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Meaning of good faith
Although the dairy code doesn’t define exactly what good faith means, the meaning of good faith reflects historical judge-made law, known as the ‘common law’.
Under common law, good faith requires parties to an agreement to exercise their powers reasonably and not arbitrarily or for some irrelevant purpose.
Certain conduct may lack good faith. For example if one party acts dishonestly or fails to have regard to the legitimate interests of the other party.
The dairy code outlines certain principles that indicate whether a party is acting in good faith. A court may consider these principles to decide whether a party has acted in good faith. A court can also consider other relevant matters.
When to act in good faith
Under the code, all processors, including those that are small business entities, must deal with farmers in good faith in relation to the supply of milk.
All parties must act in good faith at all times. This means acting in good faith:
- during any pre-contractual negotiations
- when exercising any rights or fulfilling any obligations under a milk supply agreement
- when resolving a dispute arising under a milk supply agreement
- when varying or terminating a milk supply agreement.
The obligation to act in good faith may also continue after a milk supply agreement ends.
Example
If a milk supply agreement imposes obligations that will continue after the agreement ends, the parties may be required to carry out these obligations in good faith.
Not acting in good faith
Certain behaviour may not be acting in good faith. A failure to act in good faith is a breach of the code and can lead to fines or penalties.
For example, a party may breach the good faith requirements where they have:
- acted dishonestly
- acted for some ulterior or underhanded motive, or to punish the other party
- acted in a way that undermines or denies the other party the benefits of a milk supply agreement.
Assessing whether you have acted in good faith
In determining whether a party has breached the good faith requirements, the court may also consider whether the other party to the milk supply agreement has acted in good faith.
In assessing whether your conduct meets the good faith requirements, consider whether you have:
- acted honestly in dealings with the other party
- considered any consequences your actions may have on the other party’s interests
- a contractual right - or any other legal basis - to act in that way
- acted without unreasonable delay.
What good faith does not require
Acting in good faith means that processors and farmers must pay attention to each other’s rights and interests. However, the good faith requirement does not:
- require a party to act in the best interests of another party
- stop a party from acting in accordance with their own legitimate commercial interests
- force a party to agree to make changes to an agreement that are requested by the other
- prevent a party from deciding not to renew or extend a milk supply agreement.
Example
While good faith will require parties to act honestly and reasonably during the negotiation of a milk supply agreement, it is unlikely to compel one party to make requested additions or changes to an agreement.
Similarly, a decision by a party not to renew or extend a milk supply agreement does not necessarily mean that the party has not acted in good faith.