366; and Strickland v Minister for Lands, Western Australia

(1998) 85 FCR 303.

If the content of the duty can be developed, and therefore arguments as to its observance or breach

Conclusions

Until the legislature or the High Court says otherwise, the contractual duty of good faith is here to stay.

It is not, however (at least in New South Wales), a duty that is imposed in all contracts, or in all

contracts of a particular class; far less is it a duty that is imposed regardless of the intention (objective,

not subjective) of the parties.

they cannot do so inconsistently with the express language of the contract, or necessary implications

therefrom.

It follows that if parties to a contract wish to bind themselves to act in good faith – either generally, or in

relation to specific obligations – they should make express provision for this; and because the concept

of good faith is uncertain and ambulatory, they should define what it is that they mean by the term.

Equally, if parties do not wish to be bound by an obligation of good faith (either generally or in relation

to specific obligations) they should say so.

Of course, in either case, the specification of an obligation of good faith, or its negation, in relation to

particular obligations rather than generally, may be seen as inconsistent with more general implication

or negation (as the case may be).

The law in this area cannot be regarded as settled, but (barring avulsive change on the part of the

legislature or the High Court) it is likely to be developed by accretion over the years, as our

understanding of the concept – both as to its contractual source and its content – deepens through