What Does “In Good Faith” Mean In Commercial Contracts? Understanding Your Obligations As An Australian Business

Most Australian businesses rely on a web of agreements - with suppliers, customers, landlords, distributors, investors and partners. In many of those contracts, you’ll see language requiring one or both parties to act “in good faith”.

But what does “in good faith” actually mean in Australia? How far does it go, and what happens if someone doesn’t meet that standard?

In this guide, we break down the concept in plain English, explain where it tends to apply in commercial contracts, and share practical tips for drafting, negotiating and complying with good faith obligations so you can reduce risk and keep your deals on track.

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

At a basic level, acting in good faith means you carry out your contractual rights and obligations honestly, fairly and for proper purposes. It’s not just about ticking boxes - it’s also about engaging with the other party in a way that supports the bargain you both made.

While Australian law doesn’t have a single, universal definition, courts commonly refer to themes like:

• Honesty: No deliberate lies, concealment of key facts, or misleading conduct.
• Cooperation: Taking reasonable steps to help the other party achieve the contract’s objectives (for example, providing information or approvals on time).
• Proper purpose: Using contractual rights (like discretion or termination rights) for the purposes they were granted - not as a pretext to secure an unrelated or unfair advantage.
• Fair dealing: Avoiding “sharp practice” that subverts the agreement’s spirit, such as leveraging minor ambiguities to deprive the other party of expected benefits.

Importantly, good faith doesn’t require you to put the other party’s interests ahead of your own, and it doesn’t stop you from acting in your legitimate commercial interests. It simply means you don’t act dishonestly, arbitrarily, or with an improper purpose that undermines the deal.

Good faith also sits alongside your other legal duties. For example, businesses must not mislead or deceive under the Australian Consumer Law (ACL), which often overlaps with good faith concepts when it comes to truthful representations and fair dealing. If you’re reviewing your marketing or pre-contract conduct, it’s worth revisiting the principles in section 18 of the ACL.

Is There A Legal Duty To Act In Good Faith In Australia?

This is where things get nuanced. Australia doesn’t have a blanket, one-size-fits-all duty of good faith for all contracts. Instead, the position depends on:

• Contract wording: If your agreement includes an express good faith clause, courts will generally enforce it according to its terms.
• Context and construction: Even without an express clause, some courts have found an implied duty of good faith when it’s consistent with the contract’s language, structure and commercial purpose (often in long-term, cooperative relationships). But implication is not automatic and remains context-specific.
• Statutory regimes: Some sectors have specific rules. For example, under the Franchising Code of Conduct, both franchisors and franchisees must act in good faith in their dealings with each other.

So, can you assume a duty of good faith will be implied into your contract? No - you shouldn’t assume it. The safer approach is to address it expressly during negotiations, using clear wording that suits your commercial relationship. If you’re unsure how a clause might operate in your contract, a targeted contract review and redraft can help you understand the practical implications and remove ambiguity.

How Does Good Faith Work In Practice?

Good faith obligations are most relevant where parties need to cooperate, exercise discretion, negotiate further terms, or make ongoing decisions during the life of a contract. Here are common scenarios and how good faith typically plays out.

Negotiating Renewals And Variations

Where a contract anticipates renewal or variation, a good faith obligation usually requires the parties to engage genuinely with each other. That doesn’t mean you must agree to anything against your interests, but you should respond within reasonable timeframes, exchange relevant information, and avoid tactics designed purely to stall or pressure the other side.

Exercising Discretion Or Granting Consent

Many contracts give one party a discretion - for example, to approve a subcontractor, adjust delivery schedules, or decide whether to grant consent to an assignment. Good faith generally requires you to consider relevant factors, avoid irrelevant or improper ones, and reach a decision that isn’t arbitrary or capricious. If you’re going to withhold consent, be prepared to articulate a proper, contract-related reason.

Performance Of Ongoing Obligations

In long-term supply, distribution, services or joint venture arrangements, day-to-day interactions matter. Good faith conduct includes timely communication, meeting commitments, and not taking steps that deliberately undermine the other party’s ability to receive the benefit of the bargain. If you’re exploring collaboration structures, it helps to understand how a joint venture differs from a partnership so you choose the right framework for your risk profile and governance - see our comparison of joint venture vs partnership.

Using Termination Rights

Exercising a contractual right to terminate on notice is usually permissible if you follow the contract. Good faith doesn’t take away a clear termination right. However, using termination in a way that’s inconsistent with the contract’s purpose (for example, to sabotage an agreed transition process or block the other party from receiving accrued entitlements) can raise issues - particularly if other obligations (like handover assistance) still need to be performed.

