Good faith (in the context of contracts)

Good faith, although not definitively defined at law refers to honesty of purpose, sincerity of declaration, and a lack of fraudulent acts or intentions. It necessitates that parties act reasonably and in the spirit of cooperation and trust.

Good faith focuses on the nature of conduct, as opposed to the outcome of any conduct, i.e. a negative outcome resulting from an act in good faith is unlikely to result in a breach.

Good faith may be construed in a contract as either an express or implied term. It calls for support of the contractual bargain by:

• Acting honestly
• Acting with fidelity
• Acting without undermining the agreement or benefit
• Acting reasonably and dealing fairly (in light of both parties’ interests and the contractual objective)

There are two types of good faith clauses: general and narrow.

• General good faith clauses will require the exercise of good faith either throughout the entire contract, or during a nominated part
• Narrow good faith clauses will apply to the performance of negotiation in a dispute or termination of the contract

In some NSW cases (e.g. Renard Constructions (ME) Pty Ltd v Minister for Public Works; Burger King Corp v Hungry Jacks Pty Ltd), good faith provisions have been implied where they are not inconsistent with other contractual terms, however, the High Court has not yet upheld this, and has been more reluctant to infer a good faith requirement.

Contextual factors such as the nature of the contract (e.g. if it is long term, or requires a higher than usual level of trust/cooperation) may influence the court towards a decision that the contract implies a good faith requirement.