Good Faith

Literally means behaving honestly with others. More specifically, dealing with someone in good faith means the intent to be fair and open in the negotiation, disclosing material facts, with the intent to follow through on any agreements arrived at.  An obligation of good faith normally applies in a fiduciary relationship, but it’s application in other business relationships is much less consistent.

To accept something in “good faith” means to accept the thing as being what it purports to be – so to accept for example a check in good faith is to take it in the honest belief that it is a good check, payable when presented. Similarly a good faith claim is a claim or factual statement whose maker has reasonably sound reasons to believe is true and no reasons to believe false. In contract law whether there is an implied obligation of ‘good faith,’ i.e., that each party has to have a sincere intent to fulfill their contractual variations varies depending of the jurisdiction.

Thus for example the Uniform Commercial Code has an implied obligation of good faith and fair dealing, but English law generally does not accept an implied obligation (except for insurance agreements), though recent case law suggests that an explicit undertaking to act in good faith is enforceable, and inserting such an obligation in contracts, especially long-term relationship contracts may be wise. The US Second Restatement of Contracts at section 205 contains a description of what in the context of contracts ‘good faith’ means:

“Good faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the party; it excludes a variety of types of conduct characterized as involving ‘bad faith’ because they violate community standards of decency, fairness or reasonableness.”

Intentional efforts to frustrate a counterparty‘s performance of their duties under a contract have also been held to constitute bad faith.

Assuming that someone is a fiduciary or has otherwise an obligation to act in “good faith” can be commercially and financially dangerous. An unfortunate public tendency exists to assume that certain persons have a duty of good faith where none in fact exists. This is most apparent with respect to financial and investment advisors, but is a common assumption by lay-people with respect to the financial sector as a whole.