Good faith in an era of uncertainty

Until the existence and content of the duty to act in good faith is resolved, the prudent course is:

  • to exercise broad contractual powers and discretions in a way that is consistent with the imposition of a duty of good faith (ideally for a legitimate, documented business reason); and
  • to draft clauses appropriately where a broad power is intended to not be subject to an obligation to act in good faith, or identify the fetters on the power that are appropriate, for example, “the discretion must be exercised honestly, but may be exercised with regard to the party’s own legitimate self-interest”.

Example 1:  A termination for convenience clause might appropriately be worded to allow a party to ‘terminate for any reason, at any time and in its absolute discretion.’ This, together with a term expressly excluding all implied terms, would indicate the intention of the parties to exclude any good faith constraint.

Good faith standards are also imposed into some forms of contracts under some legislative regimes, for example the Franchising Code.