1. I have been asked to discuss what we mean in concrete terms when we talk of a duty to act in good faith in the performance or negotiation of a contract. Is there such a duty in Australian law? What do we mean when we say someone is not acting bona fide? Is an obligation to act in good faith different from an obligation to act reasonably? If an obligation to act in good faith exists how far does it extend and how does it operate in practice? I do not deal with the enforceability of any agreement to negotiate in good faith.[1]
BACKGROUND
Roman Law
2. The problem is an old one, no doubt as old as human trade. The traditional view of the common law limiting any obligation to act bona fide was expressed
in another Latin phrase, caveat emptor, "let the buyer beware", but even the
Romans were not so sure that was the correct approach.
3. Cicero, the illustrious Roman advocate, gave a useful and still valid example of
the area for debate in this passage of his celebrated work on moral philosophy,
De Officiis, (On Obligations or Duties), a work he wrote, ostensibly to his son, not long before he died:[2]
"[50] Let it be set down as an established principle, then, that what is
morally wrong can never be expedient - not even when one secures by
means of it that which one thinks expedient; for the mere act of thinking a
course expedient, when it is morally wrong, is demoralizing. But, as I said
above, cases often arise in which expediency may seem to clash with moral
rectitude; and so we should examine carefully and see whether their conflict
is inevitable or whether they may be reconciled. The following are
problems of this sort: suppose, for example, a time of dearth and famine at
Rhodes, with provisions at fabulous prices; and suppose that an honest man
has imported a large cargo of grain from Alexandria and that to his certain
knowledge also several other importers have set sail from Alexandria, and
that on the voyage he has sighted their vessels laden with grain and bound
for Rhodes; is he to report the fact to the Rhodians or is he to keep his own
counsel and sell his own stock at the highest market price? I am assuming
the case of a virtuous, upright man, and I am raising the question how a
man would think and reason who would not conceal the facts from the
Rhodians if he thought that it was immoral to do so, but who might be in
doubt whether such silence would really be immoral.
[51] In deciding cases of this kind Diogenes of Babylonia, a great and
highly esteemed Stoic, consistently holds one view; his pupil Antipater, a
most profound scholar, holds another. According to Antipater all the facts
should be disclosed, that the buyer may not be uninformed of any detail that
the seller knows; according to Diogenes the seller should declare any
defects in his wares, in so far as such a course is prescribed by the common
law of the land; but for the rest, since he has goods to sell, he may try to sell
them to the best possible advantage, provided he is guilty of no
misrepresentation. "I have imported my stock," Diogenes's merchant will
say; "I have offered it for sale; I sell at a price no higher than my
competitors - perhaps even lower, when the market is overstocked. Who is
wronged?"
[52] "What say you?" comes Antipater's argument on the other side; "it is
your duty to consider the interests of your fellow-men and to serve society;
you were brought into the world under these conditions and have these
inborn principles which you are in duty bound to obey and follow, that your
interest shall be the interest of the community and conversely that the
interest of the community shall be your interest as well; will you, in view of
all these facts, conceal from your fellow-men what relief in plenteous
supplies is close at hand for them?" "It is one thing to conceal," Diogenes
will perhaps reply; not to reveal is quite a different thing. At this present
moment I am not concealing from you, even if I am not revealing to you,
the nature of the goods or the highest good; and to know these secrets would
be of more advantage to you than to know that the price of wheat was
down. But I am under no obligation to tell you everything that it may be to
your interest to be told."
[53] "Yea," Antipater will say, "but you are, as you must admit, if you will
only bethink you of the bonds of fellowship forged by Nature and existing
between man and man." "I do not forget them," the other will reply: but do
you mean to say that those bonds of fellowship are such that there is no
such thing as private property? If that is the case, we should not sell
anything at all, but freely give everything away." In this whole discussion,
you see, no one says, "However wrong morally this or that may be, still,
since it is expedient, I will do it"; but the one side asserts that a given act is
expedient, without being morally wrong, while the other insists that the act
should not be done, because it is morally wrong."
4. Some people might think that the debate has not advanced terribly far since
then. It certainly reminds me of the terms of the debate here about whether and
when silence can amount to misrepresentation or misleading or deceptive
conduct under the Trade Practices Act 1974 (Cth). The views of Diogenes
reflect the traditional view of the common law while Antipater could be an
advocate from one of the modern civilian systems or America or a proponent of
consumer rights in modern Australia.
5. Cicero in notionally deciding this case and another similar example, focussed on
what he said was expedient but based on a more subtle world view than the
merely practical or greedy:
"[57] I think, then, that it was the duty of that grain-dealer not to keep back
the facts from the Rhodians, and of this vendor of the house to deal in the
same way with his purchaser. The fact is that merely holding one's peace
about a thing does not constitute concealment, but concealment consists in
trying for your own profit to keep others from finding out something that
you know, when it is for their interest to know it. And who fails to discern
what manner of concealment that is and what sort of person would be guilty
of it? At all events he would be no candid or sincere or straightforward or
upright or honest man, but rather one who is shifty, sly, artful, shrewd,
underhand, cunning, one grown old in fraud and subtlety. Is it not
inexpedient to subject oneself to all these terms of reproach and many more
besides?"
