Article 1: Is there a requirement of good faith in construction contracts?

By Adam Wallwork of Mallesons Stephen Jaques Commerical law firm, August 2004

Posted on their website at url http://www.mallesons.com/publications/Construction_update/7613706W.htm

An implied requirement of good faith?

Professors Carter and Stewart in their Journal of Contract Law article "Interpretation, Good Faith and the "True Meaning" of Contracts - The Royal Botanic Decision",¹ contend that recognition of an implied requirement of good faith in the performance and enforcement of contracts is perhaps the most important unresolved issue in Australian contract law. In that article, the authors were particularly critical of the New South Wales Court of Appeal's decisions equating a requirement of good faith with an implied term of reasonableness. They argued forcefully that the imposition of an overriding objective standard of reasonableness into contracts risked altering bargains and potentially subsumed a number of other established legal principles.

Carlin in his article "The Rise (and Fall?) of Implied Duties of Good Faith in Contractual Performance in Australia"² is highly critical of the process of judicial development of the doctrine of good faith in contractual performance in Australia, contending that the doctrine is based on unstable foundations.

Peden in her book Good Faith in the Performance of Contracts³ also faults the approach of the New South Wales Court of Appeal particularly because of its failure to distinguish between good faith and objective reasonableness and its finding that a requirement of good faith is a term implied by law into contracts generally. This second aspect marks a departure from the previous approach to implication of terms by law into particular classes of contract based on necessity or common understanding in particular relationships.

Recent decisions suggest that this criticism is having an impact. This article will examine the status, content and extent of an implied term of good faith. Then it will consider possible approaches of the High Court to this issue. In conclusion, it will examine the implications for parties negotiating and drafting construction contracts.

The implied requirement of co-operation

In an area of law containing a number of uncertainties it is reassuring that there are some established principles. One of these is the existence of an implied requirement to co-operate. As Lord Blackburn stated in Mackay v Dick (1881) 6 App Cas 251:

[As] a general rule ... where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part of the carrying out of that thing, though there may be no express words to that effect.⁴

This principle has been endorsed in recent High Court decisions including Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126. One example where this requirement would apply would be where a contractor cannot proceed to obtain an approval for a project as it is contractually obliged to do without the signature of the principal on the application.......

This articles addresses the contentious issue of building liability raised repeatedly by Jim Georgiou in construction and structures 1. While the article relates to contract law, it is very relevant as unsafe building practice can lead to substantial financial difficulties should it be proven the architect/ construction manager is at fault.