Good Faith In Business: Meaning, When It Matters And How SMEs Can Protect Themselves

When you’re running a small business, you’re making decisions and deals every day - pricing a job, negotiating a supply arrangement, responding to customer complaints, or working through a dispute with a contractor.

In all of those moments, one phrase has a habit of popping up in emails, contracts and negotiations: “in good faith”.

Sometimes it’s used casually (“we’re negotiating in good faith”), and sometimes it’s written directly into your contract (“the parties must act in good faith”). Either way, it can carry real legal weight.

In this guide, we’ll break down what in good faith means in a business context, when it matters most for Australian SMEs, and the practical steps you can take to protect your business before things go wrong.

Note: this article is general information for Australian businesses and isn’t legal advice. Good faith issues are highly fact-specific, so it’s worth getting advice on your particular contract or dispute.

What Does “In Good Faith” Mean In Business?

At a practical level, acting in good faith means doing business honestly, fairly and genuinely - not using the deal (or the negotiation) as a way to trick the other party, create “gotcha” outcomes, or avoid commitments you’ve effectively already made.

If you’ve ever wondered what “in good faith” means in plain English, a helpful way to think about it is:

• Honesty: you don’t mislead the other party about key facts.
• Genuine cooperation: you do what’s reasonably necessary to allow the contract to work as intended.
• Fair dealing: you don’t exploit technicalities or imbalances in power in a way that defeats the deal’s purpose.
• No “hidden agenda” conduct: you don’t act in a way designed to sabotage performance or force the other party into an unfair corner.

Importantly, good faith doesn’t usually mean you have to put the other party’s interests ahead of your own. You can still negotiate hard, protect your margin, and make commercial decisions that benefit your business.

But it does mean you should avoid conduct that is dishonest, opportunistic, or inconsistent with the purpose of the agreement.

Is Good Faith A Legal Duty In Australia?

This is where things can get a bit nuanced.

In Australia, there isn’t a single, universal rule that automatically imposes a standalone “good faith duty” in every commercial contract. However, courts have accepted that good faith obligations can apply in some contracts - most clearly where the contract includes an express good faith clause, and sometimes where an implied duty is found to be necessary for the contract to operate effectively.

That said, good faith isn’t a one-size-fits-all concept, and the law in this area can be unsettled depending on the circumstances. Whether it applies (and what it requires) can depend on things like:

• the wording of your contract
• the industry you operate in
• the bargaining power between the parties
• how the contract is meant to operate day-to-day

Because it’s fact-specific, a well-drafted contract is your best friend here - it reduces uncertainty and makes it far easier to manage expectations on both sides.

When Does “In Good Faith” Matter Most For Small Businesses?

Even if you’re not seeing the words “in good faith” in every contract, the concept often becomes relevant when something starts to go sideways - a disagreement about price, timing, quality, scope, renewals, exclusivity, or termination.

Here are some of the most common situations where acting (and documenting that you acted) in good faith really matters for SMEs.

1. Negotiating A Contract (Especially Where There’s A Long Lead Time)

Many small businesses spend weeks (or months) negotiating a deal - particularly for bigger jobs, ongoing supply arrangements, or partnerships.

If negotiations involve detailed promises, shifting deadlines, and reliance by one side, disputes can arise about whether someone negotiated “in good faith”, or whether they used negotiations to stall, extract information, or create leverage.

It’s also why it helps to understand the basics of offer and acceptance - sometimes parties think they’re “just discussing”, but the communications start to look like a real agreement.

2. Performing The Contract (Day-To-Day Cooperation)

Good faith commonly becomes a flashpoint during performance - when one party has discretion, controls approvals, sets timetables, or decides whether milestones are “accepted”.

For example:

• A client refuses to approve deliverables unreasonably, hoping you’ll discount your fees.
• A supplier changes processes mid-stream, making it impossible for you to meet agreed timelines.
• A platform or distributor enforces a policy inconsistently to squeeze out smaller operators.

In these scenarios, the argument is often that someone is using their contractual power in a way that undermines the deal’s purpose - which can be framed as a failure to act in good faith.

3. Renewals, Variations And “Change Requests”

SMEs often rely on flexible arrangements - renewing contracts each year, varying scope as the business evolves, or negotiating changes due to market conditions.

This is where it pays to be very clear about:

• what is negotiable vs fixed
• who has discretion and how it must be exercised
• timeframes and notice requirements

If your contract expects the parties to negotiate renewals or variations in good faith, you should treat that process like a formal project: document proposals, counter-proposals, reasons, and deadlines.

4. Terminating A Contract (Or Threatening To)

Termination can raise good faith issues when a party:

• terminates for a “technical breach” that they previously ignored
• creates breaches intentionally to trigger termination rights
• uses termination threats to force unfair concessions

Whether that conduct is lawful depends on the contract terms and the surrounding facts - but from a risk perspective, this is exactly where you want clear drafting and a paper trail.

Good Faith vs “Misleading Or Deceptive Conduct” (They’re Not The Same)

Good faith often gets mixed up with other legal concepts. One of the most important for small businesses in Australia is misleading or deceptive conduct under the Australian Consumer Law (ACL).

They can overlap, but they’re not identical:

• Good faith is generally about fair and honest behaviour in the way you negotiate and perform a contract (especially where cooperation is required).
• Misleading or deceptive conduct focuses on whether your statements, actions, or omissions misled (or were likely to mislead) someone in trade or commerce.