6. At least from that passage we can conclude that the lawyer's art of using six
words when one would do has a long history! But Cicero's point is that the
honourable is the expedient and vice versa.
7. Now in case you think I am being unduly antique in taking you back this far in
history, let me take you forward to 1817 and some litigation in America arising
out of the War of 1812 between the United States and Great Britain. During the
war the British had blockaded the port of New Orleans, preventing the export of
tobacco and depressing the market price the growers could obtain. Peter
Laidlaw & Co., Louisiana tobacco merchants, learned early on that the war had
been concluded and, acting as commission agents, bought 111 hogsheads of
tobacco from another merchant, Mr Organ. After the news became available
generally and the price of tobacco soared Mr Organ sued. There was evidence
available but not admitted that the seller inquired of the buyer if there was any
news which was calculated to enhance the value of tobacco, and the buyer
remained silent. A retrial was ordered to allow that evidence to go to a
Louisiana jury. The judgment itself is brief and not remarkable but the
submissions traversed the arguments of Cicero to which I have referred,
discussed the relevant passages from Pothier, Contrat de Vente, particularly
relevant because it was a case from the former French territory of Louisiana
whose system is still based on the civil law, and included this passage from the
submissions, dear to any common lawyer's heart, if not completely successful in
this case at this stage:[3]
"The only real question in the cause is, whether the sale was invalid
because the vendee did not communicate information which he received
precisely as the vendor might have got it had he been equally diligent or
equally fortunate? And, surely, on this question there can be no doubt. Even
if the vendor had been entitled to the disclosure, he waived it by not
insisting on an answer to his question; and the silence of the vendee might
as well have been interpreted into an affirmative as a negative answer. But,
on principle, he was not bound to disclose. Even admitting that his conduct
was unlawful, in foro conscientiae, does that prove that it was so in the civil
forum? Human laws are imperfect in this respect, and the sphere of
morality is more extensive than the limits of civil jurisdiction. The maxim
of caveat emptor could never have crept into the law, if the province of
ethics had been co-extensive with it. There was, in the present case, no
circumvention or manoeuvre practised by the vendee, unless rising earlier
in the morning, and obtaining by superior diligence and alertness that
intelligence by which the price of commodities was regulated, be such. It is
a romantic equality that is contended for on the other side. Parties never can
be precisely equal in knowledge, either of facts or of the inferences from
such facts, and both must concur in order to satisfy the rule contended for.
The absence of all authority in England and the United States, both great
commercial countries, speaks volumes against the reasonableness and
practicability of such a rule."
8. When Cicero wrote about good faith in contracts about 44 BC the idea was not
new for Roman lawyers. A modern author dealing with the topic describes the
later development of that idea in Roman law after Cicero in terms familiar to
common lawyers and students of equity:[4]
"Out of the mass of decisions based on bona fides there slowly crystallised
a body of general rules which played a vital role in the reception of Roman
law into modern legal systems ... Principles such as these continue to
influence the modern administration of justice through the general clauses
incorporated into the national codifications ... However, the legal
institutions it [the concept of bona fides] had shaped and the finely nuanced
considerations to which it had given rise became part and parcel of the
civilian heritage on which the modern legal systems are based.
In addition, the ethical principles which form the basis of the classical
notion of bona fides are today enjoying a renaissance. This has to do with
the fact that within a framework of general concepts the modern lawyer has
to resolve legal issues which have always been measured against the ideals
of the bonus vir and bene agere; i.e. the main pillars of bona fides itself." 9. The Roman law background is interesting because it provides an historical
context, the factual problems are also familiar and much of the present debate is
influenced by modern civilian systems, equitable doctrines, the reception of an
obligation of good faith into American commercial law through § 1-304 of the
Uniform Commercial Code, under the influence of the partly German educated
American realist Professor Karl Llewellyn, the use of the idea of good faith in
the draft for the proposed European Civil Code, the Vienna Convention on the
International Sale of Goods as well as in the UNIDROIT Principles of International Commercial Contracts. In other words, even if the common law
does not admit of an overarching duty of good faith in contracts might some
such notion eventually be imported through international commercial law or the
application of equitable maxims to the common law?
