FOR LAWYERS

Good Faith

By
Lia Kopin-Green
/
December 18, 2022

What is Good Faith?

In business law, the directors and officers of a corporation must act in good faith while carrying out their fiduciary duties. The duty of good faith refers to the implied covenant that the parties will act honestly and fairly. As a simple rule of thumb, upholding good faith means not lying, cheating, or stealing.

Moreover, good faith is a key condition in every contract in the United States. According to this principle, it is assumed that the contracting parties have honest intentions and will not do anything to deliberately harm the other party or breach their contract. A party may be held liable for damages if it breaches the contract by failing to act in good faith.

Key Takeaways 

  • In corporate and business law, the directors and officers of a corporation must act in good faith while fulfilling their fiduciary duties.
  • Good faith generally refers to the implied covenant that parties must act honestly, fairly and with sincere intentions. 
  • Depending on the circumstances, good faith may also be defined as faithful performance of duties, observance of fair and lawful dealing standards, and lack of fraudulent intent.
  • In the United States, all contracts have an unstated good faith element by virtue of the Uniform Commercial Code.

Determining Good Faith

Good faith is a common legal term used in a variety of legal settings, including in contracts, business deals, mediation, corporate transactions and settlement negotiations. The meaning of good faith may vary depending on the jurisdiction circumstances of the situation at hand. In fact, in general, good faith has no specific definition. Nonetheless, the courts have used their discretion to establish its scope in a number of settings. Some courts choose to determine good faith using one of the two standards below:

  • A party may be held liable for failing to act in good faith if they fail to fulfill their obligations of a contract for no reason or for a reason irrelevant to the situation.
  • A party may be held liable for failing to act in good faith if they acted unreasonably and if he or she knew or should have known the action was unreasonable.

Examples of Lack of Good Faith

Examining cases of lack of good faith can provide insight into the concept of good faith in business law. Let’s take a look at a simple example in which a corporation failed to act in good faith.

Suppose that a renowned restaurant chain is in the midst of negotiating a contract with one of its suppliers for the raw materials it needs to operate its business. Throughout the negotiation process, the restaurant owner fails to disclose crucial information about its budget needs in hopes to take advantage of the supplier and demand unfair terms. In this case, the restaurant owner would be exhibiting bad faith. 

Bottom Line

In conclusion, the principle of good faith is an important concept in business law that requires parties to act honestly and with integrity in their dealings. Understanding this principle and its potential consequences can help companies avoid legal problems and maintain positive business relationships. If you have legal needs related to good faith or any other area of law, consider reaching out to one of our experienced attorneys at Attorney at Law.

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