Dairy Code: What does the obligation to deal in good faith require

It provides that processors can only purchase milk under a milk supply agreement that complies with the requirements set out in the Dairy Code. 

Section 11 of the Dairy Code requires farmers and processors to deal with each other in good faith, within the meaning of the unwritten law as in force from time to time. Significantly, section 11(3) makes clear that the requirement to deal in good faith applies from precontractual negotiations through to the resolution of disputes that may arise and the variation or termination of a milk supply agreement.

What does Good Faith require?

The meaning of the obligation to act in good faith has been considered by the Court in the context of both cases in which the obligation has been implied into contracts as a matter of general law and in cases involving alleged breaches of the statutory requirement under the Franchise Code. The Federal Court in ACCC v Geowash Pty Ltd¹ reviewed these cases and summarised the meaning of good faith under the “unwritten law” as follows:²

• “the ‘good faith’ obligation imports a normative standard to be observed by the parties in dealings as to matters to which the standard is applied;
• the normative standard embraces an obligation to act honestly and with fidelity to the bargain concluded between the parties;
• the normative standard also embraces an obligation to act co-operatively in matters related to performance;
• the standard does not require a party to subordinate its legitimate interests to those of the counterparty, but it does require due regard to the legitimate interests that both parties have in the performance of the contract they have made;
• conduct which is dishonest, capricious, arbitrary or motivated by a purpose that is antithetical to the evident object of any provision of the franchise agreement or the Code that governs the conduct being scrutinised or conduct with is otherwise motivated by bad faith will not meet the standard;
• where the scrutinised conduct, viewed in the particular context, is objectively unreasonable then the unreasonableness may form part of the basis for a conclusion that there has been a lack of good faith, but objective unreasonableness is insufficient of itself to amount to a lack of good faith; and
• the quality of the scrutinised conduct is to be evaluated having regard to the circumstances of the particular parties, particularly their sophistication, commercial power and the relative significance for each party of the subject matter of the conduct.”

Most of these principles are encompassed and given a more specific focus by section 11(4) of the Dairy Code which sets out a non-exhaustive list of factors to be taken into account in assessing whether a processor or farmer has acted in good faith in dealings with the other, including whether the party has acted honestly and co-operatively to achieve the purposes of the milk supply agreement or whether they have acted arbitrarily, capriciously, unreasonably, recklessly or with ulterior motives or otherwise to undermine or deny the other party’s benefits under the milk supply agreement.

Based on cases dealing with the duty of good faith under the Franchise Code, circumstances involving misleading representations, the provision of incorrect information or the imposition of unreasonable pressure are likely to give rise to a breach of the obligation of good faith under the Dairy Code.³ In many cases, this style of behaviour will also constitute misleading and deceptive conduct under section 18 of the Australian Consumer Law.

As noted above, the general law formulation of good faith does not prevent a party from acting in its own legitimate interests. While this is not expressly acknowledged in the Dairy Code in the same manner as in the Franchise Code,⁴ it is a well-established feature of the general law formulation of good faith. The obligation of good faith does not require a party to prefer the interests of the other party, as is the case in a fiduciary relationship, but rather requires a party to act reasonably and to have due regard to the legitimate interests of both parties in the enjoyment of the contract.⁵ Put another way, an obligation to act in good faith means that a party cannot act in “bad faith”, including acting in a manner that is capricious, dishonest, unconscionable, arbitrary or that is motivated in a way that is antithetical to the object of the contractual power in question.⁶

Enforcement and Remedies

Breaches of sections 11(1) and 11(2) of the Dairy Code gives rise to civil penalties. In the case of a breach by a processor of its duty of good faith, the civil penalty is 300 penalty units unless the processor is a “small business entity”, in which case the civil penalty is 100 penalty units. The civil penalty for a breach of the good faith obligation by a farmer is 100 penalty units.⁷

The ACCC can apply to the Court for the imposition of pecuniary penalties for breach of the Dairy Code.⁸ Further, a breach of the Dairy Code constitutes a breach of section 51ACB of the Competition and Consumer Act. A breach of section 51ACB does not render the milk supply agreement void, either expressly or through the application of the common law principles relevant to illegal contracts.⁹ Rather, the breach gives rise to statutory remedies including the right of a person who has suffered loss or damage as a consequence of the breach to recover damages under section 82 of the Act as well as other remedial orders under section 87. Those remedial orders could, in an appropriate case, include the setting aside of the relevant milk supply agreement.¹⁰ Injunctive relief can also be sought under section 80 by ACCC or another person.

If you need assistance with the Dairy Code, please contact Addisons’ Competition, Consumer & Antitrust team.

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