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

“In good faith” shows up in a lot of Australian contracts. It sounds simple, but what does it actually require you to do in day-to-day business?

If you’re negotiating a deal, managing a supplier relationship, exercising a contractual discretion (like changing a price or approving a refund), or ending an agreement, a good faith obligation can shape your options - and your risk.

In this guide, we’ll unpack what “in good faith” means for small businesses in Australia, when it applies, how it differs from other duties, and practical ways to draft, negotiate and live up to good faith obligations.

What Does “In Good Faith” Mean In Australia?

At its core, acting “in good faith” means you’ll act honestly, reasonably and with a spirit of cooperation so the contract can achieve its intended purpose.

Australian courts have recognised good faith in different contexts (both as an express clause and, sometimes, as an implied obligation in the performance of contracts). While the exact contours can vary by contract and context, a good faith obligation usually involves three ideas:

• Honesty: No lying, concealment, or trickery when performing or enforcing rights under the contract.
• Legitimate interests: You can pursue your own commercial interests, but don’t act to undermine the other party’s core benefit of the deal.
• Reasonableness and cooperation: Take reasonable steps to cooperate where necessary to give the agreement business efficacy.

Good faith does not require you to act against your own interests or to be altruistic. It’s a balanced obligation - you can protect your position, but you shouldn’t sabotage the deal or use contractual powers in a capricious or unconscionable way.

Good faith is different from the rules that govern how a contract is formed. For formation, we look to familiar concepts like Offer and Acceptance, consideration and intention to create legal relations. Good faith typically operates after a binding agreement exists (and sometimes during negotiations if the parties have agreed to a framework that includes good faith bargaining).

When Does A Duty To Act In Good Faith Apply?

Whether you must act in good faith depends on the contract and the circumstances. Common trigger points for small businesses include:

1) Performance Of An Ongoing Contract

Many commercial agreements include an express good faith clause covering performance and enforcement. Even if it’s not written, courts sometimes imply an obligation of cooperation to help the contract work as intended.

2) Discretionary Powers

Where a party has a broad discretion - for example, to approve a subcontractor, vary a delivery schedule or apply a set-off clause - good faith can require you to exercise that discretion honestly and for a proper purpose, not arbitrarily or to punish the other party.

3) Negotiations And Renewals

Parties sometimes agree to “negotiate in good faith” towards a later agreement (like a renewal, price review or supply variation). While this isn’t a promise to reach a deal, it is a promise to engage genuinely and not to derail talks for an ulterior purpose. If you later document any changes, make sure your contract amendments are captured clearly and signed properly.

4) Termination Rights

Even when you have a termination-for-convenience right, good faith can influence how you give notice and how you treat accrued rights. You don’t have to keep a bad deal alive, but executing your exit in a fair, transparent way reduces dispute risk.

5) Statutory Overlays

Separate to contractual good faith, you must comply with the Australian Consumer Law (ACL). For example, section 18 prohibits conduct that is misleading or deceptive. A party might breach good faith and also fall foul of section 18 of the ACL or the general law on misleading or deceptive conduct.

Good Faith vs Honesty, Reasonableness And “Best Endeavours”

Good faith often gets confused with other standards. Here’s how they differ in practice:

• Honesty: A minimum standard - don’t lie or knowingly mislead. Good faith is broader; it includes honesty but also covers motive and cooperation.
• Reasonableness: Usually an objective yardstick - what would a reasonable business do in the circumstances? Good faith can include reasonableness, but it’s context-driven and tied to the bargain’s purpose.
• Best Endeavours/Reasonable Endeavours: These are efforts obligations to achieve a specified outcome (for example, to obtain a licence). Good faith is about how you behave and exercise rights while pursuing your interests within the contract.

You can include all of these in a single agreement. Just be clear about where each applies - vague or overlapping standards can create uncertainty.

Practical Examples For Small Businesses

Let’s ground the concept with everyday scenarios.

Supplier Price Review

Your supply agreement allows a six-monthly price review. Acting in good faith could mean giving genuine reasons for an increase, providing reasonable supporting data, and allowing time for discussion. You don’t have to agree to a discount - but stonewalling or using the review to squeeze unrelated concessions can create risk.

Exclusivity Periods

During an Exclusivity Agreement for a potential distribution deal, good faith may require you to share relevant information, not shop the deal secretly to competitors, and move the process along within agreed timeframes.

Approving A Subcontractor

If your client contract gives them the right to approve your subcontractors, they should exercise that approval reasonably and in good faith - for example, by assessing qualifications rather than rejecting to gain leverage elsewhere.

Exercising Set-Off

Where you have a contractual right to set off disputed amounts, a good faith approach is to notify the counterparty, show how you calculated the set-off, and avoid inflating deductions. This is good contract hygiene and sits well with fair dealing expectations built into a set-off clause.

Terminating For Convenience

Even with a clear termination right, give proper notice, follow the process in the contract, and pay what’s due up to termination. If you’re hashing out an orderly wind-down, documenting it in a Deed can lock in releases and avoid later disputes.

