Good Faith In Contracts: Essential Australian Business Insights

When you’re negotiating a deal or managing a key supplier, you’ll often hear people say “let’s act in good faith.” It sounds simple, but what does “good faith” actually mean in Australian contract law, and how does it affect the way you draft, negotiate and enforce your agreements?

In this guide, we break down how courts approach good faith, when the duty is implied (and when it isn’t), and the practical steps you can take to protect your business - from the way you structure clauses to how you manage performance and disputes.

If you understand how good faith works, you can negotiate with confidence and reduce the risk of costly disagreements later.

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

At its core, acting in good faith means exercising contractual rights and performing obligations honestly, reasonably and for the purpose the contract intended - not to undermine the deal or take advantage of the other party for an unrelated reason.

Australian courts generally describe good faith as involving a few overlapping ideas:

• Honesty in dealings (no tricks or deception in how you use the contract).
• Considering the other party’s legitimate interests (without having to put them ahead of your own).
• Not acting capriciously or for an extraneous purpose (for example, using a termination right to pressure an unrelated negotiation).

Good faith does not require you to be altruistic. You can still pursue your commercial interests and enforce your rights. The line is crossed when conduct frustrates the bargain or abuses a contractual discretion.

This concept sits alongside other parts of Australian law that promote fair dealing. For example, the prohibition on misleading or deceptive conduct under the Australian Consumer Law (ACL) applies regardless of what your contract says. You can read more about that standard in our overview of section 18.

Does Every Contract Impose A Duty Of Good Faith?

Not always. Whether a duty of good faith applies depends on the contract’s language and commercial context.

Courts may imply a duty into certain contracts - especially long-term, relational agreements like supply, distribution, franchise or joint venture arrangements - where cooperation is essential. But implication is not automatic. If the contract’s language clearly allows a party to act in a particular way, courts are slow to re-write those rights by implying additional limits.

It also matters which clause you’re talking about. Good faith commonly attaches to:

• Open-ended discretions (e.g. a right to “approve in sole discretion”).
• Conditions requiring cooperation (like “best endeavours” to achieve a milestone).
• Renegotiation or review mechanisms (for price resets or service levels).

But good faith rarely stops a party from exercising a clearly expressed, unqualified right (for example, a true “without cause” termination right), provided the right isn’t exercised for an illegitimate purpose or contrary to other laws (like the ACL).

You can reduce uncertainty by addressing good faith expressly. Some contracts include a general duty to act in good faith and a definition that sets expectations. Others exclude implication of duties to preserve clear rights. Which approach is best will depend on your leverage and the nature of the relationship.

How Does Good Faith Affect Key Contract Clauses?

Good faith doesn’t sit in a vacuum - it influences how several common clauses operate in practice. If you use these tools, consider how a court might read them through a good-faith lens.

Termination And Renewal Rights

Where a party has a right to terminate for convenience or to refuse renewal, an implied duty of good faith may limit capricious or retaliatory use of that right. If you plan to rely on such clauses, ensure the contract’s process is clear (notice periods, cure rights) and that you can show a legitimate business rationale.

If you later need to change how these rights work, make sure your approach to amending a contract is valid and documented properly.

Discretionary Approvals

Clauses that allow one party to approve something “in its sole discretion” are common. Even then, good faith can require that discretion to be exercised honestly and reasonably. Consider adding objective criteria to guide approvals (e.g. quality standards, timelines) so decisions are easier to justify.

Limitation Of Liability

Courts generally respect clearly drafted risk allocations. However, if conduct amounts to bad faith, it may increase the risk of a court reading limitations narrowly or finding other remedies. Crisp drafting helps - see our guide on limitation of liability - and align your risk caps with the commercial reality of the deal.

Set-Off And Withholding Rights

Set-off and withholding clauses let you hold back payments when there’s a dispute. Using them oppressively can raise good-faith issues (for example, withholding more than is reasonably connected to the dispute). Clear mechanics (notice, calculation and dispute steps) reduce risk. Learn how these provisions are typically framed in our note on set-off clauses.

Waivers And Releases

A waiver is effective when it’s voluntary and informed. If a party obtained a waiver through pressure or misleading conduct, you may face arguments about bad faith. Ensure your releases are documented properly and consider when a waiver is the right tool versus a more detailed settlement agreement.

Letters Of Intent And Heads Of Agreement

Even before a final contract is signed, parties often agree to negotiate in good faith. Be clear whether your pre-contract document is binding (and on what points), and manage the negotiation process consistently. If you agree to good-faith negotiation, keep records showing reasonable engagement and timely responses.

Practical Ways To Draft And Negotiate For Good Faith

You can build good faith into the DNA of your contracts without losing commercial flexibility. Here’s how.

1) Use Clear Objectives And Decision Criteria

When a clause gives you a discretion (approve, vary, withhold), add criteria guiding how the decision will be made. This helps both sides understand expectations and makes your decisions easier to defend later.

2) Calibrate Termination And Review Mechanisms

Include fair notice and cure processes where possible. If you truly need a without-cause termination right, keep the process mechanical and transparent (for example, a fixed notice period and exit obligations). Avoid using review clauses to extract unrelated concessions.

