Act In Good Faith: Meaning And Practical Implications For Australian Contracts

When you’re running a small business, relationships matter. Whether you’re dealing with customers, suppliers, landlords, franchise partners, or co-founders, you’re constantly making decisions that affect trust and long-term outcomes.

That’s where the idea of acting in good faith comes in. You’ll often see “good faith” language in contracts, and you’ll also hear it used in disputes when things start to go wrong (for example, one party says the other “didn’t act in good faith” during negotiations or performance).

But what does “act in good faith” actually mean in Australia? Is it a legal duty? Can you breach it even if you’ve technically followed the contract? And what should you be doing in practice to reduce your risk?

Below, we’ll break down the in good faith legal meaning in a business context, explain how courts tend to look at it, and share practical steps you can take to protect your position in contracts.

Note: This article provides general information only and does not constitute legal advice. Because good faith obligations can depend on the contract, the conduct, and the jurisdiction, consider getting advice for your specific situation.

What Does “Act In Good Faith” Mean In Australian Law?

In a business context, to act in good faith generally means you behave honestly and fairly toward the other party, and you don’t undermine the purpose of the agreement.

In plain English, good faith usually involves things like:

• Honesty (not misleading the other party or hiding key information in a deceptive way)
• Fair dealing (not using your power in an unreasonable or opportunistic way)
• Cooperation where cooperation is needed to achieve the contract’s purpose
• Not acting for an “improper purpose” (for example, using a contractual discretion to punish the other party rather than protect your legitimate interests)

One important point: acting in good faith doesn’t usually mean you have to be “nice”, accept bad commercial outcomes, or put the other party’s interests ahead of yours. You can still negotiate hard, protect your profit, and enforce your rights. The issue is how you do it.

Is There A General Legal Duty Of Good Faith In Contracts?

In Australia, good faith can arise in different ways:

• Expressly: the contract includes a clause requiring the parties to act in good faith (common in franchising, long-term supply arrangements, joint ventures, and some commercial leases).
• Implied: in some cases, courts may imply obligations of good faith into a contract, depending on the wording, the nature of the relationship, and the commercial context. However, this isn’t automatic across all contracts, and the approach can vary between courts and fact scenarios.
• By statute: some laws and industry codes require parties to act in good faith in particular settings. For example, the Franchising Code of Conduct imposes a statutory obligation on franchisors and franchisees to act in good faith in their dealings with each other.

Because “good faith” can be fact-dependent, the safest approach is to assume your conduct may be assessed not only by what the contract says, but also by what a reasonable commercial party would expect in the circumstances.

Why Does Good Faith Matter For Small Business Contracts?

Small business contracts often involve ongoing performance: monthly deliveries, recurring service work, staged payments, renewals, variations, and “business as usual” communications that shape the relationship over time.

That’s why good faith comes up so often. Even if you have a signed agreement, disputes commonly happen around:

• price increases and variations
• service levels and performance standards
• renewals, extensions, and termination
• decision-making powers (for example, where one party has “absolute discretion”)
• negotiations when circumstances change (delays, supply chain issues, cost blowouts)

If you run into a dispute, an allegation that you failed to act in good faith can increase your legal risk because it may:

• support a claim that you breached the contract (even if the breach isn’t obvious)
• undermine your ability to rely on a discretion, clause, or termination right
• affect remedies (damages, injunctions, or orders for specific performance)
• push the matter into a more complex (and expensive) dispute

Good faith is also a drafting issue. A poorly drafted contract can accidentally create “grey areas” where one party thinks they have flexibility, but the other party expects cooperation or fair dealing.

Where You’ll Commonly See “Act In Good Faith” In Business Agreements

Good faith obligations are especially common in agreements where the parties are locked into a relationship for a long time, or where one party has significant power over the other.

Supply And Services Agreements

In supplier and services arrangements, disputes often arise around variations, delay, quality, exclusivity, and forecasting. A good faith clause may require both parties to:

• cooperate on practical steps to meet timelines
• share information relevant to performance (within reason)
• avoid unreasonable obstruction or “gotcha” tactics

For service businesses, having clear Service Agreement terms can reduce confusion about deliverables, change requests, and what happens when the scope shifts.

Commercial Leases And Renewals

In leasing, “good faith” often becomes relevant around negotiations for renewal, consent to assignment/sublease, make good requirements, and disputes about outgoings or rent review processes.

Because the lease can shape your business’s cashflow and flexibility, it’s worth getting the terms reviewed early with a Commercial Lease Review so you understand where you have discretion and where you may need to act reasonably or cooperatively.

Franchising And Long-Term Growth Deals

Franchise relationships (and franchise-like arrangements) are a common area where good faith issues come up, because there’s an ongoing relationship and often a power imbalance. Even outside strict franchising, “good faith negotiation” clauses can be used when one party wants flexibility to expand, restructure, or make system changes.