Civilian Systems
10. The idea of bona fides was incorporated into the general clauses of the modern
French and German civil codes. Article 1134 of the French Code Civile
provides that agreements must be performed in good faith. It is the subject of a
significant body of jurisprudence. Similarly in Germany § 242 BGB requires
the obligor under a contract to perform in a manner consistent with good faith
taking into account accepted practice. Again that has given rise to a
considerable body of German law. As Professor Shermaier concluded:[5]
"The principles of bona fides, as incorporated into the general clauses,
render a substantial contribution to the adaptation of the codified law to
changing social values. They thus contribute, as Stammler has said, to the
realisation of the social ideal. Without this constant regard for fairness and
justice Roman law would not have survived throughout the ages; and the
modern codifications, too, would soon have become useless and outdated,
had they not provided space for the operation of bona fides."
United States
11. In America the idea of an implication of a requirement to act in good faith in a
contract antedated the Uniform Commercial Code although it was not
universally accepted.[6] The performance and enforcement of contracts in good
faith became a feature of American commercial law through § 1-304 of the
Uniform Commercial Code. It provides that every contract or duty within that
Code imposes an obligation of good faith in its performance and enforcement.
Section 1-201(b)(20) defines "good faith" as "honesty in fact and the
observance of reasonable commercial standards of fair dealing". The
involvement of the legal realist Professor Karl Llewellyn in the drafting of that
code seems to have been influential in the importation of this approach to
"channel the exercise of freedom of contract by creating a market climate which
encourages compliance with commercial norms of decency and fairness."[7]
International Instruments
12. The Vienna Convention on the International Sale of Goods, to which Australia
and most of its major trading partners, with the exception of the United
Kingdom and Japan, have adhered, mentions the good faith principle in article
7(1) which requires that Convention to be interpreted having regard to its
international character and to the need to promote uniformity in its application
and the observance of good faith in international trade. That does not amount to
an implied term requiring the parties to exercise good faith in the performance
of the contract but it does require interpretation of the Convention in conformity
with such an idea. The UNIDROIT Principles of International Commercial
Contracts in article 1.7(1), however, do require each party to act in accordance
with good faith and fair dealing in international trade. Those UNIDROIT
Principles may be used to interpret or supplement international law instruments
and have been used to help arbitrators and some European courts to interpret the
Vienna Convention.[8]
13. Again art. 1-201 of the Principles of European Contract Law, developed as a
possible first step towards a general European Civil Code, provides that "these
principles should be interpreted and developed in accordance with their
purposes. In particular, regard should be had to the need to promote good faith
and fair dealing, certainty in contractual relationships and uniformity of
application." The duty may not be excluded or limited. The group developing
these principles is a private body modelled on the American Law Institute,
responsible for the Restatements of Americam Law, but one that is likely to be
very influential in the development of the law in Europe.
14. It can be seen from this brief and limited international survey that the idea of
interpreting contracts to require good faith in their performance or to require the
parties to act in good faith is neither new nor uncommon. Even if it does not
form part of Australia's common law, Australian lawyers engaged in
international legal transactions will need to be familiar with the idea and its
application in practice.
Meaning
15. Sir Anthony Mason has suggested that good faith embraces three notions, an
obligation in the parties to cooperate in achieving their contractual objects,
compliance with honest standards of conduct and compliance with standards of
conduct which are reasonable having regard to the interests of the parties.[9]
16. Such an approach incorporates the obligation to cooperate expressed in Mackay v Dick [10] and the normal requirement of honesty. The controversial question is
whether an objective standard of reasonable conduct is required, a standard that
was not required explicitly, for example in Meehan v Jones [11] and a question to
which I shall return.
Recent Australian Developments
17. The idea of good faith is familiar to Australian lawyers from its use in statutes,[12]
in equity, in insurance contracts, which are contracts of the utmost good faith,
and from the concept of a purchaser in good faith.[13] But a requirement that the
parties perform a contract by acting in good faith towards one another has not,
historically, been regarded as a necessary feature of commercial contracts here.
The accepted wisdom has been that parties to such contracts are expected to
look after their own interests, caveat emptor.[14]
18. The remarks of Priestley JA in Renard Constructions (ME) Pty Ltd v Minister for Public Works [15] made significant inroads into that view. His Honour said
that "there are many indications that the time may be fast approaching when the
idea, long recognised as implicit in many of the orthodox techniques of solving
contractual disputes, will gain explicit recognition in the same way as it has in
Europe and in the United States."[16] Especially in New South Wales his views
rapidly seemed to become almost the new orthodoxy. They were influential
elsewhere also.
19. Within seven years Finkelstein J of the Federal Court was able to say that
"recent cases make it clear that in appropriate contracts, perhaps even in all
commercial contracts, such a term will ordinarily be implied; not as an ad hoc term (based on the presumed intention of the parties) but as a legal incident of
the relationship.[17]
20. The High Court, however, has shown no real enthusiasm to take up the debate.
Four years ago it sidestepped the issue in Royal Botanic Gardens and Domain Trust v South Sydney City Council.[18] But Kirby J in particular said that a general
implied contractual term appeared to conflict with fundamental notions of
caveat emptor inherent in common law conceptions of economic freedom and to
be inconsistent with the law as it has developed in Australia in respect of the
introduction of implied terms into written contracts which the parties have
omitted to include.[19] The High Court has not revisited the debate since then.
