Negotiating in Good Faith : The Role of Contractual Obligations

30 November 2025 in Contract Lawyers | 6 min read | skip to FAQs

Many contracts include dispute resolution clauses that include an obligation to participate in good faith negotiations. This article examines the concept and definition of good faith negotiations and considers what constitutes the minimum requirements of good faith negotiations, including if a refusal to negotiate may satisfy the definition of good faith negotiations.

We first consider the definition of good faith and then considers various relevant cases, including the case of Laing O’Rourke (BMC) Pty Ltd v Transport Infrastructure Development Corp [2007] where it was found that no negotiation satisfied the obligation to negotiate. In contrast, in the case of United Group Rail Services Ltd v Rail Corporation NSW (2008) the courts identified conduct that illustrated a lack of good faith.

What is the Definition of Good Faith?

There is no statutory definition of good faith, however, it is generally understood that good faith involves acting honestly and genuinely.  However, the concept is broader than mere honesty and extends to fairness. This is illustrated in the case of Commonwealth Bank of Australia v Barker [2014] HCA 32. This case illustrates that good faith negotiations are considered to be negotiations that are honest, make a genuine attempt to resolve any dispute and act in a manner consistent with the object of the contract. It is important to note that this does not require a party to act against its own interests as found in the case of Paciocco v Australia and New Zealand Banking Group Limited [2015] FCAFC 50.

Generally, the idea of good faith and the assessment of whether a party’s words or conduct was done in good faith will be dependent on the context in which the matter is examined.

Some Characteristics of ‘Good Faith’:

1. Acting honestly.
2. Acting genuinely.
3. Consistency in conduct.
4. Open communication with other parties.
5. Abstaining from acting in an arbitrary manner.

Where does the Requirement of ‘Good Faith’ Originate?

As stated, there is no statutory definition of good faith and consequently there is no statutory requirement for dealing with negotiations in good faith. The principle is mainly derived from common law and does not apply to contracts universally. In summary, the duty to act in good faith arises where such an obligation is stated in a contract.

Contracts with Express Terms

1. In matters where the contract contains an express term where parties must negotiate or deal with each other in good faith the duty arises.
2. The express clause should also include a definition of what is and what is not required of the parties to satisfy the obligation of good faith.

Contracts with Implied Terms

1. Where an express term is not included to stipulate good faith negotiations the requirement may be implied.

Griffith CJ in Butt v M’Donald (1896) 7 QLJ 68, 70-71 stated that, “It is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other to have the benefit of the contract.”

Can Refusal to Negotiate Satisfy an Obligation to Negotiate in Good Faith?

Where the Courts found that No Negotiations meant Good Faith Negotiations

The case of Laing O’Rourke (BMC) Pty Ltd v Transport Infrastructure Development Corp [2007] NSWSC 723, dealt with the obligation to act in good faith and is unique in its determination and reasoning of whether no negotiations can fulfil the requirement for good faith negotiations. In the judgment of Hammerschlag J at paragraph [50] it was stated that:

“It is not the tension between negotiation and good faith that is the lynch pin in the argument, it is the absence of an objective yardstick by which to measure the good faith or otherwise of a negotiating party’s stance. An appropriate (and indeed often effective) negotiating strategy may be a refusal to negotiate.”

This case demonstrates that while there is a tension between optimal negotiating strategies and the obligation to negotiate in good faith, the act of abstaining from negotiations may in certain circumstances be consistent with an obligation to negotiate in good faith.

However, it is important to note that this case had a specific set of circumstances and may be distinguished from other cases.  Such clauses obliging parties to participate in good faith negotiations may be void for uncertainty and in this case the clause stipulating the requirement for good faith negotiations was found to be unenforceable.

Where the Courts Found that No Negotiations did not mean Good Faith Negotiations

In the case of United Group Rail Services Ltd v Rail Corporation NSW [2009]NSWCA 177, Allsop P stated the following in reference to Hammerschlag J’s view at paragraph [77]:

“The voluntary and willing entry into the contract is that it is free to pursue its own interests in negotiation, but by reference the honest and genuine appreciation of the rights and entitlements arising out of the relationship.”

This view does not contradict the observation made by Hammerschlag J but more contextualises the question of whether no negotiations can constitute good faith negotiations. What this case demonstrates is that while negotiations may well be self-serving, if the contract stipulates (express or implied) a requirement for good faith negotiations then it will be an obligation. The relevant clause also stipulated clear and certain actions required of the parties such as attending meetings to negotiate.

The implication of this reasoning is that good faith negotiations require the positive act of attendance and conduct contrary to this will be inconsistent with good faith negotiations. Consequently, although no negotiations may satisfy an obligation of good faith negotiations, it will not satisfy an obligation of good faith negotiations where the clause is specific and includes obligations such as attendance at meetings and participation in mediation. Ultimately in this case where the agreement between the parties requires ‘an honest and genuine approach to settlement with fidelity to the bargain’ no negotiation did not equate to good faith negotiations.

There remains some debate about the enforceability of a clause requiring good faith negotiations and the conduct required to comply with such a clause. This can be addressed by ensuring that any contract with an obligation to negotiate in good faith defines clear and certain conduct and actions required of each party. Such drafting will avoid the problem that the clause will be void for uncertainty.

Key Takeaways

1. There is no statutory definition of good faith.
2. A clause in a contract which simply states that there is an obligation to negotiate in good faith is unlikely to be enforceable. This is because without specific details regarding conduct and actions the clause can be void for uncertainty.
3. However, a dispute resolution clause in a contract which specifically defines the obligations involved to negotiate in good faith can be binding. The contract should include details of the obligations, such as attending meetings or participating in mediation.
4. Careful drafting of dispute resolution clauses can ensure good faith negotiations can be enforced.

How can BSM Sydney Lawyer assist you?

The contract lawyers at Brander Smith McKnight Sydney lawyers have decades of experience in drafting and reviewing contracts and dispute resolution clauses. We understand the nuances and legal implications of contract drafting and will create watertight contracts. Our senior contract lawyers offer a free 20-minute consultation.

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