Ahead of the Deal - Australian M&A briefing
Key insights
- A duty or obligation of good faith is "not recognised as a general legal incident of all commercial contracts" in Australia. Where it is implied into a contract, it is a context-specific duty or obligation, not a free-standing standard of conduct.
- Recent NSW decisions show the limit: good faith cannot create obligations that the agreement does not contain or rescue a bargain that the parties left incomplete.
- Parties should not rely on 'good faith' as a means to regulate behaviour in an M&A context. If a particular outcome matters, draft it. This means that triggers, timings, conditions and limits on discretion should be clearly articulated. Sophisticated parties cannot rely on good faith to fill those gaps later.
The obligation of good faith "varies in what is required for its satisfaction by reference to the nature of the contract. But the notion is rooted in the bargain and requires behaviour to support it, not undermine it, and not to take advantage of oversight, slips and the like in it" (Paciocco v ANZ Banking Group).
Good faith is no safety net for an incomplete commercial bargain, particularly in an M&A deal.
In Australia, it is "not recognised as a general legal incident of all commercial contracts” – that is, there is no free-standing obligation or overarching duty to act in good faith in every aspect of a contractual relationship, and a requirement to act in good faith is not generally implied in share or asset purchase agreements (Les & Zelda Investments v Whitehaven Coal).
An obligation or term to act in good faith may be:
- implied by law for a particular class of contracts if it is "reasonable" and "necessary" to do so, or
- implied in fact, if the BP Refinery criteria for the implication of terms are satisfied. This requires such a term to:
- be reasonable and equitable;
- be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it;
- be so obvious that “it goes without saying”;
- be capable of clear expression; and
- not contradict any express term of the contract.
These are critical boundaries. Good faith may police performance of an existing bargain, but it cannot supply or stand in for a bargain that the parties never made.
What are the boundary lines?
At its core, good faith requires parties to:
- act honestly and with fidelity to the bargain;
- not undermine the substance of the benefit for which they contracted;
- act reasonably and with fair dealing, having regard to the parties’ interests (which may conflict) and to the contract’s objectively ascertained provisions, purposes and aims; and
- not act capriciously
(Whitehaven; Paciocco).
What constitutes conduct in 'good faith', however, remains an "inherently nebulous concept" (Gujarat NRE v Wollongong Coal). Its content turns on the contract’s language, purpose and commercial context. Courts therefore resist applying a single normative standard across different agreements, but what is clear is that the duty is ancillary not freestanding. It governs the exercise of powers and performance of obligations under the relevant agreement. It cannot be used to impose obligations or confer powers that the parties did not expressly contemplate (Whitehaven).
Although Courts have taken different approaches to implying a duty or obligation of good faith, the BP Refinery criteria remain relevant to the assessment.
Recent authority makes clear, however, that good faith cannot exceed the boundaries of the express bargain. The practical limit is this: Where a contract gives a party a power wider than necessary to protect its legitimate interests, a court may imply a duty to act in good faith if that power is exercised "in a capricious or arbitrary manner or for an extraneous purpose" (Whitehaven). That constrains an existing power, it does not create a new one.
A finding that there is an implied duty of good faith does not necessarily dictate the content of that duty, or indicate that duty has been breached. The question is whether the party’s conduct, assessed against the bargain, undermined the benefit the other party contracted to receive. Honesty and fidelity require a party to give effect to the agreement, not sidestep it, but good faith does not require it to subordinate its interests to the other party’s interests (Gujarat; Cordon Investments v Lesdor Properties).
As a point of distinction, there is a duty to cooperate that is implied as a matter of law in all Australian contracts – to do "all that is necessary to be done to carry out what the parties agreed should be done…[and] to do nothing to put an end to an existing state of circumstances." The duty to cooperate "does not extend to being nice" (Whitehaven).
The implied duty of cooperation is closely related to, and frequently arises alongside, good faith, but the former facilitates performance of the bargain, whereas a good faith obligation constrains how parties perform their obligations and exercise contractual rights. Both are assessed by reference to the rights, obligations and intent of the parties to the relevant agreement, and neither doctrine permits a court to rewrite the deal.
Raked over hot coals: Lee v Kim [2026] NSWSC 825
Lee v Kim concerned Lee’s partial sale to Kim of shares in a company operating a Korean BBQ restaurant. The business depended heavily on Lee's financial support and carried unpaid operating expenses.
The share sale agreement provided that Lee, "acting on behalf of [the company would] accept full responsibility of all liabilities previously to the completion of sale, including but not restricted to, rent/suppliers/wages/utilities. It is a condition of sale, the Purchaser, Jihoon Kim will have zero accountability on the above incurred (if any) previous to the date of purchase."
After completion, Lee did not repay the company's debts.
The drafting context mattered: neither party had legal training or legal advisers, and Lee prepared the one-page agreement. The language was "not very clear”, which was critical to deciding whether to imply a term.
The Court did not need to imply a general duty of good faith. It instead determined that there was an implied term requiring Lee to repay the pre-completion liabilities within a reasonable time and found that without such a term, the company would not have been able to continue trading.