Shareholder And Co-Founder Relationships

Good faith is also relevant internally, especially where business partners have decision-making obligations and voting rights. A clear Shareholders Agreement can reduce the chances of conduct being labelled as unfair or opportunistic when decisions get tough (like raising capital, issuing new shares, or removing a director).

Does Acting In Good Faith Mean You Can’t Enforce Your Contract?

No. Acting in good faith doesn’t stop you from enforcing your rights.

For example, if your contract says you can suspend services for non-payment, you may still be able to suspend services. The key is how you exercise that right and whether your conduct aligns with the contract’s purpose and commercial expectations.

Courts often look at things like:

• Was the decision honest? (or was it a pretext?)
• Was it consistent with the contract? (including the purpose of the deal, not just one clause in isolation)
• Was it arbitrary or capricious? (for example, changing your position without reason)
• Did you give the other party a genuine chance to comply? (where that would be commercially expected)

So, you can still protect your business. The goal is to make sure you’re doing it in a way that is defensible and well-documented.

Good Faith Vs “Being Reasonable”

People often mix up “good faith” with “reasonableness”. They’re related, but not always the same.

Some contracts impose an obligation to act reasonably (for example, “consent must not be unreasonably withheld”). Others impose good faith obligations (for example, “the parties must negotiate in good faith”). Some do both.

Practically, the overlap is that both concepts discourage unfair surprise and misuse of power. But good faith can be broader because it may involve honesty, cooperation, and purpose-focused conduct.

Practical Ways To Show You’ve Acted In Good Faith (And Reduce Dispute Risk)

If a dispute arises, it’s much easier to defend your position when your conduct is consistent, transparent, and backed by evidence.

Here are practical habits small businesses can build into their contracting process.

1. Draft Contracts That Match How You Actually Operate

A common problem is signing a template contract that sounds “standard”, but doesn’t match how work is delivered in real life.

For example, if you often agree to scope changes by email or text, make sure your contract clearly addresses variation requests, approval processes, and how pricing changes work. Otherwise, you may end up with an argument that you “should have cooperated” or that your refusal was inconsistent with the relationship.

For customer-facing businesses, clear Terms of Trade can help align expectations about payment timing, late fees, delivery, and dispute processes.

2. Be Careful With “Sole Discretion” Powers

Some contracts give one party a discretion, such as the ability to:

• approve or reject variations
• set or change standards
• determine whether work is satisfactory
• decide whether to renew the agreement

Even if the clause says “absolute discretion”, exercising it harshly, unpredictably, or for an improper purpose can trigger a good faith dispute.

If you need broad flexibility, it can help to draft the clause so the discretion is tied to legitimate business interests or objective criteria. If you’re on the receiving end, you may want limits, notice periods, or review rights.

3. Document Key Decisions (Especially When You Say “No”)

Good faith disputes are often evidence disputes. One party says the other acted unfairly; the other party says they acted reasonably. Without records, it becomes harder to prove what happened.

As a practical step, keep brief written records when you:

• reject a variation request
• terminate or threaten termination
• issue a breach notice
• change pricing or delivery terms
• refuse consent (assignment, subcontracting, etc.)

This can be as simple as a follow-up email confirming what was discussed, what decision you made, and why.

4. Use Clear Communication And Avoid “Ambush” Conduct

From a risk perspective, “ambush” behaviour is one of the easiest ways to get accused of failing to act in good faith.

Examples might include:

• waiting for a minor breach, then immediately terminating without warning (where warning would normally be expected)
• refusing to respond to reasonable operational requests, then later alleging non-performance
• silently allowing a pattern to develop, then claiming the other party “should have known” it was unacceptable

That doesn’t mean you have to tolerate ongoing issues. It just means you should address them early and clearly.

5. Make Sure Your Internal Documents Support Your External Promises

Good faith arguments aren’t only about the contract itself. They can also be influenced by what you represented during negotiations, onboarding, marketing, or operational discussions.

For example, if your website says “cancel anytime” but your written agreement locks customers into a fixed term, you may be increasing the risk of a dispute about fair dealing and expectations.

If you collect customer data, being upfront about how you use it (and aligning your actual practices with your policy) also reduces trust issues. A tailored Privacy Policy is an important part of that consistency.

Key Takeaways

• To act in good faith in Australia generally means acting honestly, fairly, and in a way that supports (rather than undermines) the purpose of the contract.
• Good faith obligations can be express (written into the contract), implied (in some cases, depending on the contract and context), or influenced by statutory requirements in certain industries (such as franchising).
• Good faith doesn’t stop you from enforcing your rights, but it can affect how you’re expected to exercise discretion, negotiate changes, and manage disputes.
• Clear contracts that reflect real operations-supported by consistent communication and written records-make it much easier to show you acted appropriately if a dispute arises.
• If you rely on “discretion” clauses (or you’re signing an agreement where the other party has broad discretion), it’s worth checking whether the drafting properly protects your business and reduces grey areas.

If you’d like help reviewing or drafting a contract so your business is set up to act in good faith (without giving away unnecessary leverage), you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.