21. The reluctance of the High Court to enter into the debate unless a case that
raises the issue clearly comes before it may also reflect the views of Gummow
J. While still a member of the Federal Court his Honour decided Service Station Association v Berg Bennett & Associates Pty Limited.[20] His detailed reasons
there leave little scope for the implication of a general term of good faith in the
performance of commercial contracts in Australian law.[21] His Honour concluded after a lengthy, learned discussion about the development and use of
the doctrine in the United States as follows:[22]
"Anglo-Australian contract law as to the implication of terms has
heretofore developed differently, with greater emphasis upon specifics,
rather than the identification of a genus expressed in wide terms. Equity has
intervened in matters of contractual formation by the remedy of rescission,
upon the grounds mentioned earlier. It has restrained freedom of contract
by inventing and protecting the equity of redemption, and by relieving
against forfeitures and penalties. To some extent equity has regulated the
quality of contractual performance by the various defences available to
suits for specific performance and for injunctive relief. In some, but not all,
of this, notions of good conscience play a part. But it requires a leap of faith
to translate these well-established doctrines and remedies into a new term
as to the quality of contractual performance, implied by law."
22. In a useful critique of the decisions since Renard Constructions, Mr Tyrone
Carlin drew attention to the fact that the real question raised in that case
involved the extent to which the exercise of powers expressly conferred by
contract can be tempered by the implication of a term requiring reasonableness
in their exercise, not an implied duty of good faith in contractual performance.[23]
Priestley JA also noted that his discussion of good faith did not form part of his
reasons for judgment.[24] Mr Carlin also argues persuasively that Priestley JA's
comments have been taken out of context and treated as authoritative when they
were not.[25]
23. Even though Renard Constructions continues to be relied upon to argue that a
general implied term of good faith in contractual performance exists in Australia
in spite of Gummow J's reservations,[26] such discussion as there was in the High
Court in Royal Botanic Gardens does not encourage the conclusion that it will
soon imply such a general term in Australian contracts. That is the apparent
position in Queensland and Victoria too.[27]
IMPLICATION OF SUCH A TERM IN PARTICULAR CONTRACTS
24. Is it possible to imply such a term in particular factual circumstances rather than by operation of the law generally? That appears to have been done in News Ltd v Australian Rugby Football League [28] because of the special nature of the
relationship between the Australian Rugby League and the teams affiliated with
its competition. The reasons for such an implication were not elaborated at any
great length in that case.
25. The next significant decision was that of Finn J in Hughes Aircraft International v Air Services Australia (1997) 76 FCR 151, 191-194 where his Honour expressed his personal preference for the views of Priestley J in Renard Constructions while noting the decision of Gummow J in Service Station Association. His Honour decided the issue before him on the basis that the
implication of such a duty was a legal incident of the particular class of contract
with which he was dealing. That case dealt with pre-award contracts dealing
with procurement from a Government authority and his Honour found a duty to
act fairly appeared to have been accepted in other British Commonwealth
jurisdictions. As his Honour said at 194:
"If the purpose of a tender process contract is to be accomplished, if
contractor-tenderers are to be given an effective opportunity to enjoy the
fruits of the bid and not to have that opportunity destroyed by the unfair
dealing of the other party to the contract, a duty such as I have described
would appear to me to be a presupposition of such a contract. In the tender
process context such a duty seems little more than an appropriate adaptation
of the duty to cooperate recognised in Butt v M'Donald (1896) 7 QLJ 68 at
70-71."
26. Similar arguments have been advanced in respect of franchise relationships
many of which would, in any event, be covered by the unconscionability
provisions of the Trade Practices Act 1974 (Cth) in s. 51AC. There is,
nonetheless, an increasing tendency for an obligation of good faith to be treated
as arising in particular cases.[29]
27. One of the problems associated with implying such a term in a particular factual
context is whether that conforms with the traditionally accepted tests for the
implication of terms, a point made by Kirby J in Royal Botanic Gardens, or
with the traditionally accepted obligations of parties to such contracts.[30]
INTERPRETATION AND DRAFTING OF EXPRESS TERMS - REASONABLENESS
28. If there is an express term requiring the parties to perform the obligations of the
contract in good faith it would need, on general principles, to be interpreted in
context and not to override other express terms giving particular contractual
rights to the parties.[31] In other words if a contract gives a right to terminate if
certain conduct occurs it is difficult to argue convincingly that a duty to perform
the contract in good faith could override such an express provision. If one
wishes to incorporate an express term of good faith in a contract it seems to me
that it would be most desirable to express that obligation in a particular context
to give it real meaning. As Elisabeth Peden says "broad definitions of good
faith based on general moral standards of cooperation, fairness and justice, can
seem uncertain and vague and too much the exercise of judicial discretion."[32]
29. For example, an agreement might include an arbitration clause leaving it up to
the parties to agree on who should be nominated as an arbitrator should a
disagreement arise in the performance of a contract. The incorporation of an
obligation in each party to act in good faith in the choice of an arbitrator would
probably be so vague as to be anodyne. The wise solicitor may find it prudent to
amplify the obligation of good faith by reference to objective standards of
qualification and independence of a possible arbitrator to ensure good faith is
exercised in fact as well as in theory and to avoid the problem the courts face at
present of deciding whether conduct incorporating objective standards of
reasonableness is required by parties to such contracts.
