Acting in good faith ' What does it really mean in a contract?

• Published date: 26 May 2020
• Author: Mr Andrew Statham
• Subject Matter: Corporate/Commercial Law, Contracts and Commercial Law
• Law Firm: Holding Redlich

We often see contractual obligations on parties to act in 'good faith'.

For instance:

The Company may, acting reasonably and in good faith, set off from any amount due to the Contractor, any amount due or which may become due to the Company under this Contract.

What does 'good faith' mean? In the above example, how does it affect the exercise by the Company of its right to set-off?

Despite the long history of good faith, we still don't know for sure, but we have some suggestions as to what it might mean. According to the High Court of Australia:

• an element of good faith would be "fairness in dealings between contracting parties" and it "is wider than that of honesty"¹.

From the Federal Court of Australia:

• the obligation of good faith means to "act honestly and with a fidelity to the bargain; an obligation not to act dishonestly and not to act to undermine the bargain entered or the substance of the contractual benefit bargained for; and an obligation to act reasonably and with fair dealing having regard to the interests of the parties (which will, inevitably, at times conflict) and to the provisions, aims and purposes of the contract objectively ascertained"²; but
• acting in good faith does not mean a party has to act against its own interests³.

In the absence of a definitive statement as to its meaning, and given 'good faith' has been and is still being considered by the courts of various jurisdictions within Australia and within a variety of contexts, there is a broad range of meanings attributed to it. However, it seems that 'good faith' likely involves elements of:

• fairness
• honesty
• reason...