Who does this affect?

Construction industry participants.

What do you need to do?

Ensure that good faith clauses adequately reflect the parties' rights and obligations. We can help.

Authors
Beth Cubitt  
Partner

Nick Kelton  
Senior Associate

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Peter Megens  
Partner
T +61 3 9643 4253

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The case concerned a joint venture contractual arrangement with the object of conducting practice of radiology and related services at a number of clinics. The main issue at stake in this case was the applicability of a restraint of trade clause in the Joint Venture Agreement.

Whilst factually the matter appears to be of little relevance to Construction Law, Justice Einstein made some important remarks in respect of the issue of express and implied duties of good faith.

Relevant Facts

The first plaintiff, PRP was the trustee of the “Pittwater Radiology Trust”. The second plaintiffs were the members of the partnership between PRP and the defendant, PRPL.

The Joint Venture Contract provided an express duty of good faith at clause A4:

The defendant also alleged that an implied duty of good faith existed that purported to extend to the partners and the partnership.

It was alleged that by taking steps preparatory to establishing new radiology clinics within the 5km radius the relevant restraint of trade clause within the Joint Venture Agreement had been breached. Further, it was contended that the implied and express duties of good faith had been breached by the partners.

Implied Duty of Good Faith

On the issue of good faith, Einstein J stated that the current position in New South Wales was that an implied term requiring the exercise of good faith in the performance of such contracts will usually be implied by law into commercial contracts. This implied term would take its place alongside the implied obligations to do all such things as are necessary to enable the other party to have the benefit of the contractual promise and not to hinder or prevent the fulfillment of the purpose of express promises made in the contract.

Einstein J stated that the authorities support the proposition that there is a close association between the concept of “unreasonableness” and “lack of good faith” and cites the decision of Burger King Corp v Hungry Jack’s Pty Ltd [2001] NSWCA 187 in support of this proposition. Einstein J also noted that the implied duty of good faith does not require a party to subordinate its contractual rights.

Notwithstanding His Honour’s comments, Einstein J held that there was no implied term of good faith in the Joint Venture Contract as such an implied term would be inconsistent with the express term in the Joint Venture Agreement and would in effect be the same as an order for rectification of the express term. The express term called for good faith in “relation to the business”, which His Honour considered was limited to the numerous matters involved in running a business.

Accordingly, this decision appears to suggest that the implied duty of good faith does not automatically exist in every agreement and may be implied in or out of a contract as the Court sees fits according to the facts of the case.