A statement of good faith implies the parties involved in a contract will avoid acting in a dishonest manner or do anything that will intentionally prevent the completion of a contract.

Definition of Good Faith

The term "good faith" refers to the comprehensive and somewhat abstract concept of a sincere motive or belief. In addition, good faith refers to the lack of a desire to defraud another person or business entity and alludes to the fact that there is no intended malice. "Good faith" is derived from a translation of the Latin words "bona fide." In fact, the court system uses both terms when referring to matters of good faith.

Every contractual agreement includes the implied condition that all parties involved are required to act in good faith. In other words, the parties to a contract are expected to refrain from deliberately hindering the contract's completion. In the event that a party fails to act in good faith, a breach of contract is considered to have occurred and the offending party will likely be held liable for any damages that arise as a result. In simple terms, good faith means that everybody involved will act in an honest manner and will refrain from such actions as:

  • Lying
  • Stealing
  • Cheating

From the perspective of a business owner who sells merchandise, good faith implies the business will engage in honest behavior and comply with reasonable standards as they apply to fair trade and commercial dealings. In this scenario, failing to act in good faith doesn't necessarily mean acting in a manner that is contrary to community standards such as:

  • Decency
  • Being fair
  • Being reasonable

Instead, it focuses more on adhering to what the involved parties to a contract have agreed and the expectations that each party can reasonably place on the other.

How Does the Law Apply to Good Faith?

"Good faith" is a term that is used in multiple areas in the law. It is especially significant in the area of commercial law, though. For example, every state has adopted the Uniform Commercial Code, which offers protection for good faith purchasers for value.

According to section 1-201(9) and section 2-403 of the Uniform Commercial Code, merchants can retain possession of goods if they were purchased from a seller who didn't have a title to the goods in question. However, this requires the merchant to be able to demonstrate they were a good faith purchaser for value. To do this, they must meet the following requirements:

  • They must actually be a merchant.
  • They must be able to demonstrate they conducted themselves honestly during the transaction in question.
  • They must be able to prove they have reasonably observed the commercial standards pertaining to fair dealing in the transaction.

Under normal circumstances, as long as the transaction happened during the normal course of business, the buyer is likely to meet the requirements listed above. However, if the purchase happened under what might be considered suspicious or unusual circumstances, it is possible the court could determine the buyer was not acting in good faith.

In the event that somebody who is not a merchant purchases something to which the seller does not have a legal title, issues pertaining to good faith are known as both of the following:

  • The innocent purchaser doctrine
  • The bona fide purchaser doctrine

Typically, as long as the buyer acquired the property by means of an honest contract or purchase agreement, and he or she was not aware the seller lacked the required legal title or there is no way to prove the buyer acted with the knowledge that the seller lacked the proper title, they are likely to be considered innocent.

Whether you're dealing in commercial or non-commercial law, when somebody acts in good faith and pays a seller engaging in fraudulent activity, he or she is protected from others who may be able to claim a legal title to the property in question. In the event the court determines a buyer was acting in good faith, the person claiming title to the property can only take legal action against the seller.

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