3) Align Performance Standards With Remedies

Set objective service levels and link them to proportionate remedies (service credits, step-in rights). Overly punitive remedies can invite disputes. Balanced incentives encourage cooperation and reflect good-faith performance.

4) Document Communications And Decisions

Maintain concise records of key decisions, reasons and correspondence. If a dispute arises, your paper trail will be crucial evidence of honest, rational conduct.

5) Match Contract Structure To The Relationship

For enduring relationships, consider a master Service Agreement with statements of work. This gives you flexibility while retaining consistent good-faith obligations. If you’re sharing sensitive information during negotiations, use a proper Non-Disclosure Agreement so confidentiality expectations are clear from the outset.

6) Execute Contracts Correctly

Good faith is easier to argue about when the contract is clearly valid and properly signed. For companies, ensure you’re executing under section 127 or by a clearly authorised representative. For formal documents like deeds, follow the requirements in our guide to deeds so enforceability isn’t in doubt.

How Do You Prove (Or Defend) A Good-Faith Dispute?

Most good-faith disputes are won or lost on the facts. The question is whether, in context, a party acted honestly and reasonably in pursuing its contractual interests.

In practice, courts look at indicators like:

• Whether the party considered relevant factors and ignored irrelevant ones.
• Consistency with the contract’s purpose and the parties’ shared assumptions at the time of signing.
• Evidence of cooperation (or the lack of it) in meeting mutual objectives.
• Timing and tone of communications, including whether positions shifted without reason.

If you’re alleging a breach of good faith, common remedies include damages for loss caused by the breach and, in appropriate cases, injunctions or orders to stop a party from using a right for an improper purpose. Sometimes, the dispute can be resolved by clarifying how a discretion should be applied going forward.

It’s also common for good-faith issues to appear alongside other claims, such as misleading or deceptive conduct (ACL) or breach of express co‑operation obligations. Make sure your pleadings and evidence support all angles.

Where Does Good Faith Fit In The Contract Lifecycle?

Thinking about good faith at the right moments will save you headaches later. Here’s a simple lifecycle view.

Formation: Offers, Acceptance And Pre-Contract Conduct

Start clean. Make sure there’s a clear offer and acceptance, and avoid conduct that conflicts with your stated terms. Our primer on offer and acceptance covers the basics. If you use online terms or standard Terms of Trade, ensure your process actually incorporates them (tick-box acceptance, reference on quotes, etc.).

Execution: Getting The Signatures Right

Execution mistakes create unnecessary risk. Follow company signing rules, confirm authority, and keep a clean record of the final form. If needed, brush up on the requirements for signing documents so you’re covered.

Performance: Act Consistently With The Contract’s Purpose

During performance, communicate early, consider reasonable requests, and keep decisions tied to documented criteria. If you need to update scope or commercial settings, use a formal variation process - see our guide to amendments - rather than relying on informal side conversations.

Governance: Use The Right Company And Deal Documents

Where your contract sits in a broader relationship, make sure your internal and deal documents are aligned. Founders should consider a Shareholders Agreement and, for companies, a tailored Company Constitution. Internally, adopt processes that support timely decisions and consistent communications.

Customer Experience And Compliance

If you publish promises on your website or in sales materials, ensure your delivery matches the message. A robust Privacy Policy and clear online terms can set expectations and reduce disputes, while aligning with your obligations under the ACL.

Sample Good-Faith Wording (And When To Use It)

Every deal is different, but these examples illustrate common approaches:

• General duty: “Each party must act in good faith in the performance of this Agreement.”
• Guided discretion: “Where a party’s consent is required, that consent must not be unreasonably withheld or delayed, having regard to .”
• Co-operation: “The parties must do all things reasonably necessary to give full effect to this Agreement, including .”
• Negotiation commitment: “The parties will negotiate in good faith any under clause X with a view to reaching agreement within 20 Business Days.”

If you’re the party with more at stake, these clauses can add helpful guardrails. If you’re protecting a broad right (like termination for convenience), you might limit general duties and instead build fairness into the process steps (clear notice, transition assistance) to avoid ambiguity.

Common Pitfalls To Avoid

• Relying on “sole discretion” without criteria, then making inconsistent decisions.
• Using withholding or audit rights as leverage for unrelated issues.
• Letting operational delays become “gotchas” when a simple extension would preserve value for both sides.
• Promising to “act in good faith” but ignoring agreed milestones or communication protocols.
• Assuming a release or waiver cures all issues when the underlying conduct may still be challenged.

A short internal checklist - “purpose, process, proof” (What’s the legitimate purpose? Are we following the agreed process? Do we have proof of our reasoning?) - helps teams stay on track.

Key Takeaways

• Good faith in Australia is about honest, reasonable exercise of contractual rights - it doesn’t stop you pursuing your commercial interests.
• Whether a duty applies depends on the contract and context; reduce uncertainty by addressing good faith expressly or by adding objective decision criteria.
• Clauses involving discretion, termination, review and set-off are most affected by good faith, so draft processes and standards with care.
• Keep a clear paper trail of decisions and communications - in a dispute, facts will drive outcomes.
• Get the foundations right: clean formation and execution, appropriate governance documents, and clear customer-facing terms and policies.
• If the relationship or scope changes, use a documented variation process rather than informal side agreements.

If you’d like a consultation on drafting, negotiating or reviewing contracts with the right good-faith settings for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.