Although the Code does not define exactly what good faith means, it does state that the obligation of good faith is to reflect historical judge-made law (known as the ‘common law’).

Under common law, good faith requires parties to an agreement to exercise their powers reasonably and not arbitrarily or for some irrelevant purpose. Certain conduct may lack good faith if one party acts dishonestly, or fails to have regard to the legitimate interests of the other party.

Australian courts have found business dealings to be not in good faith when they involve one party acting for some ulterior motive, or in a way that undermines or denies the other party the benefits of a contract.

The Code outlines certain matters that a court may consider when determining whether a party has acted in good faith. These matters are whether the party:

• acted honestly and not arbitrarily
• cooperated to achieve the purposes of the agreement.

A court can also take into account other matters it considers relevant.