KJSbwGood faith clauses are finding their way into more and more commercial contracts. Traditionalists amongst lawyers will tell you that they are meaningless and that the only provisions which belong in a contract are precise statements of what each party must do, at what price, when and what  happens if they don’t do what they are supposed to. Warm and fuzzy motherhood statements, they say, do not belong in contract documents, which should be bullet proof.

But good faith clauses are fighting back. Late in 2010, the New South Wales Court of Appeal decided a case involving a heads of agreement between Macquarie International Health Clinic Pty Limited and Sydney South West Area Health Service, relating to the development by Macquarie of a private hospital and a car park on Royal Prince Alfred Hospital land, which required the parties to act with the utmost good faith to one another.

After the agreement was signed, Area Health created a strategic plan which did not propose any development consistent with the agreement with Macquarie.  Area Health never mentioned this to Macquarie and was nailed  under the good faith clause because disclosure would have made a substantial difference to Macquarie’s expectations under the heads of agreement.

The Court said that the good faith promise must be construed having regard to the terms of the contract and the circumstances known to the parties in which it was entered into. It said that a contractual obligation of good faith embraces an obligation on the parties to cooperate in achieving the contractual objects, compliance with honest standards of conduct, and compliance with standards of conduct that are reasonable having regard to the interests of the parties.  It said that a contractual obligation of good faith does not require a party to act in the interest of the other party or to subordinate its own legitimate interest to the interest of the other party but it does require it to have due regard to the legitimate interests of both parties.

So, parties entering heads of agreement, letters of intent, memorandum of understanding or formal contractual documents should be careful about good faith clauses.  If you require advice in relation to the negotiation or preparation of contract documents, the commercial team at Everingham Solomons can assist you because Helping You is Our Business.

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