Standards Australia has recently released a draft of the AS11000 General Conditions of Contracts (AS11000), which is a “construct only” contract, merging AS2124-1992 and AS4000-1997.
Clause 2.1 of the AS11000 introduces a new overriding obligation on parties to act in good faith towards each other; however the AS11000 does not define “good faith”, leading some to conclude that the obligation is unclear and may make it difficult for parties to precisely identify its scope. This raises a critical issue for parties who may soon have to deal with the practical implications of this obligation.
Fortunately, the courts have already considered the meaning and scope of an express obligation of good faith. For instance, the NSW Court of Appeal found that a contractual obligation of utmost good faith is to be construed having regard to the terms of the contract and the circumstances known to the parties when the contract was formed. The obligation requires:
- co-operation between the parties to achieve the contractual objects;
- honest standards of conduct;
- reasonable standards of conduct, having regard to the party’s interests; and
- parties to have regard to the legitimate interests of the other party but not subordinate their own legitimate interests to the interest of the other contract party.1
A further example is the WA Court of Appeal which preferred to adopt the natural and ordinary meaning of “good faith”, in finding that the only requirement (in a Memo of Understanding) was for the parties to deal with each other honestly.2
The express “good faith” obligation may also have practical implications for the conduct of parties attempting to resolve disputes under AS11000, either at issue resolution meetings (as part of the new early warning procedure), or at conferences convened as part of the dispute resolution procedure.
In that regard, the WA Court of Appeal’s comments regarding the obligation to negotiate in good faith appear relevant. Parties may now be expected to:
- actively engage in the conferral process;
- give serious and genuine consideration to proposals and counterproposals made and received;
- make and respond to proposals and counterproposals in a reasonably timely manner having regard to the time allotted for conferrals and to the nature and scope of the issues to be negotiated, their technical and factual complexity, and their commercial significance to the parties; and
- act honestly.
Parties would also be prohibited from conferring in an arbitrary or capricious manner.
For the above reasons, AS11000 may well encourage an effective dispute resolution procedure.