Many parties to construction contracts are unaware that NSW courts often imply a duty to act in good faith in construction contracts. Although a duty to act in good faith may be included expressly, parties need to be aware of how and when a duty to act in good faith may be implied into construction contracts. Only then will parties be able to reflect their intentions in their construction contracts.
The Duty to Act in Good Faith
What is a Duty to Act in Good Faith?
In Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 (Renard), the NSW Court of Appeal equated a duty to act in good faith to reasonableness. However, this was developed further by the High Court in Paciocco v Australia and New Zealand Banking Group Limited [2015] FCAFC 50. The High Court interpreted a duty to act in good faith to mean:
- to act honestly;
- with a fidelity to the bargain;
- to not act dishonestly and not to act to undermine the bargain entered or the substance of the contractual benefit bargained for;
- act reasonably and with fair dealing having regard to:
- the interests of the parties (which will, inevitably, at times conflict); and
- provisions, aims and purposes of the contract, objectively ascertained.
Recognition of Duty to Act in Good Faith
Since 1992, NSW courts have recognised that a duty to act in good faith may be implied in construction contracts. Renard decided that a duty to act in good faith will be implied into construction contracts if it is ‘necessary to give business efficacy to the contract’.
However, subsequent case law, such as Sundararajah v Teachers Federation Health Ltd [2011] FCA 1031, made clear that the duty to act in good faith will only be implied if it operates as an aid to further explicit terms of the contract. This means it will assist with the interpretation of the existing terms of the contract but not operate to override any of the explicit terms of the contract.
Although courts at the state level, particularly NSW, show acceptance of an implied duty to act in good faith, the Federal High Court is yet to decide on the issue and therefore there is reluctance by some to accept the law as settled.
Duty to Act in Good Faith in Construction Contracts
Although a duty to act in good faith may be implied into contracts, it may apply or be excluded from certain provisions. Below we consider how a duty to act in good faith may be implied into specific provisions of construction contracts.
Termination under show cause regime
In issuing a show cause notice, NSW courts are likely to imply a duty to act in good faith as was the case in Renard and Bundanoon Sandstone Pty Ltd v Cenric Group Pty Ltd; TWT Property Group Pty Limited v Cenric Group Pty Ltd [2019] NSWCA 87 (Bundanoon).
In Bundanoon, the principal issued a notice under the contract requesting the contractor show cause for an alleged breach, and subsequently terminated the contract. The principal then engaged the subcontractor directly. The court found that the principal had a ‘closed mind’ and had already decided to terminate the contract regardless of the contractor’s response. In this case, the court determined that the exercise of a power to terminate under a show cause regime is subject to an obligation of good faith and reasonableness.
Termination for convenience
In contrast to termination under a show cause regime, termination for convenience is unlikely to attract an implied duty to act in good faith as shown in Trans Petroleum (Australia) Pty Ltd v White Gum Petroleum Pty Ltd [2012] WASCA 165. This is because the construction contract expressly provides for an unfettered right to terminate at the principal’s convenience. A duty to act in good faith will not be implied in contradiction to the terms expressly agreed by the parties.
Obligations of a Superintendent
Under the AS Standard AS4000 and AS4902 contracts, there is an obligation for the Superintendent to act in good faith. However, even when this obligation is removed, or when other contracts do not expressly provide for a duty of good faith, a duty to act honestly and impartially may be implied.
Principals often want to ensure that the contract does not contain a duty for the Superintendent to act in good faith. It is important that any express provisions adequately convey the parties’ intention if they wish to exclude a duty to act in good faith. The case of Hervey Bay (JV) Pty Ltd v Civil Mining and Construction Pty Ltd [2008] QSC 58 illustrated that giving the Superintendent the ability to act within its “absolute discretion” is adequate to override any implication of a duty to act in good faith (Hervey Bay amendment). If you are a contractor, you will want to ensure that the Superintendent has an express obligation to act in good faith.
Key Takeaways
Whilst NSW courts will imply a duty to act in good faith, they will not do so when it is inconsistent with the express language of the contract. It is vital that the parties address when a duty to act in good faith will apply.
We suggest that the duty to act in good faith is expressly dealt with in construction contracts:
- If the parties want a duty to act in good faith to apply, they should make express provision in the contract to ensure that both parties understand their duties.
- If the parties do not wish to be bound by a duty to act in good faith, the parties need either make explicit reference to its exclusion or use language that has been tested in court, such as the Hervey Bay amendment.
If you would like to discuss this article with us, please contact Brett Vincent, Partner, or Jordan Russell, Foreign Lawyer on (02) 9261 5900.