Australia: Obligation to "Negotiate in Good Faith"

Addisons Contractual Interpretation Series
Last Updated: 25 April 2012
Article by Kristy Dixon

This is one of a series of articles in which we review the judicial interpretation of some words and phrases that are commonly used in contracts. In this article we look at the meaning of the phrase "negotiate in good faith".


An express obligation on parties to "negotiate in good faith" is used in the following contexts:

  • As an obligation to negotiate a more complete agreement in a "preliminary document", such as a heads of agreement or memorandum of understanding. For example, the parties to a proposed sale of business transaction may set out the key commercial terms in a MOU, which is stated to be non-binding except for the obligation to negotiate in good faith to finalise the complete agreement.
  • As an express term of an existing and complete contract requiring the parties to "negotiate in good faith" in the performance of some aspect of the contract. For example, the dispute resolution mechanism in an agreement may have a requirement that the parties meet and negotiate in good faith to resolve a dispute as a first step before resorting to court proceedings or reference to an independent expert.

Is an obligation to "negotiate in good faith" enforceable?

Traditionally, an agreement to negotiate has been considered to be unenforceable for its lack of certainty. In the words of an English court, "no one could tell whether the negotiations would be successful or would fall through; or if successful what the result would be"1.

Similar sentiments were expressed by Handley JA the 1991 New South Wales Court of Appeal case of Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd2, who observed that parties to a negotiation "may withdraw or continue; accept, counter offer or reject; compromise or refuse, trade-off concessions on one matter for gains on another and be as unwilling, willing or anxious and as fast or as slow as they think fit"3.

While the obligation to negotiate a more comprehensive joint venture agreement in the Coal Cliff Collieries case was ultimately held to be unenforceable on the basis of uncertainty, the prevailing majority judgement disagreed with the traditional view adopted by Handley JA and expressly rejected the proposition that a court would never enforce a promise to negotiate in good faith. In their view, such a promise will be enforceable in certain circumstances, such as where an identifiable third party has been given power to settle ambiguities and uncertainties associated with the negotiation. This position was confirmed and expanded upon by the NSW Court of Appeal in 2009 in United Group Rail Services Limited v Rail Corporations New South Wales4, in which the Court also provided some guidance as to what is required of parties who are subject to an obligation to "negotiate in good faith".

What does "negotiate in good faith" mean and require?

The obligation to negotiate in good faith in the United Group case was included in the dispute resolution clause of an engineering contract between the parties. The clause required the senior representatives of the parties to "meet and undertake genuine and good faith negotiations with a view to resolving the dispute or difference". If the dispute was not resolved within 14 days, the clause then directed the parties to resort to mediation and arbitration. The central legal issue was whether the "genuine and good faith negotiations" requirement lacked certainty to the point of being incomplete and unenforceable.

The NSW Court of Appeal upheld the clause on the basis that there was an objective yardstick by which the Court could determine whether there had been compliance with it. The Court held that "an honest and genuine approach to settling a contractual dispute, giving fidelity to the existing bargain, does constrain a party". This constraint requires the honest and genuine assessment of rights and obligations, and it requires a party to negotiate by reference to such.

The Court also provided some examples of what is required under an obligation to negotiate in good faith:

  • a party may not be entitled to threaten a breach of contract in order to bargain for a lower settlement sum than it genuinely recognises is due;
  • a party would not be entitled to pretend to negotiate, having decided not to settle what is recognised to be a good claim, in order to drive the other party into an expensive arbitration that it believes the other party cannot afford; and
  • if a party recognises, without qualification, that a claim or some material part of it is due, the obligation may require payment to be made.

It should be noted, that the dispute resolution clause in the United Group case included finite limits for the obligation; that is, the express requirement that negotiation was to be conducted by senior representatives over a limited 14-day period, and that if that failed, the final step was arbitration. A "negotiate in good faith" obligation without some similar constraints or boundaries is likely to be too vague to be enforceable.

In the 2010 case of Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service5, the NSW Supreme Court of Appeal again emphasised the need for an objectively ascertainable structure to an obligation to "negotiate in good faith". The Court indicated that, where enforceable, the obligation will usually include:

  • an obligation 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; 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.

While these obligations do not require the interests of one party to be subordinated to those of the other, it does require a party to have due regard to the legitimate interests of both parties.

Practical implications

A simple undertaking to "negotiate in good faith" is likely to be held to be unenforceable by the courts. However, if there is some identifiable process upon which the obligations can fasten, the commitment may be binding. This will ultimately depend upon the specific terms and the context of the obligation.

The courts are likely to accept that an obligation in an existing contract to renegotiate specific terms (such as key performance indicators or pricing) "in good faith" is enforceable. However, where the negotiation relates to reaching agreement on a new matter that is not covered by the existing terms, it is more likely to be unenforceable for lack of certainty.

Even where an undertaking to negotiate in good faith is held to be enforceable, the practical requirements inherent in the obligation are limited.

Accordingly, before agreeing to an obligation to "negotiate in good faith" in a commercial document, you should consider the following:

  • What is the likelihood of the obligation being enforceable? Is it part of a preliminary agreement or an existing contract? Is the obligation sufficiently certain?
  • What does or should the obligation to negotiate in good faith require the parties to do? Consider setting out a process to be followed, ideally involving fixed time periods and some recourse to an independent body to resolve the dispute. It is also important to keep in mind that the obligation means that you will not be able to engage in any bargaining technique that is inconsistent with the notion of "good faith".
  • Is there a risk that the other party will not act in good faith? If the answer is yes, and you are concerned with incurring significant expenses during the negotiation, it may be a good idea to provide explicitly in the contract that if the parties fail to come to an agreement during the allocated period of negotiation, the parties will share any expense reasonably incurred in anticipation of the deal under negotiation.

The assistance of Chuanchan Ma, Graduate, of Addisons in the preparation of this article is noted and greatly appreciated


1 Courtney & Fairbairn Ltd v Tolaini Bros (Hotels) Ltd [1975] 1 WLR 297 per Lord Denning.
2 (1991) 24 NSWLR 1.
3 Above n2 at 41-42 per Handley JA (dissenting).
4 [2009] NSWCA 177.
5 [2010] NSWCA 268.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Kristy Dixon
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions