Acting in Good Faith in Australia: What It Means and How to Comply

As a small business owner, you want your deals to be clear, fair and reliable. That’s where “acting in good faith” comes in - it’s a legal principle that underpins how you negotiate, perform and end contracts in Australia.

It isn’t about being perfect or sacrificing your commercial interests. Instead, acting in good faith is about being honest, reasonable and cooperative so both sides can enjoy the benefit of the bargain. Done well, it reduces disputes, speeds up negotiations and builds trust with customers, suppliers and partners.

In this guide, we’ll break down what acting in good faith means for Australian businesses, when it applies, how to embed it in your contracts and what to do if things go wrong. Our aim is to make the concept practical, so you can put it to work in your agreements and day-to-day operations.

What Does “Acting In Good Faith” Mean In Australian Contracts?

Acting in good faith is about dealing honestly, reasonably and with due regard for the other party’s legitimate interests.

In practice, this usually involves:

• Being honest and not misleading during negotiations and performance.
• Cooperating to achieve the contract’s objectives, not just your own short-term wins.
• Exercising contractual discretions (like “at our absolute discretion”) reasonably and not arbitrarily or for an ulterior purpose.
• Not undermining the other party’s ability to receive the benefit of the contract.

Australian courts have recognised duties of good faith in certain contexts, particularly in long-term, relational contracts (e.g. distribution, franchise, joint venture) and where a party holds a discretionary power. Whether an implied duty exists depends on the contract’s words and the facts - which is why it’s smart to address it expressly in your agreements.

Good faith is not the same as fiduciary duties (which require putting another party’s interests ahead of your own). It also doesn’t force you to accept a bad deal or keep performing a contract that the other party has fundamentally breached. It’s about fair dealing, not surrendering your commercial position.

When Do Small Businesses Need To Act In Good Faith?

1) Pre-Contract Negotiations

Even before a contract is signed, you should avoid conduct that could be misleading or deceptive. Clear, accurate communications about price, scope, and timing help ensure offers and acceptances reflect true agreement. If you’re unsure about contract formation basics, it’s worth revisiting offer and acceptance so you can anchor your process in solid ground.

2) Performing The Contract

Once a contract is on foot, good faith usually means cooperating to make it work. This could involve reasonable notice of changes, responding to queries promptly and following agreed procedures (such as escalation or dispute processes) before taking drastic steps.

3) Exercising Discretion Or Termination Rights

Many contracts give one party a discretion - for example, whether to approve a variation, grant an extension or terminate for convenience. Good faith suggests you exercise these rights honestly and for their intended purpose. That doesn’t remove your rights - it simply means decisions should be rational and proportionate, not arbitrary or designed to sabotage the other side.

4) Varying The Deal

Business needs change. If you need to adjust scope or timing, good faith practically means communicating early and capturing the change in writing. Formalising changes helps avoid disputes about what was agreed, and a simple change process can support smooth amendments to contracts.

How To Build Good Faith Into Your Contracts

The easiest way to manage good faith expectations is to address them expressly in your agreements. Here are practical ways to do that.

Include An Express Good Faith Clause

A short clause can require both parties to act in good faith and cooperate to achieve the contract’s objectives. You can adjust the scope (for example, apply it to certain processes like approvals or variations) and clarify that good faith doesn’t require you to act against your own commercial interests.

Define Clear Processes For Common Scenarios

Ambiguity breeds disputes. Define how the parties will handle changes, delays, quality problems or unforeseen events. For example, a variations clause might specify notice, evidence, timeframes and pricing principles. Clear processes make it easier to act reasonably when issues arise.

Balance Risk With Thoughtful Liability Clauses

Allocate risk fairly and predictably. It’s normal to limit certain losses and cap liability, but make sure these clauses are balanced and clearly drafted so they don’t undercut the commercial intent of the deal. If you’re revisiting your risk settings, it helps to understand limitation of liability clauses and how they interact with exclusions for consequential loss.

Use Plain, Consistent Language

Good faith often fails in practice because parties misunderstand their obligations. Keep definitions tight, avoid contradictions between clauses, and make obligations time-bound where possible. The clearer the drafting, the easier it is to perform the deal cooperatively.

Align Your Standard Terms With The Unfair Contract Terms Regime

If you use standard form terms with consumers or small businesses, Australia’s unfair contract terms (UCT) laws can apply. Clauses that create a significant imbalance and aren’t reasonably necessary to protect your legitimate interests can be unlawful. Ensuring your terms are fair - and operable in good faith - reduces legal risk and improves customer experience.

Practical Ways To Act In Good Faith Day-To-Day

Embedding good faith into daily practice is as important as the contract wording. Here’s how to make it real.

Communicate Early And In Writing

Flag potential issues (delays, supply constraints, scope changes) as soon as you see them. Confirm key steps and decisions in writing so there’s a clear record. This simple habit often prevents small problems from turning into major disputes.

Follow Agreed Processes

Use the variation, approval and dispute resolution processes you included in the contract. If you prefer a different approach, get the other party’s agreement rather than going off-piste. Consistency is a hallmark of reasonable, good faith performance.

