You’ve done it! You worked and negotiated for months, and all parties have finally signed that contract. You compromised where you could, you held firm when you needed to, and the business contract was finally signed. Everything is laid out as it should be, but in America, there is more to that contract. Now that it is signed, both parties are required to act in good faith and deal fairly.
Good faith is applicable to all contracts, not just to business contracts. An ordinary person will sign many contracts in their life, such as a contract with their employer laying out their hours, expectations, and pay. You’ll sign a contract with your insurance company, agreeing to your policy and qualifications. When you purchase a property, you sign a contract containing the terms of the sale. All of these contracts are held to the standard of good faith.
What Is Good Faith?
Acting in good faith means you will be honest in upholding your end of the contract and not stand in the way of the success of the other party in performing their end of the contract or from reaping the benefits of the agreed-upon contract.
There are two standards that courts will look for to uphold good faith: reasonableness and intent.
Standard Of Reasonableness In Good Faith
A company or person entering a business contract must act within reason to uphold their end of the bargain. If one party fails to uphold their end of the deal, the court will examine their reasons for the failure. If the reason is unrelated to the contractual relationship or there is no logical reason, the court may declare the action in bad faith.
For example, you sign a contract with your car insurance company. Unfortunately, you are in an accident. You are injured, and your car has extensive damage. You submit a claim to your insurance, and the nature of the accident falls under your coverage. If the car insurance company denies your claim or drags their feet for an extended amount of time, they may be acting unreasonably. There is no logical or relevant reason for them to deny your claim, and the courts could find their actions to be bad faith.
Going further, a second example would be if you were a franchisee. You own and operate one franchised store, so you agree to pay a monthly franchise fee in return for support from the franchisor. This location does not take off as expected, so you reach out to the franchisor for support, looking for marketing ideas or investor contacts. The franchisor ignores your requests for no valid reason, you miss your payment, and they want to shut you down. Because their lack of support is unreasonable, the courts could find them acting in bad faith.
Standard Of Intent In Good Faith
After the courts have examined a situation for reasonableness, they will then look to intent. Did the person or company know and intend to hurt the other party to the contract? Are they purposefully withholding their end of the bargain?
As an example of bad faith intent, let's look back at the car insurance scenario. They are acting unreasonable by not resolving your claim in a way that upholds the contract. The insurance company would be acting with bad intent if they knew there was no logical reason or reasonable basis to deny the claim and still deny it.
A second example of bad intent is if two people entered into a sales contract for a parcel of real property, but the seller did not disclose that they already had a sales contract with another party. Regardless of the reason, whether it was a party that they thought had backed out of the deal (although not actually doing so) or the seller wants a better deal with the new party, they are acting with the requisite bad intent. They are, on purpose, not disclosing all necessary information and intend to deceive the new buyer.
What Is Fair Dealing?
Good faith and fair dealing go hand-in-hand. Fair Dealing deals with the “spirit of the contract.” For example, if a company intentionally uses difficult and vague language to confuse the other party, that is a lack of fair dealing. Other examples would include a company intentionally performing contractual obligations incorrectly, interfering with the other party’s ability to uphold their end of the contract, or one party not diligently completing their obligations.
Business contracts tend to be a bit more complicated when it comes to good faith and fair dealing compared to the examples we've provided above. Still, the principles remain the same—both parties are required to act according to certain standards and expectations when entering into a contract. Due to the complexity of those contracts (and the issues surrounding them), we recommend speaking with a business attorney if you feel you are dealing with a good faith or fair dealing issue.
Next, let's take a look at what can happen if a contract is breached due lack of good faith or fair dealing.
What Can I Do If I Feel Like the other Party Breached My Contract?
First, if you enter into a business contract, the most important thing you can do is hire an attorney to review the contract. The attorney will be able to read over the contract and ensure that everything is addressed.
If you entered into a business contract and you believe that the other party is acting in bad faith or not dealing with you fairly, reach out to a trusted and experienced attorney. Johnson May has reliable attorneys who are here to help. We want to work with you to make sure the business is dealing in good faith, and if they are not, we will help to get proper performance from the other party.