A common phrase you may hear in the legal and business vernacular is ‘good faith’. Many key things in law and business hinge upon them being done ‘in good faith’. In this article, we’ll explain what it means to do something in good faith, and what happens when it isn’t.
Contract law
In
contract law, the implied covenant of good faith and fair dealing is a
general presumption that the parties to a contract will deal with each
other honestly, and fairly, so as to not destroy the right of the other
party or parties to receive the benefits of the contract. Implicit
concepts, and even implied contracts
themselves, can be difficult territory to navigate. Nevertheless, there
are certain things that can help you identify some of these more
abstract or broadly defined terms.
In Australia, good faith is not specifically outlined in any legislation. Whilst it is recognised in various Codes of the Australian Competition and Consumer Commission,
it is mainly a principle of the common law. Accordingly, what is meant
by in good faith may sometimes need to be determined in court before a
judge. Therefore, it can vary from case to case. In any event, whatever
the nature of your business, there is always an implied duty of good
faith. We have provided some information about this below.
Characteristics
As mentioned, it is difficult to define this principle, but the following attributes often go hand in hand:
- Not acting arbitrarily or capriciously
- Not acting with an intention to cause harm
- Acting with due respect for the intent of bargain as a matter of substance, not form
- Acting for a proper purpose
- Consistency in conduct
- Acting honestly
- Communicating openly and effectively between parties
- Stating a party’s position on matters at issue, and explaining that position
- Cooperating with the other party
- Considering the interests of the other party
Why it’s important
In essence, this principle is the keystone to fairness and equity in our society, especially in business dealings. Although specific provisions of an agreement may provide certain protections for contracting parties, sometimes one of the parties may do something which undermines the point of the contract even though they may not have contravened or breached a specific clause of the agreement. Accordingly, this is where the principle of good faith provides protection. This may arise if you are buying or selling a business. It can also arise when franchising your business. Whether you are drafting a sale of business agreement or even an agreement for contractors, it is reassuring to know that the principle of good faith is ever present.
Breaches of Good Faith
- A court will not consider a party to act in good faith if they are dishonest in their dealings. This is so even if their conduct in and of itself has not necessarily contravened a clause in a contract.
- A court will not consider a party to be acting in good faith if they are acting for an ulterior purpose other than what is set out in the contract.
- A court will not consider a party to have breached an implied doctrine of good faith if they are acting for legitimate commercial reasons.
As you can see, acting in good faith is an integral part of business dealings. The absence of this principle can give rise to underhanded conduct that can undermine your interests, and the interests of others. If ever in doubt about your contractual rights, it is always wise to consult a contract lawyer for advice.
