The notion of "good faith" has been used in commerce in an attempt to give effect to commercial commitments and common practices which are commonly honoured in business but which the law does not recognise as legally binding. This lack of legal recognition has caused the business community considerable difficulties in the making and performance of contracts for complex arm's length transactions.
Good faith in the making of contracts addresses the issue of pre-contractual promises that the existing law considers unenforceable. The lengthy process of negotiating complex transactions calls for the recognition of binding commitments at the pre-contractual stage. The law does not recognise a pre-contractual agreement to negotiate. A requirement of good faith should be applicable to the making of contracts that require progressive stages in their conclusion. The law should recognise pre-contractual commitments if the parties so intended.
Good faith may also be used as a mechanism for the finalisation of contracts. The complexity of some transactions leaves no option for the parties but to conclude their bargain notwithstanding the absence of certain terms. An objective good faith is an appropriate mechanism to complete these outstanding terms.
Good faith in the performance of contracts encompasses honesty and reasonableness and intends to control the exercise of contractual rights according to common standards in business practices. Good faith also concerns the performance of obligations that the parties have left undermined at the time of contracting.
Honesty and reasonableness in the exercise of contractual rights do not always meet the test of necessity for their implication under the present common law criteria for the implication of terms. In the Renard decision (1992) 26 NSWLR 234, Priestley JA was able to imply reasonableness in the exercise of contractual rights by widening the common law test of necessity for the implication of terms.
Subsequent cases have not followed this reformulated test of necessity. Only the revised test facilitates the implication of good faith. Application of the previous narrower test does not permit the importation of community standards as limitations upon the exercise of rights. If the narrower test continues to apply, there has been no development in the existing law.
The business community anticipated that alternative methods of dispute resolution would produce fairer outcomes than those obtained through the courts. This was a misconception. Alternative dispute resolution methods do not change the legal principles applicable to the substantive matters in dispute. The causes of these difficulties are the unfettered discretionary rights and the failure to enforce honesty and reasonableness in the performance of contractual obligations. The alternative methods address the symptoms not the causes of the difficulties experienced by business.
A major cause of construction disputes is the vagueness and incompleteness of the scope of work at the time of tendering and contracting. The lack of particulars of large construction projects prevents the parties from finalising essential terms at the time of contracting.
Good faith and reasonableness are necessary in construction projects because of the complex interrelations between the parties in carrying out the work. New methods of contracting such as partnering and alliances have utilised good faith as the mechanism to fill the gaps that were otherwise unavailable at the time of contracting. However, such "contractual arrangements" are probably unenforceable under the present legal principles.
The notion of "good faith" in business is worthy of legal recognition. The business community has moved ahead of the law by incorporating an obligation of good faith in interim agreements made in the course of negotiating contracts. Good faith has also been utilised in partnering and alliance agreements for large projects. It is time for the law to catch up with business.