Exercise Discretion Rationally

When a decision is “at your discretion,” ask: Is the decision connected to the purpose of this discretion? Is it based on relevant information? Have I considered the other party’s reasonable interests? Document your reasoning so you can show it was made in good faith if questioned.

Protect Confidentiality And Commercial Sensitivities

Good faith doesn’t mean disclosing everything. It’s fair to protect your confidential information and IP. Use a practical Non-Disclosure Agreement when sharing sensitive details, and set boundaries around how information can be used.

Be Realistic About What You Can Deliver

Don’t promise what you can’t deliver. Acting in good faith often starts with setting realistic expectations around scope and timing. If external factors change, reset expectations promptly and propose reasonable options.

What Happens If Good Faith Is Breached?

Remedies depend on your contract and the facts. A failure to act in good faith may be:

• A breach of an express good faith clause.
• Evidence that a party exercised a contractual discretion improperly.
• Part of a broader breach of contract claim, if the conduct prevented the other party from receiving what they bargained for.

Courts can award damages, grant injunctions or issue declarations. In some cases, consistent unreasonable conduct can justify termination - but always check your agreement and get advice before taking that step.

Keep in mind that separate legal regimes may also apply. For example, misleading or deceptive conduct under the Australian Consumer Law can arise from statements or conduct that create false impressions during negotiations or performance. Acting in good faith complements, rather than replaces, these obligations.

Practical Steps If You Suspect Bad Faith

• Identify the clause(s) involved (e.g. approval, variation, termination for convenience, exclusivity).
• Collect evidence: correspondence, meeting notes, timeline of requests and responses.
• Propose a reasonable path forward in writing (this shows you’re acting in good faith).
• Escalate under the contract’s dispute resolution process.
• Get legal advice early if the issue persists or threatens performance.

A constructive, documented approach can resolve most issues without litigation - and if things do escalate, having a clear paper trail matters.

Key Contract Documents And Clauses That Support Good Faith

Getting the right contracts in place makes it easier to act in good faith and enforce it if needed. Depending on your business model, consider the following:

• Customer Contract: Clear scope, service levels, timelines, change control and dispute processes set expectations and reduce room for misunderstandings. A well-structured Customer Contract makes cooperative delivery far simpler.
• Terms Of Trade: If you sell goods or services on standard terms, make sure your Terms of Trade balance risk sensibly (warranties, liability, delivery, returns) and align with good faith and UCT requirements.
• Non-Disclosure Agreement (NDA): Protects confidential information so you can negotiate openly without risking your IP or trade secrets. A straightforward NDA encourages candid, good faith discussions.
• Variation And Change Control: Build a simple, written process for changes. This is one of the most effective ways to operationalise good faith during performance.
• Limitation Of Liability/Exclusions: Calibrated risk allocation supports fair dealing and avoids “gotcha” outcomes. If you’re drafting or reviewing these, refresh your understanding of limitation of liability clauses and consequential loss.
• Contract Formation And Updates: Make sure the way you form the contract (quotes, POs, click-accepts) and manage changes stacks up legally. It helps to revisit offer and acceptance and use written processes for amendments.

Not every business needs all of these, but most will benefit from several. The crucial thing is that your contracts reflect how you actually operate - so your team can act in good faith without friction.

Common Pitfalls To Avoid

Relying On “Absolute Discretion” Without Guardrails

Discretionary rights are useful, but if you use them arbitrarily, you risk allegations of bad faith and potential legal challenge. Build in simple criteria or procedures where appropriate, or at least record your rationale when you exercise a discretion.

Not Documenting Variations

Verbal agreements feel efficient in the moment but create uncertainty later. Use your variation process consistently and keep a tidy audit trail.

Overreaching Liability Caps Or Exclusions

Clauses that significantly undermine the commercial bargain (or clash with the ACL) can be risky and may be unenforceable. If a dispute arises, you could end up debating enforceability as well as liability - which is costly and avoidable.

Confusing “Cooperation” With Giving Up Your Interests

Acting in good faith doesn’t mean subsidising the other party’s mistakes or absorbing unlimited risk. It’s about reasonable, honest dealing within the commercial framework you’ve agreed.

Skipping The Dispute Process

Jumping straight to termination or suspension without following the contract’s dispute steps can backfire. Use the process - it’s there to help both sides act reasonably under pressure.

Key Takeaways

• Acting in good faith means dealing honestly, reasonably and cooperatively so both sides can achieve the contract’s objectives.
• It’s most relevant during negotiations, performance, variations and when exercising contractual discretions like approvals or termination.
• Address good faith expressly in your contracts and support it with clear processes for changes, approvals and dispute resolution.
• Balanced risk allocation (including liability caps and exclusions) and clear customer-facing terms make it easier to perform in good faith.
• If you suspect a breach of good faith, document the conduct, propose a reasonable pathway, follow the dispute process and consider your breach of contract options.
• Keep communications timely and in writing; consistent processes and practical NDAs support open, good faith collaboration.

If you’d like a consultation on building good faith into your contracts and processes, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.