Good Faith In Australian Contract Law: What Businesses Must Know

When you’re running a business in Australia, contracts are part of everyday life - with customers, suppliers, partners, investors and employees. Most owners focus on price, scope and timelines (and that’s important), but there’s a broader principle that often shapes how contracts are performed and enforced: good faith.

Understanding what “acting in good faith” means - and when it applies - can help you negotiate smarter, avoid disputes and protect your rights without giving up commercial leverage. In this guide, we unpack the concept in plain English, explain when the duty can arise, what it looks like day-to-day, and how to manage the risk in your contracts.

What Is ‘Good Faith’ In Australian Contract Law?

In simple terms, acting in good faith is about performing and exercising contractual rights honestly, fairly and for the purpose they were agreed. In practice, it usually includes obligations to:

• Act honestly and not mislead or deceive the other party.
• Avoid acting capriciously or for an ulterior purpose that undermines the bargain.
• Cooperate where necessary so both parties can enjoy the contractual benefits.

Good faith does not require you to put the other party’s interests ahead of your own, waive your rights, or accept a bad deal. You can still act commercially and protect your position - you just can’t do so by acting dishonestly, arbitrarily or in a way that defeats the contract’s objects.

There isn’t a single, universal statutory definition that applies to all contracts. Australian courts look at context - the words of the contract, the relationship between the parties, industry norms and commercial purpose - to decide what good faith requires in a particular situation.

Does A Duty Of Good Faith Apply To Every Contract?

No. Australia does not recognise a blanket, automatic duty of good faith in every contract.

Instead, a duty can arise in different ways (explained below), and when it does, it’s shaped by the agreement and the circumstances. Courts have recognised duties of good faith in certain contexts - commonly in the performance of long-term or “relational” contracts, or where one party has a discretionary power that could be abused - but it’s not a one-size-fits-all rule.

Two important boundaries to keep in mind:

• Contract terms matter. If your agreement includes a good faith clause, that wording leads the analysis. If it excludes or narrows good faith, that can be effective (subject to statutes and public policy).
• Some conduct is restricted by statute regardless. For example, misleading or deceptive conduct is prohibited under Australian Consumer Law (ACL), and unconscionable conduct is regulated under the Competition and Consumer Act (CCA), separate from any good faith analysis. You can read more about section 18 (misleading or deceptive conduct).

How Can Good Faith Arise In Your Contracts?

1) Express Contract Terms

The clearest path is an express clause, for example: “Each party must act in good faith in exercising rights and performing obligations under this agreement.”

Express clauses allow you to define what’s expected (and what’s not). Many businesses also include clarifications such as: acting in good faith does not prevent a party from pursuing its legitimate commercial interests, enforcing clear contractual rights or relying on a specific termination right.

If you want the obligation to be clear and appropriately scoped, have the clause tailored as part of your contract drafting.

2) Implied Terms (By Law, Fact or Construction)

Even without an express clause, a duty of good faith may be implied in some situations. Common examples include:

• Exercise of discretion: Where a contract gives one party a unilateral discretion (for example, to set a price, approve variations or decide whether to renew), the law may require that power to be exercised honestly and rationally, and not for an improper purpose.
• Relational contracts: Long-term, cooperative arrangements (such as joint ventures, franchise or supply agreements) sometimes carry implied obligations to act in good faith in performance, so the bargain remains workable.
• Business efficacy: If, without a minimum level of cooperation or honesty, the contract would be unworkable or the promised benefit illusory, a limited good faith obligation may be implied to make the deal effective.

Whether a term is implied is highly context-specific. There is no presumption that every Australian contract contains an implied good faith term, and different courts have taken different approaches.

3) Statutory Obligations

In some settings, “good faith” or similar standards are set by law and cannot be excluded. Two frequent touchpoints for businesses are:

• Franchising: The Franchising Code of Conduct (a mandatory code under the Competition and Consumer Act 2010 (Cth)) requires each party to act in good faith in relation to all aspects of a franchise relationship. Breaches are enforceable under the CCA (not the ACL) and may attract ACCC action and penalties. Careful franchise agreement review is essential.
• Consumer law and fairness standards: Statutory prohibitions on misleading, deceptive or unconscionable conduct often overlap in effect with good faith expectations, even if the word “good faith” isn’t used in the legislation.

By contrast, there is no general, non-excludable “construction law” duty of good faith. Standard construction contracts may include good faith or cooperation provisions, but these are a matter of drafting and negotiation, not an automatic statutory rule.

What Does Acting In Good Faith Look Like Day-To-Day?

Translating the principle into everyday conduct is where it becomes practical. Examples include:

• Honest communication: Don’t conceal critical facts that materially affect performance or the other party’s decision-making. Don’t make promises you know you can’t keep.
• Cooperation to achieve the bargain: Provide information, approvals or access that the contract contemplates within a reasonable time, rather than creating roadblocks.
• Exercising rights for proper purposes: If you have a discretion (e.g. to approve, vary or terminate), use it for the purpose the clause was designed for and avoid arbitrary decisions.
• Proportionate responses to issues: Where minor breaches occur, consider commercially sensible steps like seeking clarification or a short extension before leaping to termination (unless your strategy or contract clearly calls for immediate enforcement).
• Reasonable notice of changes: If circumstances change (supply bottlenecks, staffing issues), communicate early and propose workable adjustments.