Pre-Contract Conduct And Representations

Good faith expectations can also inform how parties should behave when negotiating a deal - think honest disclosure of material facts and avoiding misleading statements about capability, pricing, or deliverables. Here, the ACL’s prohibition on misleading or deceptive conduct operates alongside any good faith expectations built into the contract structure.

Drafting And Negotiating Good Faith Clauses

Because implication is uncertain, many businesses prefer to deal with good faith expressly. The goal is clarity: enough guidance so both sides know what’s expected, without creating vague obligations that invite disputes.

Be Specific About What “Good Faith” Means

Rather than relying on a general phrase, define what good faith requires in your relationship. For example, you might specify that each party will:

• Act honestly and not knowingly mislead the other.
• Not exercise discretions arbitrarily, capriciously, or for an improper purpose.
• Provide information reasonably necessary to perform the contract.
• Consider the other party’s legitimate commercial interests when making key decisions.
• Use reasonable endeavours to resolve issues promptly at an operational level before escalating.

Tie Good Faith To Objective Standards

To reduce uncertainty, anchor the obligation to familiar concepts such as “acting reasonably”, “not unreasonably withholding consent”, or performing certain steps “in accordance with industry standards”. You can also include process commitments - for example, meeting within a set period to negotiate renewals, or following a documented approvals workflow.

Keep Decision-Making Records

Where you exercise discretion or refuse consent, keep a short written record of your reasoning and the factors you considered. If your approach is later challenged, contemporaneous notes, emails and checklists can be strong evidence that you acted with proper purpose and in line with your contract.

Use Dispute Resolution Pathways

It’s common to require parties to negotiate in good faith before commencing litigation. A staged process (operational meeting → senior management conference → mediation) helps resolve issues early. If a dispute does settle, a clearly drafted deed is essential so there are no loose ends - if you need a refresher on what to include, see our guide to a deed of release and settlement.

Check Related Contracts Work Together

If your deal sits within a broader relationship - for example, a supply agreement sitting alongside terms of sale, a distribution arrangement, or an internal governance document for founders - make sure those instruments are aligned. For founder-managed companies, a Shareholders Agreement can set expectations around decision-making, information sharing and dispute pathways, which complements any good faith obligations in external contracts. For customer-facing terms, ensure your Terms of Trade or service terms are clear about discretions (like pricing changes or service variations) and how they’ll be exercised.

What Happens If A Party Acts In Bad Faith?

Consequences depend on the contract wording, the conduct, and the loss suffered. Typically, the legal focus is on remedies for breach - not “voiding” contracts wholesale.

• Breach of contract damages: If an express (or properly implied) good faith obligation is breached and that causes loss, the non-breaching party can seek damages to put them in the position they would have been in if the obligation had been performed.
• Injunctions or specific performance: In some cases, a court may restrain a threatened bad faith act (for example, an arbitrary refusal of consent) or order performance where appropriate.
• Repudiation considerations: Serious, deliberate conduct that strikes at the heart of the bargain may (in limited circumstances) amount to repudiation, entitling the innocent party to terminate - but this is fact-specific and assessed against the contract as a whole.
• ACL exposure: If the conduct is misleading or deceptive, separate remedies may arise under the ACL in addition to any contractual claim.

What’s unlikely? Courts don’t typically re-write bargains under the banner of “good faith”, and they rarely set aside a valid contract purely because one party acted tough in negotiations. The inquiry is practical: did the contract impose a good faith constraint, was it breached, and what loss flowed as a result?

If you think a counterparty is acting in bad faith, avoid knee-jerk escalation. Gather the documents, assess your contract’s wording, and get early advice. A short, targeted review can often clarify your options and lead to a pragmatic resolution. Our team can assist with a focused contract review so you understand risk and strategy before you take a step.

Key Takeaways

• “In good faith” is about honesty, fair dealing and proper purpose - it supports the bargain both parties made without forcing you to sacrifice your legitimate commercial interests.
• There’s no universal, automatic duty of good faith in every Australian contract; courts enforce express clauses and may imply good faith only where it fits the contract’s language and context.
• Good faith often matters most when exercising discretion, negotiating renewals, performing long-term obligations, or deciding whether to grant consent.
• Draft clearly: define what good faith requires, tie it to objective standards (like reasonableness), and adopt practical processes for approvals, information sharing and dispute resolution.
• If a party acts in bad faith, remedies usually focus on breach of contract damages and, where appropriate, injunctions - not automatically voiding the contract.
• Align related documents: governance documents (like a Shareholders Agreement) and customer-facing Terms of Trade should work coherently with any good faith obligations in your core contracts.

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