30. It seems to me that a role for an express obligation of good faith in the
performance of a contract is likely to arise where the contract's provisions give
a discretion to a party to act in one of a number of ways. If such an obligation is
to have a practical effect it should focus on requiring the party to exercise the
discretion by reference to those virtues of cooperation, honesty and
reasonableness spoken of by Sir Anthony Mason. To make this explicit would
be desirable given the distinction the High Court has made, for example,
between requiring honesty if not reasonableness in the determination of whether
satisfactory efforts have been made by a purchaser to obtain finance in a
"subject to finance" conveyancing transaction.[33]
31. In other words it will be desirable, if drafting such a clause, to include an
obligation in the purchaser to act in good faith in seeking to obtain finance for
the purchase by acting both honestly and reasonably in seeking the finance and
by using his or her best endeavours to cooperate with the vendor in achieving
the object of the contract.
32. I hesitate to give any drafting examples but do suggest that a focus on achieving
objective standards of reasonableness in the behaviour of parties to a contract is
the most useful general approach to achieving the general effect of a "good
faith" clause as the need to act honestly and to cooperate in achieving the
contractual objects are terms already effectively implied in Australian contracts.
33. In the absence of such an approach to drafting one needs to come to grips with
the meaning of the third principle discussed by Sir Anthony Mason: what is
compliance with standards of conduct which are reasonable having regard to the
interests of the parties? It seems to me that this may be something different
from objectively reasonable conduct. It does not go so far as a fiduciary duty
where the beneficiary has a legitimate expectation that the fiduciary will act in
the beneficiary's interest.[34] Nor should it prevent one party from conduct in
reliance on a contractual right where the interests of the parties are opposed.
Perhaps it means that when a party makes a decision under a contract it should
be mindful of the other party's position and act reasonably taking that position
into account.
34. A useful discussion of such an idea, particularly in the insurance context, by
Chesterman J in Re Zurich Australian Insurance Ltd [35] may help:
"[84] The central problem remains. What is "due regard" for the
interests of the insured? The passage I have quoted from the American
Law Reports points to the failure of the courts of that country to
formulate any satisfactory test to decide what is an appropriate level of
consideration for the insured's interests. One can say with confidence
that due regard will depend upon the nature of the right being exercised
and the circumstances in which it comes to be exercised but that is not
to say very much. To my mind an important factor is that the parties
have agreed by formal written contract to confer on one of them, the
insurer, a discretion, the exercise of which will or may occur in
circumstances where their interests are opposed. In other words, as Mr
Hawke puts it (at p. 97), the contract indicates a mutual intention that
the insured be placed, to a certain extent, in the insurer's hands in
relation to the exercise of the power.
[85] Importantly the implied limitation that an insurer will exercise
rights with due regard for the interests of the insured has little
application with respect to a condition which operates only as between
the insurer and the insured. Condition 3 expressly confers upon the
insurer the right to act in a way which can only be inimical to the
insured's interests. An implied term can scarcely overcome this
express agreement by the insured that the insurer may act to its
detriment.
[86] The situation is different, as the cases illustrate, where an insurer
is empowered by the policy to deal with third parties either by way of
compromising or defending claims or bringing suits against them. The
interests of insurer and insured, which may be different, are affected by
the outcome of the action or defence. One can readily see how the
insurer should be mindful of its insured's position when defending,
suing or compromising. But the capacity of the insurer to injure the
interests of the insured pursuant to a term that only operates between
insurer and insured and which expressly authorises the conduct is of a
wholly different category. It seems to me the implied limitation cannot
have any application to Zurich's reliance on Condition 3."
CAN ANY IMPLIED DUTY BE EXCLUDED?
35. The answer to this question must depend greatly on the nature of any implied
duty that is eventually found to exist under Australian laws. If an implied duty
of the type recognised under the civilian systems were to be "created" by a
decision of the High Court as one applying to all contracts, such as the
obligation to cooperate deriving from Mackay v Dick requiring each party to do
that which was necessary for the performance of the contract, then there would
seem to be little scope for excluding the duty by agreement.
