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An Examination of the Common Law Obligation of Good Faith in the Performance and Enforcement of Commercial Contracts in Australia

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An Examination of the Common Law Obligation of Good Faith in the Performance and Enforcement of Commercial Contracts in Australia Chapter One Introduction ‘ … the most important contractual issue of our time.’1 1.1 The Impact of the Classical Model The classical model of contract law2 was premised upon an adversarial ethic where contractual parties legitimately sought to maximise their own interests.3 Under this static model,4 ‘contract law simply set ground rules for self-maximising private ordering.’5 As a corollary of the underlying ideology of liberal individualism,6 (or, in a market context, ‘market individualism’),7 with the fundamental aim of protection of the individual as an autonomous subject,8 contractual performance and the exercise of contractual rights and discretions was virtually unrestrained by considerations of the reasonable expectations or the legitimate interests of the other party to the contact.9 It is these reasonable expectations10 or 1 The description of good faith employed by the Lord Chief Justice of England, Lord Bingham of Cornhill, ‘Foreword’ in R Harrison, Good Faith in Sales (1997) vi. In a similar manner, the implied requirement of good faith in contractual performance and enforcement has been described as perhaps the most important unresolved issue in Australian contract law: J W Carter and A Stewart, ‘Interpretation, Good Faith and the “True Meaning” of Contracts: The Royal Botanic Decision’ (2002) 18 JCL 182, 190. 2 A model consistent with, and reflective of, the economic theory of laissez-faire: A F Mason, ‘Contract, Good Faith and Equitable Standards in Fair Dealing’ (2000) 116 LQR 66, 70. 3 Acting in the manner of a straightforward maximiser, that is a person who attends only to their own interests: D Gauthier, Morals by Agreement (1986) as referred to by R Brownsword, ‘Positive, Negative, Neutral: the Reception of Good Faith in English Contract Law’ in R Brownsword, N Hird and G Howells (eds), Good Faith in Contract: Concept and Context (1999) 13, 32. 4 Classical contract law focused almost exclusively on the static point of contract formation: M Eisenberg, ‘Why There is No Law of Relational Contracts’ (2000) 94 Northwestern University Law Review 805, 807. 5 J M Feinman, ‘Relational Contract Theory in Context’ (2000) 94 Northwestern University Law Review 737, 738. 6 Bigwood refers to contract law’s embracement of individualism as its dominant informing ideology: R Bigwood, ‘Conscience and the Liberal Conception of Contract: Observing Basic Distinctions Part II’ (2000) 16 JCL 191, 203. An economic justification for individualism is the notion of the invisible hand transforming what appears to be selfishness into public benefit: Anthony J Duggan, ‘Is Equity Efficient?’ (1997) 113 LQR 601, 603. 7 A model of self-interested dealers converging on a marketplace, making their one-off exchanges, and going their separate ways: I R Macneil, ‘The Many Futures of Contract’ (1974) 47 S Cal LR 691. 8 R Bigwood, ‘Conscience and the Liberal Conception of Contract: Observing Basic Distinctions Part I’ (2000) 16 JCL 1, 19. 9 Subject only to an observance of the like freedom and equal opportunity of all others to pursue their own self-interest: ibid 20. 10 See below 3.2.1. 1 legitimate interests11 that an obligation of good faith in contractual performance and enforcement may operate to protect.12 Consistent with the classical paradigm, the obligation of good faith in contractual performance and enforcement continues to be rejected as an overriding principle of the English common law,13 regardless of the contractual setting.14 In the colourful language of one commentator, the British courts have treated the doctrine of good faith like a ‘contagious disease of alien origin’.15 What Brownsword16 has labelled as the ‘pragmatic thesis’17 would suggest that the English common law already provides piecemeal solutions to issues that in other jurisdictions may require the application of a good faith obligation or principle.18 Further, under what Brownsword labelled as the ‘repugnancy thesis’,19 good faith is regarded as incompatible with an adversarial ethic20 and likely to undermine unduly freedom and sanctity of contract, and ‘their analogues and by-products: certainty, predictability, finality of transactions, self- reliance, laissez-faire, judicial non-intervention, bargained-for exchange, and the like.’21 In Australia, the twin ‘English’ public policy themes of freedom of contract and the desirability of certainty22 of contract23 in commercial dealings 11 See below 3.2.2. 12 The content of the good faith obligation is more fully considered in chapter six. 13 As in Australia, there are English legislative references to good faith. See, eg, the Unfair Terms in Consumer Contracts Regulations 1999 (UK) (being delegated legislation that gave effect to the European Union’s Directive on Unfair Terms in Consumer Contracts as adopted by the Council of Ministers on 5 April 1993). This delegated legislation has, in turn, given rise to case law. See, eg, Director General of Fair Trading v First National Bank PLC [2002] 1 All ER 97. 