That route matters. The repayment obligation was "so obvious, that it was not addressed in the parties’ agreement" and was "necessary to give business efficacy" to the contract. Although the Court said the same result could have been achieved through good faith, the clearer lesson is that the Court used the BP Refinery criteria for implied terms to fill an obvious gap in an unclear bargain, rather than using the concept of good faith to create a new obligation.
No coal comfort: Les & Zelda Investments Pty Ltd (as trustee for Les & Zelda Family Trust) v Whitehaven Coal Ltd (No 4) [2026] NSWSC 107
Whitehaven presented the opposite problem. The transaction was documented in comprehensive arrangements including a share purchase agreement and restriction deed. The Supreme Court of NSW refused to imply a duty or obligation of good faith into those arrangements. The practical message is stark: sophisticated parties cannot expect a court to restore protections they left out of a detailed deal.
The dispute concerned shares issued by Whitehaven Coal Limited (Whitehaven) as scrip consideration for the acquisition of a coal exploration and mining entity.
The scrip was subject to voting and disposal restrictions that would fall away when specified events, which related to the grant of mining leases and environmental approvals in respect of the target entity's coal exploration projects, occurred. The agreement set no deadline for those trigger events and imposed no obligation on Whitehaven to procure their occurrence.
As a condition to the sale, a pre-completion capital injection was made into the target, partly to repay its debt. The share sale agreement said nothing about using the balance to develop projects that, if developed, would have satisfied the trigger events. That omission was central.
L&S (a holder of the scrip consideration) alleged that Whitehaven breached an implied good faith obligation in circumstances where:
- Whitehaven "indefinitely mothballed" the development of the projects, the completion of which would have led to satisfaction of the trigger events; and
- Whitehaven had represented that it would expend the money for the "ongoing development" of the target's assets.
The Court found that the "essential promises" had been made and performed and none of the Court’s threshold descriptors – “nugatory, worthless”, “seriously undermined”, “deprived of their substance” or “drastically devalued” – applied.
Having regard to the BP Refinery criteria, it was also not necessary to imply a good faith obligation to give the agreements business efficacy, and in fact this would have been inconsistent with their express terms.
While the agreements contemplated lifting the voting and disposal restrictions, the duty to act in good faith could not operate as a standalone obligation requiring Whitehaven to go beyond the exercise of its own discretion to procure the achievement of the trigger events (even where the parties had contemplated that those events might occur).
The plaintiffs also asserted a breach of the duty to cooperate, and that claim failed for the same reason.
The Court regarded the parties’ sophistication as significant. They had "highly experienced corporate and legal advisers”, so the absence of any express promise or obligation on Whitehaven to take steps to develop the relevant projects was "all the more striking."
That point reflects a broader principle: the more detailed and express the agreement, the less room there is to imply a generic good faith obligation.
Whitehaven therefore draws the line clearly. Good faith cannot add to or contradict the express bargain. Even in Lee v Kim, where the drafting was unclear but the agreement contained an underlying obligation, the Court used the BP Refinery criteria to imply a term to produce an outcome – not to impose a duty of good faith.
Border dispute
The High Court has left the central question unresolved, though it has warned against implying a general duty of good faith, describing it as “inconsistent with the law as it has developed in this country in respect of the introduction of implied terms into written contracts" (Royal Botanic Gardens v South Sydney City Council). It has also warned that implying broad normative standards such as reasonableness and good faith is "not a step to be taken lightly" (Commonwealth Bank v Barker).
NSW authorities take a more open, context-driven approach. The NSW Court of Appeal has recognised that “in New South Wales a duty of good faith, both in performing obligations and exercising rights, may by implication be imposed upon parties as part of a contract” (Alcatel v Scarcella). However, in the context of share purchase agreements where the obligations typically relate to a single event rather than regulating an ongoing relationship between the parties, there is generally greater reluctance by the Courts to imply such an obligation (as distinct from other types of contracts such as franchising, distribution, licensing or employment contracts).
The Court must first consider the agreement's express terms and the parties’ conduct, and determine whether the agreement would be "effective without [the implied duty of good faith], and whether the enjoyment of the rights expressly conferred would or could be rendered nugatory, worthless or perhaps be seriously undermined" without the duty (CGU v Garcia).
By contrast, courts in other Australian jurisdictions have taken a more cautious approach, requiring that the ordinary BP Refinery principles be satisfied before implying any term (Wang v HMG Capital; QNI Resources v North Queensland Pipeline; Caratti Holdings v Coventry Group).
Don't leave it to faith
Commercial parties and their advisers should not, in negotiating and documenting the terms of an M&A transaction, treat the concept of good faith as a means to regulate contractual conduct in a way that is not expressly contemplated by their agreement. A requirement of good faith, where it exists, can govern the performance of rights and obligations a contract already creates, but it cannot supply a missing term or rescue an incomplete bargain.
Spell out the outcome that matters: define triggers, deadlines, conditions, rights and limits on discretion. Do not assume a court will imply a duty to deliver an outcome the agreement leaves open.
If a result matters, draft it.
Authors: Sharon Liu, Partner and Adelaide Holm, Lawyer.
Want to know more?
- From handshake to headache – why 'preliminary' agreements can make or break your deal
- Before the ink dries – lessons from 'pre-contractual' pitfalls and earnout entanglements