36. There is also an argument that "good faith" is inherent in all common law
contractual principles and that an attempt to imply an independent term
requiring good faith is unnecessary.[36] The authors who propound that theory
argue good faith is inherent in all aspects of contract law because good faith is
the essence of contract. They develop their argument by analysing typical steps
in the formation and performance of an agreement. It is an interesting argument
but not one that convinces me, partly because of the debate as to whether the
law requires both honesty and reasonableness in performing obligations under a
contract or merely honesty. If those authors are correct, however, then the
argument against the ability to exclude such an implied obligation of good faith
would be stronger.
37. If, however, the obligation is one found to arise only in particular contracts or
by implication from particular facts then there should be no reason in theory
why such an implied implication might not be excluded just as fiduciary
obligations that might otherwise arise may be excluded by agreement.
38. In practical terms it is difficult to imagine an attractively drafted term seeking to
exclude an obligation of good faith. It would certainly ring alarm bells for the
other party to the negotiations. Perhaps it could be phrased more palatably if it
were expressed in terms that a party to a contract be at liberty to consult only its
own interests in making a particular decision under the contract but, again, that
should serve only to alarm a prospective party to the contract.
CONSTRUING THE CONTRACT SO THERE IS AN EXPECTANCY OF GOOD FAITH
39. The construction of a contract consistently with obligations of good faith can be
achieved in the exercise of the courts' equitable jurisdiction as Lord Hoffmann,
originally trained in the Roman-Dutch system in South Africa, said in O'Neill v Phillips:[37]
"An example of such equitable principles in action is Blisset v. Daniel (1853)
10 Hare 493 to which Lord Wilberforce referred in In re Westbourne
Galleries Ltd. at p. 381. Page-Wood V.-C. held that upon the true
construction of the articles, two-thirds of the partners could expel a partner
by serving a notice upon him without holding any meeting or giving any
reason. But he held that the power must be exercised in good faith. He said
that "the literal construction of these articles cannot be enforced" and, after
citing from the title "De Societate" in Justinian's Institutes, went on:
'It must be plain that you can neither exercise a power of this
description by dissolving the partnership nor do any other act for
purposes contrary to the plain general meaning of the deed, which must
be this, that the power is inserted, not for the benefit of any particular
parties holding two-thirds of the shares but for the benefit of the whole
society and partnership ..."
In the Australian case of In re Wondoflex Textiles Pty. Ltd. [1951] V.L.R.
458, 467, Smith J. also contrasted the literal meaning of the articles with the
true intentions of the parties:
'It is also true, I think, that, generally speaking, a petition for winding
up, based upon the partnership analogy, cannot succeed if what is
complained of is merely a valid exercise of powers conferred in terms
by the articles. ... To hold otherwise would enable a member to be
relieved from the consequences of a bargain knowingly entered into by
him. ... But this, I think, is subject to an important qualification. Acts
which, in law, are a valid exercise of powers conferred by the articles
may nevertheless be entirely outside what can fairly be regarded as
having been in the contemplation of the parties when they became
members of the company; and in such cases the fact that what has been
done is not in excess of power will not necessarily be an answer to a
claim for winding up. Indeed, it may be said that one purpose of [the
just and equitable provision] is to enable the court to relieve a party
from his bargain in such cases.'
I cite these references to "the literal construction of the articles" contrasted
with good faith and "the plain meaning of the deed" and "what the parties can
fairly have had in contemplation" to show that there is more than one
theoretical basis upon which a decision like Blisset v. Daniel can be
explained. 19th century English law, with its division between law and
equity, traditionally took the view that while literal meanings might prevail
in a court of law, equity could give effect to what it considered to have been
the true intentions of the parties by preventing or restraining the exercise of
legal rights. So Smith J. speaks of the exercise of the power being valid 'in
law' but its exercise not being just and equitable because contrary to the
contemplation of the parties. This way of looking at the matter is a product of
English legal history which has survived the amalgamation of the courts of
law and equity. But another approach, in a different legal culture, might be
simply to take a less literal view of 'legal' construction and interpret the
articles themselves in accordance with what Page-Wood V.-C. called 'the
plain general meaning of the deed.' Or one might, as in Continental systems, achieve the same result by introducing a general requirement of good faith into contractual performance. These are all different ways of doing the same
thing. I do not suggest there is any advantage in abandoning the traditional
English theory, even though it is derived from arrangements for the
administration of justice which were abandoned over a century ago. On the
contrary, a new and unfamiliar approach could only cause uncertainty. So I
agree with Jonathan Parker J. when he said in In re Astec (B.S.R.) Plc. [1998] 2 B.C.L.C. 556, 588:
'in order to give rise to an equitable constraint based on 'legitimate
expectation' what is required is a personal relationship or personal
dealings of some kind between the party seeking to exercise the legal
right and the party seeking to restrain such exercise, such as will affect
the conscience of the former.'