14 It has been previously observed that ‘the criterion … of good faith is mysterious and exciting to an English lawyer’: H Collins, ‘Good Faith in European Contract Law’ (1994) 14 Oxford Journal of Legal Studies 229, 249. Cf Lord Steyn who observed that English lawyers remain resolutely hostile to any incorporation of good faith principles into English law: Johan Steyn, ‘Contract Law: Fulfilling the Reasonable Expectations of Honest Men’ (1997) 113 LQR 433, 438. 15 G Teubner, ‘Legal Irritants: Good Faith in British Law or How Unifying Law Ends Up in New Divergences’ (1998) 61 MLR 11, 11. 16 In the context of arguing that the rationality of English contract law would be enhanced by the adoption of an explicit concept of good faith: R Brownsword, ‘Two Concepts of Good Faith’ (1994) 7 JCL 197. 17 Ibid 198. 18 Bingham LJ also refers to the fact that English law ‘has developed piecemeal solutions in response to demonstrated problems of unfairness.’: Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] 1 QB 433, 439. This quotation was recently cited with approval by the House of Lords in R (European Roma Rights Centre) v Immigration Officer at Prague Airport (United Nations High Commissioner for Refugees Intervening) [2005] 2 WLR 1, [59] (Lord Hope of Craighead). 19 Brownsword, above n 16, 198. 20 Ibid. Brownsword notes, in the context of a putative duty to carry on negotiations in good faith, similar comments were made by Lord Ackner in Walford v Miles [1992] AC 128, 138. 21 Bigwood, above n 8, 2 (footnote 4). 22 One commentator has noted that the appeal to the virtue of certainty was the crucial gateway signalling the presence of communication between the practical world of business and the closed doctrinal system of law: H Collins, ‘The Sanctimony of 2 have been commonly repeated by those who seek to retard the development of any contractual obligation of good faith which may be based on competing policy considerations. Members of the judiciary24 and academic commentators alike have been concerned about the impact of the implied obligation of good faith on the sanctity of freedom of contract and the potential uncertainty25 that may be introduced into commercial arrangements negotiated at arm’s length by commercial entities. The following quotation typifies the type of judicial concern traditionally raised: The courts should not be too eager to interfere in the commercial conduct of the parties, especially where the parties are all wealthy, experienced, commercial entities able to attend to their own interests.26 Similar academic concerns have been expressed: Good faith … is an imperfect translation of an ethical standard into legal ideology and legal rules. However much it might stimulate research or encourage inquiry into theories underlying contract law, its appropriate home is the university where it can perform these functions without wreaking practical mischief.27 1.2 A Changing of the Guard In more recent times, the validity of some of these traditional concerns has been openly questioned. Sir Anthony Mason, taking up two points made by Kelly J in Gateway Realty Ltd v Arton Holdings Ltd (No. 3),28 has queried: why are not good faith and fair dealing superior objects to obsessive insistence on total clarity and certainty in contract? And why is emphasis on the need for good faith and fair dealing not likely to lead to the resolution of business 29 disputes? Contract’ in R Rawlings (ed), Law, Society and Economy, Centenary Essays for the London School of Economics and Political Science 1895-1995 (1997) 63, 66. 23 Of course, the desirability of certainty of contract may be questioned. ‘It is said by some, and disputed by others, that businessmen prefer certainty to justice, and like to know where they stand.’: Lord Justice Staughton, ‘Good Faith and Fairness in Commercial Contract Law’ (1994) 7 JCL 193, 194. 24 The potential for the good faith doctrine to undermine certainty of contract law was raised in, amongst other decisions, Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582 and Service Station Association Ltd v Berg Bennett & Associates Pty Ltd (1993) 117 ALR 393. 25 It has been observed that certainty can become a mantra, a euphemism for the sanctity of contracts: Collins, above n 22, 67. 26 Rogers J in GSA Group Ltd v Siebe PLC (1993) 30 NSWLR 573, 579. 27 M Bridge, ‘Does Anglo-Canadian Contract Law Need a Doctrine of Good Faith?’ (1984) 9 Can Bus LJ 385, 412. 28 (1991) 106 NSR (2d) 180, 198. 29 Mason, above n 2, 89. 3 Changing social attitudes also herald the need for a retreat from legal formalism.30 The words of Gleeson CJ are apposite: The demands of justice, as seen through modern eyes, are much less likely to be met by formal and inflexible rules which treat hard cases with the dismissiveness sometimes manifested in earlier times.
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