On the other hand, conduct that often attracts criticism includes using a discretionary right as leverage to extract unrelated concessions, stalling approvals to force a price change, or terminating on a technicality where the real motive is an unrelated strategic shift.

What about negotiations? Australian law does not impose a universal duty to negotiate in good faith. However, if you commit to negotiating in good faith in a preliminary agreement - for example, a Heads of Agreement or Memorandum of Understanding - courts can enforce that promise on its terms (e.g. to genuinely engage for a set period). Make sure those documents are clear on what is binding and what isn’t.

Managing Risk: Clauses, Disputes And Practical Tips

Should You Include A Good Faith Clause?

Often, yes. Because the implied duty is not uniform across all contracts, many businesses prefer to deal with good faith expressly. An express clause helps by:

• Clarifying expectations and reducing ambiguity.
• Tailoring the standard to your industry and deal (e.g. linking good faith to cooperation and timely information-sharing).
• Preserving commercial flexibility (e.g. stating that enforcing a clear contractual right is not, by itself, bad faith).

When drafting, consider tying good faith to specific obligations (approvals, variations, pricing reviews, renewals), and include sensible “carve outs” so the clause doesn’t unintentionally water down key rights. If the transaction is complex or high-value, get input from a contract lawyer.

Other Contract Tools That Support Good Faith Performance

• Cooperation and information clauses: Spell out what cooperation looks like (timeframes, data access, escalation steps) so disputes are less likely to hinge on vague expectations.
• Discretion guidelines: If a party has a discretion (e.g. approvals), include objective criteria and procedural steps (like reasons on request). This guides decision-making and evidence.
• Renegotiation and review mechanisms: For long-term deals, build in periodic reviews or pricing adjustments so commercial shocks can be addressed within the contract.
• Dispute resolution: Provide a staged process (good faith discussions, mediation, then litigation/arbitration). A clear pathway supports cooperative resolution.

If There’s A Dispute Alleging Bad Faith

Outcomes depend on your contract, the conduct and the context. Potential consequences include damages (compensation), injunctions (court orders to stop or require action), or in some cases the right to terminate. If a statutory code applies (such as franchising under the CCA), regulatory penalties may also be in play.

Practical steps to take early:

• Check the contract for any express good faith clause, discretion limits, notice requirements and dispute procedures.
• Collect contemporaneous evidence (emails, meeting notes, decision records) that shows honesty, cooperation and a proper purpose.
• Engage with the other side and propose workable solutions. Courts look favourably on reasonable, documented attempts to resolve issues.
• Escalate through the agreed dispute resolution steps before filing proceedings, unless urgent relief is needed.

Best-Practice Habits That Demonstrate Good Faith

• Document key decisions and the reasons for them, especially when exercising a discretion.
• Flag problems early and propose options (extensions, partial performance, substitutions) rather than allowing issues to snowball.
• Keep approvals and feedback within agreed timeframes, or explain delays upfront.
• Align your internal processes (procurement, legal sign-off, operations) with the cooperation and information obligations in your contracts.

Key Legal Documents To Have In Place

Tailored contracts and policies make it easier to meet (and enforce) good faith expectations and minimise ambiguity. Depending on your business, consider:

• Service Agreement or Customer Terms: Set clear deliverables, approvals, variations, timelines and a dispute pathway - this is where good faith and cooperation can be defined in practical terms.
• Shareholders Agreement: If you have co-founders or investors, ensure decision-making, buy-sell processes and deadlock resolution are clear, reducing the risk of “bad faith” allegations among owners. See Shareholders Agreement.
• Heads of Agreement / MoU: If you want to trial a relationship while negotiating the definitive deal, set out whether any good faith negotiation obligations are binding and for how long, using a Heads of Agreement or MoU.
• Franchise or Distribution Agreements: Where relevant, align your processes with the Franchising Code’s good faith requirement and ensure disclosure and review mechanisms are robust. Targeted review of franchise agreements can reduce risk.
• Website and Sales Materials: Make sure your advertising and customer communications comply with the ACL and avoid claims that could be viewed as misleading - a baseline that sits alongside any good faith obligations. For core principles, see section 18.

You won’t need every document listed here, but for the agreements that drive your revenue or key relationships, it’s worth getting them drafted or reviewed so the good faith obligations are clear, balanced and enforceable.

Key Takeaways

• Good faith generally means acting honestly, fairly and for the proper purpose of the contract - it does not require you to give up legitimate commercial interests.
• There is no universal duty of good faith in every Australian contract; whether it applies depends on express terms, implication in context and any relevant statutes.
• The Franchising Code (under the CCA) imposes a good faith obligation on franchisors and franchisees; misleading or deceptive conduct is prohibited under the ACL, separate from good faith.
• Day-to-day, good faith looks like timely cooperation, honest communications and using discretions for their intended purpose - not as leverage for unrelated outcomes.
• Manage risk by addressing good faith expressly, guiding discretions, setting cooperation procedures and including staged dispute resolution in your contracts.
• Use tailored documents - from a Service Agreement to a Shareholders Agreement or Heads of Agreement - to make expectations clear and reduce ambiguity.
• If a dispute arises, follow the contract, document your reasons and engage constructively; for complex matters, speak with a contract lawyer early.

If you’d like a consultation about good faith in your business contracts - whether you’re drafting a new deal or facing a dispute - you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.