Key Takeaways

  • A good faith statement affirms that parties in a contract act honestly, fairly, and without intent to deceive.
  • U.S. law, including the Uniform Commercial Code (UCC), enforces an implied covenant of good faith in commercial dealings.
  • The concept applies across legal contexts, including contracts, employment, real estate, and commercial transactions.
  • Sample clauses often reference "good faith" in the context of payment negotiations, performance standards, and dispute resolution.
  • Breach of good faith may result in legal liability even if no explicit clause is violated.

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.

Legal Significance of a Good Faith Statement

A good faith statement often appears in legal documents to reinforce the principle that parties intend to act honestly and fulfill their obligations fairly. Though it can be explicitly written into contracts, courts usually recognize an implied covenant of good faith and fair dealing in most agreements—meaning parties must avoid conduct that would undermine the contract’s purpose.

A good faith statement may be included to demonstrate:

  • Willingness to negotiate fairly,
  • Commitment to fulfilling obligations without deception,
  • Intent to avoid exploiting loopholes or ambiguities.

This principle is fundamental in employment law, insurance claims, lease agreements, and sales contracts. While not all jurisdictions define it identically, the core idea remains: parties should not frustrate the purpose of the agreement by acting dishonestly or unfairly.

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.

Examples of Good Faith Statements in Contracts

Good faith statements can be found in various contractual clauses. These often clarify expectations regarding performance, negotiation, and dispute resolution. For example:

  • Negotiation Clause: “The parties acknowledge that all payment obligations under this Agreement were negotiated in good faith.”
  • Performance Clause: “Each party agrees to use commercially reasonable efforts and act in good faith in fulfilling their respective obligations.”
  • Dispute Resolution Clause: “Before initiating formal dispute procedures, the parties agree to make a good faith effort to resolve issues through direct negotiation.”

These statements are especially common in industries requiring collaboration and mutual trust, such as joint ventures, licensing deals, and real estate development.

Consequences of Bad Faith Conduct

When a party acts in bad faith—by misleading the other party, refusing to fulfill obligations, or otherwise undermining the contract—they may face serious legal consequences. Courts can award:

  • Compensatory damages for losses resulting from the breach,
  • Punitive damages (in rare cases, when malice or fraud is involved),
  • Contract termination or rescission.

Common bad faith behaviors include deliberately delaying payments, concealing critical information, or sabotaging agreed-upon performance metrics. In commercial law, especially under the UCC, these actions can void protections otherwise afforded to the offending party.

Good Faith in Everyday Business Practices

Beyond formal contracts, good faith is also essential in day-to-day business operations. For example:

  • Retailers acting in good faith must not misrepresent products.
  • Employers must honestly evaluate job performance and communicate expectations.
  • Vendors and suppliers must deliver goods and services per agreed-upon standards without deception.

Acting in good faith also involves following industry norms and commercial standards—what is considered fair and honest by a reasonable businessperson in the same field.

Frequently Asked Questions

1. What is a good faith statement in a legal contract?A good faith statement affirms that both parties intend to act honestly, fairly, and without intent to defraud or obstruct the agreement’s completion.

2. Is a good faith statement legally binding?While the phrase itself may not be enforceable, it reflects the broader legal obligation known as the “implied covenant of good faith,” which is legally recognized in many types of agreements.

3. Can you sue for a breach of good faith?Yes. If one party acts in bad faith—such as by misleading or sabotaging the other—they may be held liable for breach of contract or tort damages.

4. How is good faith determined in court?Courts assess behavior, context, and industry standards to determine whether actions align with honesty, fairness, and the reasonable expectations of the parties.

5. Is good faith required in every type of agreement?In most U.S. contracts, yes—especially those governed by the Uniform Commercial Code. Some exceptions may exist in purely personal agreements or contracts explicitly excluding such obligations.

If you need help with statement of good faith, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies such as Google, Menlo Ventures, and Airbnb.