Alternative dispute resolution includes negotiation, mediation and arbitration and differs from litigation. In contrast, the proceedings are conducted in private and kept confidential. Furthermore, the resolution which you agree to does not necessarily have to be binding. There is usually no judge. There is usually no need to tell the other party everything you know.
This all sounds reassuring. Except when you start to think about what could possibly be keeping the other party from abusing this process.
That’s how we come to good faith.
When must I act in good faith?
In Australia, under s 27 of the Civil Procedure Act 2005 (NSW), if you have been referred to mediation by a judge, it ‘is the duty of each party to proceedings’ to act ‘in good faith’.
Additionally, if your commercial agreement has a Dispute Resolution Clause, it is likely there might be a term that requires both parties to attend and participate in the negotiation, mediation or arbitration in good faith.
Defining ‘good faith’
According to the High Court of Australia, to act in good faith means to deal fairly, reasonably and honestly with the other party, to have regard to their interests and not act unpredictably just to trouble them (Commonwealth Bank of Australia v Barker [2014] HCA 32).
It is important to consider when you are in a mediation that requires you to act in good faith whether you are acting for an ulterior purpose, are imposing anything on the other party or are single-mindedly pursuing your own objectives. Participating in a mediation in this way may mean you are not acting in good faith.
In saying this, there is no single, fixed definition of ‘good faith’. In fact, your Dispute Resolution Clause may define ‘good faith’ a certain way. Importantly, not all clauses to act in good faith are contractually binding.
However, when it comes to court-referred mediation, the obligation to act in good faith is not ‘opt in’. You are legally bound to ‘act honestly and with a fidelity to the bargain’ (Paciocco v Australia and New Zealand Banking Group Ltd [2015] FCAFC 50). The law is not asking you to act against your own interests or even to put the other party first, but it intends to ensure that both parties work towards resolving their dispute in a way that is mutually beneficial.
Why acting in good faith is beneficial to both parties
Acting in good faith often involves laying all your cards on the table, treating the other party respectfully and being open to compromise. All these qualities do not just show the other party that you are serious about solving your dispute and enhance your relationship with them, but bring about what the justice system intends – a quick, affordable and just resolution to your dispute. Acting in good faith is the future of dispute resolution.
In fact, an obligation to act in good faith can be found in other parts of Australian Law, including the Franchising Code of Conduct and possibly as an implied term in your contract.
If you would like to add a Dispute Resolution Clause to your contract, have concerns about your Dispute Resolution Clause or are uncertain about how to move forward in a commercial dispute, contact OpenLegal.
Anna is a Paralegal at OpenLegal and is currently completing her Bachelor of Laws / Arts at the University of New South Wales.
Phil is a director at OpenLegal. He has over 16 years experience working in private practice and in-house counsel in Sydney and London, giving him expertise in employment law, IP, finance, leases, dispute resolution, insurance and contracts.