This is putting the matter in very traditional language, reflecting in the word
"conscience" the ecclesiastical origins of the long-departed Court of
Chancery. As I have said, I have no difficulty with this formulation. But I
think that one useful cross-check in a case like this is to ask whether the
exercise of the power in question would be contrary to what the parties, by
words or conduct, have actually agreed. Would it conflict with the promises
which they appear to have exchanged? In Blisset v. Daniel the limits were
found in the "general meaning" of the partnership articles themselves. In a
quasi-partnership company, they will usually be found in the understandings
between the members at the time they entered into association. But there may
be later promises, by words or conduct, which it would be unfair to allow a
member to ignore. Nor is it necessary that such promises should be
independently enforceable as a matter of contract. A promise may be binding
as a matter of justice and equity although for one reason or another (for
example, because in favour of a third party) it would not be enforceable in
law." (My emphasis.)
CONCLUSION
40. This passage from the decision of Lord Hoffman reminds me of the attitude
expressed in a colloquium on good faith organised by the University of Brussels
by the French-speaking editor: "The mistrust of Anglo-Saxon jurists for the
general concept of good faith is equalled only by the imagination which they put
towards multiplying particular concepts which lead to the same results."[38] The
author takes the view that the English legal tradition in seeking to avoid
imposing a general obligation of good faith includes many other concepts
designed to achieve the same end.
41. The use of equity rather than the law to achieve a "good faith" construction of a
contract also helps form a bookend to the examples given at the start of this
paper drawn from Cicero. As the praetors later introduced actions based on
bona fides to supplement and correct pre-existing Roman civil law so did the
chancellor use equitable ideas to reform the English common law.[39]
42. As Lord Justice Bingham said in Interfoto Picture Library v Stiletto Visual Programme [1989] QB 433, 439:
"In many civil law systems, and perhaps in most legal systems outside the
common law world, the law of obligations recognises and enforces an
overriding principle that in making and carrying out contracts parties
should act in good faith. This does not simply mean that they should not
deceive each other, a principle which any legal system must recognize; its
effect is perhaps most aptly conveyed by such metaphorical colloquialisms
as 'playing fair', 'coming clean' or 'putting one's cards face upwards on the
table'. It is in essence a principle of fair and open dealing...
English law has, characteristically, committed itself to no such overriding
principle but has developed piecemeal solutions in response to
demonstrated problems of unfairness. Many examples could be given. Thus
equity has intervened to strike down unconscionable bargains. Parliament
has stepped in to regulate the imposition of exemption clauses and the form
of certain hire-purchase agreements. The common law also has made its
contribution, by holding that certain classes of contract require the utmost
good faith, by treating as irrecoverable what purport to be agreed estimates
of damage but are in truth a disguised penalty for breach, and in many other
ways." 43. In other words, our legal system normally achieves the result that parties should
act fairly in performing a contract even if the common law does not imply a
term that they act in good faith explicitly in every contract.
FOOTNOTES
1. See Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1.
2. De Officiis, Book III [50]-[53] translated by Walter Miller, Loeb Edition, Cambridge: Harvard
University Press, 1913 reproduced at <http://www.stoics.com/cicero_book.html> and at
<http://www.thelatinlibrary.com/cicero/off3.shtml> in Latin.
3. Laidlaw & Co. v Organ (1817) 15 US 178 at 193-194. Both the passage from Cicero and this
decision are discussed in Dafydd Walters, The Concept of Good Faith in Anglo-American Law
in B Glansdorff and ors, La Bonne Foi, Cahier No. 10, Centre de Recherches en Histoire du
Droit at des Institutions, Facultés Universitaires Saint-Louis Bruxelles 1998 at pp. 131-141.
4. M J Schermaier, Bona Fides in Roman Contract Law in R Zimmermann and S Whittaker, Good Faith in European Contract Law (Cambridge UP 2000) at 88-89.
5. Op. cit. 92.
6. See Wigand v Bachmann-Bechtel Brewing Co (1918) 222 NY Rep 272, 277 where the New
York Court of Appeals stated that "every contract implies good faith and fair dealings between
the parties to it". See also the American Law Institute, Restatement (2nd) of the Law of Contracts
(1981) s. 205 which provides that every "contract imposes upon each party a duty of good faith
and fair dealing in its performance and enforcement." But cf the analysis by Gummow J in
Service Station Association Ltd v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84, 91-98.
7. Carolyn Edwards, Article 2 of the Uniform Commercial Code and Consumer Protection: The
Refusal to Experiment (2004) 78 St John's Law Review 663, 691-695.
8. See Professor Ulrich Magnus, Remarks on Good Faith at <http://www.cisg.law.pace.edu/cisg/principles/uni7.html#um>.
9. Contract and its Relationship with Equitable Standards and the Doctrine of Good Faith, The
Cambridge Lectures, 1993 and Contract, Good Faith and Equitable Standards in Fair Dealing
(2000) 116 LQR 66. See the discussion in E Peden, Good Faith in the Performance of Contracts
(LexisNexis Butterworths, 2003) [7.2]-[7.8], pp. 160-170 and the useful discussion of the
meaning of the words by Hollingworth J in Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2004] VSC 477 [120]-[136].