If you’re dealing with customers, marketing claims, refunds, representations about delivery times, or product performance, ACL risk is often more immediate than “good faith” debates.

Two useful concepts to keep in mind are misleading or deceptive conduct generally, and how section 18 of the ACL can apply in everyday business communications (including websites, ads and sales conversations).

In short: you can be “nice” and still breach the ACL if what you’ve said (or implied) misleads people. And you can be within your strict contract rights but still face arguments about good faith depending on how you exercise those rights and what your contract requires.

How To Build “Good Faith” Protection Into Your Contracts (Without Losing Commercial Control)

The most effective way to protect yourself is to treat good faith as a contract design issue, not just a behaviour issue.

If you’re relying on a handshake, email chain, or template terms that don’t reflect how your business actually works, you’re more likely to end up in a grey area where “good faith” arguments become a substitute for clear drafting.

1. Define What “Good Faith” Means (Or Doesn’t Mean) In Your Deal

If your contract includes a good faith clause, consider spelling out what it requires. For example, you might include obligations to:

• act honestly and not mislead the other party
• cooperate reasonably to meet milestones
• respond to requests within an agreed timeframe
• not unreasonably withhold approvals

You can also include boundaries, such as confirming that good faith does not require a party to accept commercially unfavourable terms or to give up legitimate contractual rights.

This is one of the best ways to reduce disputes later: you’re turning a vague concept into operational rules.

2. Tighten The “Discretion” Clauses

A lot of good faith disputes come down to discretion - where one party can decide something unilaterally (price increases, acceptance of work, approvals, renewals, variations, etc.).

If you have discretion in your contract, ask:

• Do we need to give reasons for decisions?
• Are there objective criteria (quality standards, KPIs, timeframes)?
• Are there escalation steps if we disagree?

Clear criteria reduces the risk that a decision is later criticised as “unreasonable” or lacking good faith.

3. Use A Clear “Entire Agreement” And Variation Process

Small business disputes often involve one party saying: “But you promised this in a call last month.”

While contracts can’t magically erase all risk, having an “entire agreement” clause and a clear process for variations helps keep everyone aligned about what the deal actually is.

If you’re unsure whether your current terms are enforceable, it’s worth pressure-testing the basics of what makes a contract legally binding, especially if you’re relying on quotes, proposals, or online sign-ups.

4. Get The Right Document For The Relationship

Different relationships need different documents. For example:

• If you’re dealing with customers at scale, strong Terms & Conditions or a customer contract can reduce disputes about scope, payment, delays and liability.
• If you’re onboarding staff, a tailored Employment Contract helps set expectations and processes from day one.
• If you’ve got co-founders or investors, a Shareholders Agreement can be the difference between an orderly decision-making process and a deadlock that destroys value.

Good faith becomes much easier to manage when the contract clearly reflects the commercial reality of how you operate.

Practical “In Good Faith” Habits That Protect Your Business In Real Life

Even with a great contract, your day-to-day conduct matters. The good news is that “acting in good faith” often looks like good business hygiene - the kind that prevents disputes and builds trust.

1. Put Key Conversations In Writing (Without Turning Everything Into A Fight)

You don’t need to be formal for every email. But after an important call, send a quick recap:

• what was agreed
• what is still under discussion
• the next step and timeframe

This helps show you’ve been transparent and cooperative - and it reduces the “we remember it differently” problem.

2. Be Careful With “We’ll Sort It Later” Promises

Many disputes start because someone agreed to a vague commitment to keep the deal moving, intending to renegotiate later.

If something is genuinely unknown (like final quantities, delivery dates, or scope), be explicit about what’s fixed and what’s subject to change, including how it will be decided.

3. Use A Fair Dispute Process Before Escalating

If you end up in a disagreement, a structured dispute process can help you resolve things quickly without destroying the commercial relationship.

Common “good faith” dispute steps include:

• notice of dispute in writing
• a short period for management negotiation
• mediation before court proceedings

This doesn’t make you weak - it makes you organised, and it often saves real money.

4. Handle Customer Complaints With Extra Care

If you sell to consumers, your systems for refunds, warranties, delays and complaint handling matter a lot.

Even where “good faith” isn’t the legal test, your business reputation and ACL risk are on the line. Clear customer terms (and training your team to apply them consistently) can help you stay compliant and avoid misunderstandings.

5. Don’t Ignore Privacy And Data Handling

Good faith in modern business also shows up in how you handle people’s information. If you collect customer details through a website, mailing list, booking platform, or service intake form, you should have a clear Privacy Policy that reflects what you actually do.

Being transparent about data use is one of the simplest ways to build trust - and it can prevent complaints that “we were never told you’d use our details that way”.

Key Takeaways

• In good faith generally means acting honestly, fairly and cooperatively, without undermining the purpose of the deal.
• Good faith issues often come up during negotiations, day-to-day performance, renewals/variations, and termination - especially where one party has discretion.
• Good faith is different from misleading or deceptive conduct under the Australian Consumer Law, and SMEs should manage both risks carefully.
• Your best protection is a clear contract that defines expectations, tightens discretion, and documents how changes and disputes are handled.
• Practical habits - like written recaps, consistent decision-making, and structured dispute processes - help demonstrate good faith and prevent disputes from escalating.
• Having the right legal documents in place (like an Employment Contract, Privacy Policy or Shareholders Agreement) helps you avoid grey areas where “good faith” arguments take over.

If you’d like help reviewing or drafting contracts that protect your business (including good faith clauses that actually work in practice), reach out to Sprintlaw on 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.