Australia: Good faith in construction contracts: A bridge too far?

Standards Australia is proposing to change its standard contract to introduce an express obligation of good faith on the parties. But imposing such an obligation in 'hard dollar' construction contracts carries risks for parties and will potentially lead to more disputes.

A PROPOSAL FOR GOOD FAITH TO BE FRONT AND CENTRE

Standards Australia has released a draft of its proposed new standard general conditions of contract, DR AS 11000:2015.

AS 11000 is intended to replace AS 2124:1992 and AS 4000:1997. Both these standards are widely used in construction and any change to the terms in AS 11000 is likely to be influential.

One significant proposed change is the introduction of an express obligation of good faith on the parties. The contract provides that the parties agree 'to act reasonably in a spirit of mutual trust and cooperation, and generally in good faith towards the other'.

Another significant proposed change is that the parties, as part of their obligations to act in good faith, are required to give 'early warning' to the other when they become aware of an event or circumstance which may impact upon time, cost, scope or quality under the contract and may become an issue under the contract.

Adopting an early warning procedure as part of the standard contract is a sensible step, and the New Engineering Contracts and GC21 form of contracts already provide for some form of early warning.

But including an express obligation of good faith in construction contracts without regard to the risk allocation and commercial imperatives driving different delivery structures could be problematic.

'Good faith' is a concept often used in contracts to impose a certain standard of behaviour on the parties in performing their obligations. It is prevalent in long term contracts, contracts which include an agreement for the parties to agree on a certain matter in the future, and also alliance or other relationship-style contracts.

Alliancing contracts are well-suited to the good faith concept as remuneration is based on a cost-plus performance structure with the parties agreeing to adhere to alliance objectives which benefit both parties. It is similarly applicable to longer term contracts, where pricing is subject to adjustment.

However, in 'hard dollar' construction contracts, the parties generally go through a competitive bidding process with risk premiums intrinsically linked to the risk allocation under the contract. They are based on a commercial 'adversarial' approach to contracting and procurement. Here, an express duty of good faith poses risks and consequences for the parties.

By comparison, the NEC and GC21 contracts do not have general obligations of good faith, but parties under those contracts are required to do 'as stated in the contract and in a spirit of mutual trust and co-operation' (in the case of NEC) or 'all [they] reasonably can' to 'co-operate' and 'avoid hindering the performance of the other party' (in the case of GC21). These reflect, and are consistent with, terms implied in all commercial contracts.

UNDERSTANDING GOOD FAITH UNDER AUSTRALIAN LAW

As the Hon Marilyn Warren AC, Chief Justice of the Supreme Court of Victoria, wrote, 'whole forests have been felled to produce judicial and academic writing on the meaning of good faith in contract law'¹.

The content of an obligation to act in good faith has not been exhaustively defined, but has been held to mean the parties must cooperate to achieve contractual objectives, compliance with honest standards of conduct, and compliance with standards of conduct that are reasonable having regard to the interests of the parties; but the obligation does not require one party to subordinate its own legitimate interests to the other party's². Some judges have taken the view that 'good faith' means the absence of bad faith³.

BUT IS THERE AN IMPLIED DUTY OF GOOD FAITH IN ANY EVENT?

While there have been some cases in which courts have found an implied obligation of good faith, that conclusion has not been universally accepted, with courts in different states and territories taking varying positions⁴. The High Court has declined the opportunity to clarify the issue⁵.

Internationally, the position varies. The United States' Uniform Commercial Code expressly imposes an obligation of good faith on parties to contracts, defined as 'honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade'. Similarly, the Supreme Court of Canada recently held that parties have a duty to act in good faith in contracts, requiring parties not to 'lie or mislead' or engage in 'active dishonesty'⁶. (In Australia, the Australian Consumer Law already provides that parties should not engage in misleading and deceptive conduct.)

But in England, there is no general doctrine of good faith in English contract law⁷ and one of the UK's most progressive judges, Lord Steyn, wrote, 'I have no heroic suggestion for the introduction of a general duty of good faith in our contract law. It is not necessary.'⁸. Singapore's Court of Appeal has refused to imply a duty of good faith in contracts⁹.

AN EXPRESS OBLIGATION CAN MODIFY CONTRACT TERMS

But the draft AS 11000 document goes further than assuming an implied obligation of good faith; it expressly imposes one. This is likely to lead to uncertainty.

First, the draft AS document does not define good faith, which as noted above, is a term authoritative definition of which has proved elusive.

Secondly, A fundamental difference between an implied duty of good faith and an express obligation is that an implied term cannot be inconsistent with the express terms of a contract. But an express term can modify the effect of other terms in the contract: a general principle of construction is that a document must be read and construed as a whole. The obligation will apply to all of a party's powers under a contract (for example, a power to terminate for convenience).

It raises the question: does an express and unqualified duty to act in good faith go too far? Will parties appreciate the potential (and subtle) risks and costs in putting a framework for complying with their obligations, and the increased disputation that may, ironically, entail.

If Standards Australia adopts the approach in introducing an express obligation to act in good faith, they should define what good faith means. The parties to contracts will also need to consider the behaviour that is appropriate for the particular transaction.

HORSES FOR COURSES APPROACH

Contracts for delivery projects should have regard to the project delivery structure (including risk allocation and remuneration structures) and the commercial imperatives and mechanisms to drive performance under the different types of structures.

An overarching obligation to act in good faith will be more appropriate in delivery structures such as relationship contracting and alliancing and long term contracts, whereas imposing such an obligation in 'hard dollar' contracts may create different expectations and consequences and scope for disputes.

Footnotes

¹ Hon M Warren, 'Good faith: Where are we at?' (2010) 34 Melbourne University Law Review 344, 345 (PDF).

² See Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184.

³ See Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd (2010) 41 WAR 318; [2010] WASCA 222.

⁴ See Trans Petroleum (Australia) Pty Ltd v White Gum Petroleum Pty Ltd (2012) 268 FLR 433; [2012] WASCA 165.

⁵ Eg Commonwealth Bank of Australia v Barker (2014) 88 ALJR 814; [2014] HCA 32.

⁶ Bhasin v Hrynew 2014 SCC 71.

⁷ See Mid-Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (t/a Medirest) [2013] EWCA Civ 200.

⁸ 'Contract Law: Fulfilling the Reasonable Expectations of Honest Men' (1997) 133 Law Quarterly Review 433, 439.

⁹ Ng Giap Hon v Westcomb Securities (Singapore) Ltd [2009] 3 SLR (R) 518.

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