1. Good Faith and Bad Faith Overview
2. Benefits of the Good Faith Doctrine

Good Faith and Bad Faith Overview

Acting in good faith, or bona fide, as it is sometimes also referred to by the courts, refers to the concept of being sincere in one’s business dealings and without a desire to defraud, deceive, take undo advantage, or in any way act maliciously towards others. This concept applies to many field of law, but is especially important in commercial law, where it can apply to many situations, including contract and settlement negotiations, mediation, arbitration, and general business dealings.

Acting in good faith may have a variety of meanings for a variety of situations, but in the eyes of the courts, there will be generally one of two meanings applied to a case to determine if good faith was upheld or not, and these are:

  1. The Standard of Reasonableness. By this standard, an individual or entity may be considered to have not acted in good faith if they refused to adhere to their side of a contract for no reason that relates to the terms of the contract. For example, a party refusing to make their car payments due to a personal issue with someone at the dealership would be acting without good faith in an unreasonable manner.
  2. The Standard of Intent. By this standard, an individual or entity may be considered to have not acted in good faith if they did not act reasonably and knew their was no reasonable basis for their actions. For example, an insurance company misrepresenting the terms of their policy would be acting without good faith with intent.

A lack of good faith may be viewed by many as acting in bad faith, but the courts will usually define bad faith as acting with reckless, indifferent, arbitrary, or intentional disregard for the wellbeing of other parties. Or, in other words, an act of bad faith must be done with some manner of intent, and not merely the result of ignorance or an error in judgment. It also must be provable as an act of bad faith.

Benefits of the Good Faith Doctrine

Good faith doctrines have the benefit of enhancing the flow of commercial goods, since with them in place purchasers need not go to extraordinary lengths to determine that a seller is in good standing. Rather, a purchaser can act under the knowledge that a party acting fraudulently may have to answer for such acts in court, so long as evidence can be shown that the party acted deliberately in bad faith.

This concept is central to many other aspects of business dealings and law, including:

  • Holder in due course. This is a concept pertaining to commercial paper (checks, promissory notes, deposit certificates, etc.) that one who holds a paper note may use it with the belief that the payment promised by it will occur in due course. If good faith did not back commercial paper, trust in its value would erode.
  • The National Labor Relations Act of 1935. This gave workers in the private sector the right to form or join a union and enter into collective bargaining with their employer over such issues as hours, wages, and working conditions. It also required employers to negotiate with unions in good faith.
  • The Uniform Commercial Code. Under certain rules of this code, which has been adopted in every state, a merchant has the right to retain goods that were purchased from a seller that lacked the right or title to sell those goods, if the merchant can prove that they were ignorant of the state of the goods or seller and thus acted in good faith when acquiring them.
  • The Business Judgment Rule. This rule obligates directors and officers of corporations to act with good faith in their dealings on behalf of their corporation, while in turn they will not be held liable to incurred losses from their dealings, unless those dealings were proven to have been made in bad faith. This rule allows managers to act quickly, decisively, and sometimes riskily if they believe it will benefit their company, and do so without fear of being held personally liable by shareholders or other members of the company.
  • Good faith deposits. A good faith deposit is a payment made to a landlord or seller of such “big ticket” items as cars, boats, and homes that signifies a renter’s or purchaser’s interest in the property in exchange for the property being taken off the market until the deal is closed. Good faith benefits buyers by holding property from other potential buyers and benefits property holders by bringing serious buyers to the forefront.

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