By its very nature, capitalism epitomises struggle. Just as the God of Norse mythology, Odin, would reward a fallen warrior’s struggle with a seat in Valhalla, capitalism rewards those who are victorious in the struggle for wealth creation. In the words of the High Court, capitalism can involve the “deliberate and ruthless” conduct of commercial rivals who set out to economically “injure each other”. Economists coin the process one of “creative destruction”. Although capitalism is not perfect, it may well be the least imperfect of rival ideologies.
Good faith mollifies the harsh edges of commercial competition
Good faith represents a standard of conduct for commercial parties. Good faith, in essence, sets out to make competition less ruthless. In a contractual setting, good faith may be an express term of a contract, or it may be implied by the courts (either as a matter of fact or as a matter of law).
The evolving Australian statutory setting is an increasingly important factor in determining the application of good faith in the commercial environment. The Australian Consumer Law (ACL) aims to protect consumers. For example, section 21 — unconscionable conduct — extends the scope of the common law notion of unconscionable conduct. The extension comes via the ACL allowing a court to consider a wide range of factors to determine whether conduct has been unconscionable. The concept, good faith, is included in this range of factors. Additionally, the ACL’s unfair contract term protections depend on the notion of fairness. The notion of fairness is integral in considering the concept, good faith. Importantly, the ACL’s unfair contract term protections will extend to small business contracts on 12 November 2016.
An express obligation to act in good faith — enforceable?
The Victorian Supreme Court recently considered an express obligation to act in good faith in North East Solutions Pty Ltd v Masters Home Improvement Australia Pty Ltd (Masters).
Under a written contract, North East Solutions (NES) agreed to build a Masters store for Woolworths. The contract included an express term of good faith where the contract could only be terminated if the “parties, acting reasonably and in good faith, were unable to resolve” their differences in relation to constructions costs. The rapid rollout of Masters stores meant that precise design details were not available at the time of contracting. Disagreement over construction costs ensued. Woolworths claimed that the good faith obligation was insufficiently certain to be enforceable and, in any case, was only an agreement to negotiate in good faith.
Justice Croft ruled in favour of NES. Given the surrounding context, the expressed obligation of good faith was clear and had a “sensible and ascribable meaning”. His Honour quoted Sir Anthony Mason’s depiction of the concept of good faith to include three related notions, namely “an obligation on the parties to cooperate in achieving the contractual objects (loyalty to the promise itself); compliance with honest standards of conduct; and compliance with standards of conduct that are reasonable having regard to the interests of the parties”. Woolworths’ conduct lacked good faith as it acted with “extraneous objects in mind” which were not fully disclosed to NES (plans for another location and undisclosed construction-cost budgets). The obligation required this information to be shared to enable both parties to resolve their differences.
Australian statutory developments and good faith
Justice Croft also drew attention to the recent Full Court of the Federal Court Decision in Paciocco v Australia and New Zealand Banking Group Ltd (2015) 321 ALR 584 (Paciocco). This case involved the issue of bank fees and whether they constitute a penalty at common law or equity.
In Paciocco, Chief Justice Allsop noted the importance of the “will of parliament” in considering the concept, good faith. The issue concerned the equivalent ACL consumer protections contained in the Australian Securities and Investments Commission Act 2001 (Cth); these relate to financial transactions. His Honour remarked that it is “difficult to accept the notion that ruthless commerce, red in tooth and claw, is now acceptable in Australia.” We agree.
Good faith will cover three-quarters of Australia’s Gross Domestic Product (GDP)
The ACL provides protection to consumer transactions. Consumer spending accounts for roughly 60% of Australia’s GDP. As of 12 November 2016, unfair contract term protections will also cover small business contracts. Small business transactions make up about 15% of GDP (not counting those transactions already embedded in the consumer classification).
By the end of 2016, three-quarters of the final spending in Australia’s economy will be expressly cloaked in a statutory obligation of good faith. Of the remaining commercial activity, as Masters demonstrates, good faith can be of sufficient clarity to be an enforceable obligation.
Have we reached Valhalla?
The gates of Valhalla are in sight. A reasonable mind could ask, if three-quarters of the economy’s transactions are cloaked in some form of statutory obligation of good faith, perhaps the time is ripe to ask not whether a general obligation to act in good faith in the commercial setting exists, but to ask in what form the obligation exists, and whether there are any exceptions to it.
Although some clarity on these issues from the High Court is desirable, the implication for commercial parties is clear: the obligation, good faith, will play a larger role in mollifying the “red in tooth and claw” nature of commerce. To complete our “Vikings” Journey — to quote Ragnar Lothbrok: “It’s about loyalty. And Trust...” and therein is good faith’s rub.