Good faith under the Dairy Code

Under the Dairy Code of Conduct, processors and farmers must deal with each other in good faith. Failure to act in good faith can lead to penalties for breaching the Code.

Obligation to act in good faith

The obligation to act in good faith applies to all dealings between processors and farmers. The obligation extends to all aspects of the relationship including:

  • pre-contractual negotiations
  • performance of the agreement
  • dispute resolution
  • the end (including termination) of an agreement.

The obligation to act in good faith may also continue after a milk supply agreement ends. For 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.

Acting in good faith

The Code does not provide a definition of good faith.

However, in general terms, good faith requires parties to negotiate and exercise their rights honestly, reasonably and not arbitrarily or for some irrelevant purpose.

The Code also outlines certain matters that a court may consider when determining whether a party has acted in good faith. These matters include whether the party:

  • acted honestly and not arbitrarily, capriciously, unreasonably, recklessly or with ulterior motives
  • has tried to cooperate with the other party to achieve the purposes of any relevant milk supply agreement
  • has conducted the relationship in recognition of the need for certainty regarding the risks and costs of supplying or purchasing milk
  • conducted the trading relationship without duress.

A court may also consider whether the aggrieved party has also acted in good faith in their dealings, and take into account other matters it considers relevant.

Conduct that shows a lack of good faith

Whether certain conduct will lack good faith will depend on the circumstances surrounding the conduct.

When considering whether your conduct is in good faith, potential questions to ask include the following:

  • Have you acted honestly with the other party?
  • Have you appropriately considered the consequences of your conduct for the other party’s interests?
  • Have you made decisions without unreasonable delay?
  • Do you have a contractual or other legal right to act in that way?
  • Are you imposing any conditions on the other party that are inappropriate, unreasonable or for an ulterior purpose?
  • Are you acting in a way that undermines or denies a benefit from a milk supply agreement to the other party?

Business best interests

While good faith requires both processors and farmers to have due regard to the rights and interests of the other party, it generally does not require a party to act in the interests of the other party. Neither does it prevent a processor or farmer from acting in their own legitimate commercial interests.

For 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.

No good faith exemption for small business processors

All processors must deal with farmers in good faith in relation to the supply of milk.

However, processors that satisfy the definition of ‘small business entity’ (including processors that have an aggregated annual turnover of less than $10 million) may not be required to comply with other parts of the Code depending upon the time at which they are a small business entity.

More information

Dairy code of conduct

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