How To Draft And Negotiate Good Faith Clauses

If you include a good faith obligation, make it clear and workable. Ambiguity fuels disputes. Consider these drafting tips:

Define The Scope

• Specify where good faith applies (for example, “in relation to the exercise of discretion under clauses 6 and 7” or “during the price review process”).
• Make it clear it doesn’t require a party to act against its legitimate commercial interests.

Set Process Expectations

• Include timeframes for consultation, information-sharing requirements, and escalation steps (for example, senior representative meetings before dispute resolution).
• Align with your broader dispute pathway and signatures framework to ensure the clause works alongside your contract variations and notices provisions.

Use Objective Criteria Where Possible

• For price reviews or approvals, reference external benchmarks (e.g., CPI, market indices, minimum qualifications) to reduce subjectivity.
• For service levels, define measurable KPIs rather than relying purely on “reasonable satisfaction”.

Add Carve-Outs And Safeguards

• Preserve confidentiality and competition law compliance during information exchanges.
• Clarify that statutory rights (like the ACL) and express termination rights remain unaffected.

Choose Realistic Remedies

• Consider requiring good faith meetings before litigation or arbitration.
• For time-sensitive processes (like a launch date), allow injunctive relief to prevent steps that would defeat the bargain.

If you’re refreshing your standard form contracts, getting a lawyer to review how your good faith drafting fits with related provisions (price reviews, approval rights, liquidated damages, and dispute resolution) can save headaches later.

What Happens If Someone Doesn’t Act In Good Faith?

Consequences depend on the contract and the breach, but may include:

• Breach of contract: If good faith is an express term (or implied), not acting in good faith can be a breach of contract, giving rise to damages or termination rights.
• Injunctions or specific performance: Courts can restrain a party from acting in a way that undermines the contract, or compel steps required by the agreement.
• ACL claims: Conduct may also breach the ACL, including misleading or deceptive conduct under section 18.
• Reputational harm and commercial fallout: Even if a dispute doesn’t go to court, poor faith behaviour can damage customer or supplier relationships and future tenders.

Often, disputes over good faith arise because the underlying process or standard wasn’t defined well. Clear drafting, consistent communications, and documenting decisions all help you evidence that you acted properly.

Best Practices To Demonstrate Good Faith Day-To-Day

Small changes to how you manage contracts can go a long way:

• Follow the contract process: Give notices in writing and within timeframes. Use the method the contract specifies.
• Record your reasons: When exercising a discretion (approval, rejection, price change), note the reasons and any evidence relied on.
• Share information that matters: If the clause contemplates information exchange (e.g., for a review), provide what’s reasonably needed so the other party can engage meaningfully.
• Separate issues: Don’t use one process (like approving a variation) to force unrelated concessions elsewhere.
• Be consistent: Apply the same standards to similar decisions to avoid claims of arbitrariness.
• Escalate early: Use senior-level discussions to defuse issues before they become formal disputes - it’s efficient and shows cooperation.

If you’re still negotiating a deal and want to keep options open, build that into the contract structure - for example, by using non-binding Offer and Acceptance mechanics for future statements of work, or by setting a clear process for future variations rather than handshakes.

Frequently Asked Questions About Good Faith

Does Good Faith Apply To Pre-Contract Negotiations?

Not by default. However, if you sign a term sheet or heads of agreement that includes a commitment to negotiate in good faith, you’ll be expected to engage genuinely (for example, meeting, providing required information and not derailing talks for an ulterior purpose). Make sure any obligations to negotiate are clearly defined and time-limited, and that it’s clear what is binding and what isn’t.

Can I Still Look After My Business Interests?

Yes. Good faith doesn’t require you to sacrifice your commercial interests. You can say no to an outcome that doesn’t work for you. The key is to avoid dishonest, arbitrary or ulterior conduct that strips the other party of the basic benefit of the deal.

Is Good Faith The Same As Being “Reasonable”?

They overlap, but they’re not identical. “Reasonable” is an objective standard that often applies to specific decisions. “Good faith” is broader - it captures honesty, motive and cooperation in the context of the contract’s purpose.

How Do We Capture A Good Faith Deal We’ve Agreed In Principle?

Use a clear variation mechanism and document the change in writing, signed by authorised representatives. If the variation is substantial, a short-form deed or addendum can be cleaner. Ensure your signing and variation process lines up with your agreement’s execution clause and any requirement for written changes, to avoid uncertainty when making changes to a contract.

Key Takeaways

• Acting “in good faith” generally means being honest, cooperative and not using contractual powers to undermine the deal’s purpose.
• You’ll most often see good faith around performance, discretionary decisions, negotiations, renewals and termination processes.
• Good faith is compatible with protecting your own interests - it doesn’t force you to accept a bad outcome, but it does curb arbitrary or ulterior behaviour.
• Clear drafting helps: define where good faith applies, set timelines and process steps, and include objective criteria for reviews or approvals.
• If someone breaches good faith, remedies can include damages, injunctions and ACL claims alongside a standard breach of contract pathway.
• Good records, timely notices and transparent reasoning are your best evidence that you acted properly throughout.

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