Under the Horticulture Code, traders and growers must deal with each other in good faith. Failure to deal in good faith can lead to penalties for breaching the Code.
Although the Code does not define exactly what good faith means, it does state that the obligation of good faith is to reflect the unwritten law. This is judge-made law (known as the ‘common law’).
Under the unwritten 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 if one party acts dishonestly, or fails to have regard to the legitimate interests of the other party.
Australian courts have found business dealings to be not in good faith when they involve one party acting for some ulterior motive, or in a way that undermines or denies the other party the benefits of a contract.
The Code outlines certain matters that a court may consider when determining whether a party has acted in good faith. These matters are whether the party:
- acted honestly and not arbitrarily
- conducted the trading relationship without duress.
A court can also take into account other matters it considers relevant.
The obligation to act in good faith applies to dealings between traders and growers. The obligation extends to all aspects of the relationship between the grower and trader, 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 horticulture produce agreement ends. For example, if a horticulture produce agreement imposes obligations that will continue after the agreement ends, the parties may be required to carry out these obligations in good faith.
Parties cannot exclude or limit the obligation to act in good faith in a document, including the horticulture produce agreement. Terms are void if they limit the obligation to act in good faith in any way.
See: Fines & penalties
While good faith requires a party to have due regard to the rights and interests of the other party, it does not require a party to act in the interests of the other party. Neither does it prevent a party from acting in their own legitimate commercial interests.
For example, while good faith will require parties to act honestly and cooperatively during the negotiation of a horticulture produce 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 trading relationship does not mean that the party has not acted in good faith in negotiating the agreement.
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:
- Have you been honest with the other party?
- Have you considered the other party’s interests?
- Have you made timely decisions?
- Have you consulted with the other party regarding issues/proposed changes?
- Do you have a contractual right to act in that way?
- Are you imposing any conditions on the other party? Are those conditions necessary to protect your interests?
- Where a dispute has arisen, have you attempted to resolve the dispute (either directly with the other party, or through mediation)?
- Are you acting for some ulterior purpose?
Negligent handling of produce
A peach farmer sells his produce directly to a fruit wholesaler who resells it through a wholesale market. The wholesaler is a merchant under the Code.
Under the agreement between the two parties, the merchant collects the peaches directly from the farmer. The truck the merchant uses is not refrigerated.
On a particularly hot day, the peaches spoil in transit to the merchant’s facilities. The merchant tells the farmer that they will not pay for the produce because it had spoiled. The merchant then further demands compensation for lost revenue.
In this case the merchant has not dealt in good faith as it transported the produce without due care, and then unreasonably penalised the farmer for a problem out of their control.
Dishonest business dealings
An avocado farmer uses an agent to sell their produce to the market. The farmer instructs the agent to obtain the best possible price for the produce.
The agent finds a buyer who is willing to pay $40/tray for the farmer’s produce. However, the agent tells the farmer he was only able to obtain a price of $35/tray. The agent then keeps the difference between the price the buyer paid, and the price quoted to the farmer.
The agent has not dealt in good faith here because they acted dishonestly in order to get a financial benefit for themselves. At the same time the agent denied the farmer the revenue it was entitled to under the agreement.
Pressuring other party to act illegally
A citrus farmer has an existing relationship with a wholesale fruit marketer (merchant under the Code), but does not have a horticulture produce agreement.
Understanding that the Code requires growers and merchants to enter into horticulture produce agreements before trading with each other, the merchant asks the grower to negotiate an agreement before the next shipment. The merchant explains that it is illegal to trade in horticulture produce without a horticulture produce agreement.
The farmer refuses to enter into an agreement, and instead continues to supply his produce to the merchant. The farmer demands that the merchant pay for the delivered produce or return it at their own cost.
The farmer has not dealt in good faith in this situation as it has put the merchant in a situation where it has to either break the law or incur additional costs to return the produce.
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