Bad faith

In the context of contract law, some argue that the parties to a contract are under the general presumption to deal with each other honestly, fairly and in “good faith”. In some jurisdictions around the world (e.g. the United States of America) the legal doctrine of good faith is settled and forms part of the law (see section 1-203 of the Uniform Commercial Code and section 205 of the Restatement (Second) of the Law of Contracts). However, in Australia (and most common law jurisdictions around the globe) no definitive principle of good faith has been established and some argue that the best way to identify what the principle may encompass is that of “bad faith” (see Robert S. Summers, “The Conceptualisation of Good Faith in American Contract Law”, 2000).

In contract law, “bad faith” refers to the intention of a contracting party to mislead or deceive the other contracting party by performing the contract dishonestly or fraudulently. So, for example, if a building supplier knowingly provides defective building materials to a builder they may be said to contracting in bad faith. Although this in the ordinary sense may amount to contracting in “bad faith”, there is no express prohibition under an Australian law or prerequisite of good faith for the formation of a contract (although it is argued that an implied duty of good faith; see Priestly JA in Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234). However, if a party partakes in this type of behaviour, particularly when it will almost arise in a commercial context, they may be liable to a claim for misleading and deceptive conduct under section 18 of the Australian Consumer Law (ACL).