10. (1881) 6 App Cas 251.
11. (1982) 149 CLR 571.
12. A search for the phrase in Queensland's consolidated statutes on Austlii produces 252 results.
13. Peden, op. Cit. [7.23]-[7.26], pp. 193-198.
14. Although Lord Mansfield had described it in 1766 as "the governing principle ... applicable to
all contracts and dealings" in Carter v Boehm (1766) 3 Burr 1905, 1909; 97 ER 1162, 1164.
15. (1992) 26 NSWLR 234
16. See at 263-264. His Honour had written extrajudicially on the topic in greater detail; Contract - the Burgeoning Maelstrom (1988) 1 JCL 15.
17. Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd (1999) ATPR 41-703 at 43,014
[34], referred to in this context by TM Carlin, The Rise (and Fall?) of Implied Duties of Good Faith in Contractual Performance in Australia (2002) 25 UNSW Law Journal 99, 100-101.
18. (2002 76 ALJR 436 [40], [86]-[87] and [155].
19. At [87]
20. (1993) 45 FCR 84.
21. See at 91-98, but cf the views of the New South Wales Court of Appeal in Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349, 363-369.
22. (1993) 45 FCR 84, 96- 97.
23. Op. cit. at 104. Note how the case was treated by the Queensland Court of Appeal in Gold Coast Waterways Authority v Salmead Pty Ltd [1997] 1 Qd R 346 also.
24. See Renard at 271.
25. As to the reluctance of other judges to go as far as Priestly JA went; see GSA Group Pty Ltd v Siebe PLC (1993) 30 NSWLR 573, 579 and Service Station Association Ltd v Berg Bennett & Associates Pty Ltd at 97-98.
26. See Alcatel Australia Ltd v Scarcella and the other cases listed in fn 128 of Carlin op. cit. But cf Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15, [189]-[191] and Australian Hotels Assn (NSW) v TAB Ltd [2006] NSWSC 293 [69]-[80] which indicate a renewed
reluctance in New South Wales to recognise that commercial contracts are a class of contracts
that, as a legal incident, have an implied obligation of good faith. There is now more of a focus
on implication of such a term in particular classes of contracts.
27. See Gold Coast Waterways Authority v Salmead Pty Ltd [1997] 1 Qd R 346, Laurelmont Pty Ltd v Stockdale & Leggo (Queensland) Pty Ltd [2001] QCA 212 and Re Zurich Australian Insurance Ltd [1999] 2 Qd R 203, 213-219 [34]-[82]. There is no great desire to leap into the
fray either; Re Kendells (NSW) Pty Ltd (In Liq) [2005] QSC 064 [58]-[60] where Muir J surveys
the cases helpfully and Highmist Pty Ltd v Tricare Australia Ltd [2005] QSC 115 at [43]. In
Victoria see Essa Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA
228 [3]-[4], [25].
28. (1996) 58 FCR 447, 540-541.
29. See E Peden, Good Faith in the Performance of Contracts (LexisNexis Butterworths, 2003) at
[6.10] p. 130.
30. See the comments of Chesterman J in Re Zurich Australian Insurance Ltd above.
31. See the discussion in Peden, op. cit., at [6.18].
32. Op. cit. at [7.2] p. 159.
33. See Meehan v Jones (1982) 149 CLR 571, 581, 590-591, 597-598.
34. Sir Anthony Mason, op. cit. (2000) 116 LQR at 84.
35. [1999] 2 Qd R 203, 219, [84]-[86].
36. See JW Carter and E Peden, Good Faith in Australian Contracts Law (2003) 19 JCL 155.
37. [1999] 1 WLR 1092, 1100-1101.
38. Prof. Jacques-Henri Michel in La Bonne Foi. at (x):
"L'apport du droit anglo-saxon à la réflexion qui nous est proposée est tout aussi instructif.
Je le résumerais volontiers en une phrase. La méfiance des jurists anglo-saxons à l'égard de
la notion générale de bonne foi n'a d'égale que l'imagination qu'ils ont mise à multiplier les
concepts particuliers qui en tiennent lieu tout en aboutissant aux mêmes resultats.
Aujourd'hui, les besoins nés des échanges internationaux à dimension de la planète amènent
les jurists de la tradition continentale et ceux de la common law à confronter leurs habitudes
les plus enracinées pour en tirer les nécessaries conciliations exigées par la pratique. A lire la
dernière contribution de notre volume, on s'apercoit que le travail est d'ores et déjà entrepris
et il y a tout lieu de penser que la voie est ainsi ouverte à des contacts fructueux qui, un jour
sans doute, autoriseront une nouvelle synthèse."
39. M J Shermaier, op. cit. at 65-66.
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Institute of International Commercial Law - Last updated September 11, 2006
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