Good Faith Clause: Everything You Need to Know

A good faith clause refers to the manner in which parties in an agreement act with each other. It is often for an employer and employee relationship, where good faith would cause both parties to act respectfully to one another.

What Is Good Faith?

Good faith is a legal term that describes the intention of the party or parties in a contract to deal in an honest manner with each other. In contracts, the parties signing abide by and uphold the contract. It requires people to act honestly without taking advantage of others.

Good faith is used in many situations, including mediation, business dealings, and contracts, as well as appearing in business law. Directors and officers are required to act in good faith for the corporation. Although good faith may mean different things in certain situations, most courts use one of two standards to determine whether a defendant acted in good faith.

• Someone or a business may be liable for bad faith if they don't hold their end of the contract for no reason or a reason that has little to do with the situation.
• The second situation also uses reasonableness but asks for intent. A defendant may be liable for acting in bad faith for unreasonable behavior and if he knew or should have known the action was not reasonable.

Directors and officers of a company need to act in good faith while representing the company for anyone, including shareholders, but it's difficult for shareholders to bring them to court because of the business judgment rule. The court presumes good faith from company officers unless the plaintiff can prove otherwise

Reasonableness or Good Faith Standard?

A reasonableness criteria is objective — what would a sensible person do in this situation?

A good faith is subjective — was the person thinking he was acting reasonably without considering the perspective of a reasonable person? Sometimes it's not possible to know if a party acted reasonably or not because of a lack of evidence or evidence benefits yourself. It's unreasonable to give the party a chance to act unsensible but in good faith. Courts often decide if a person did something in good faith by thinking about how other people would have behaved in corresponding situations, therefore applying the reasonableness standard.

There are two circumstances where good faith is used to qualify a responsibility to negotiate.

• A good faith standard is built in every contract through the duty of faith because it reinforces the idea that negotiation is required when a meeting is possible. It's clear a reasonableness standard doesn't apply; just because a reasonable person would have agreed doesn't mean you have to.
• Good faith is appropriate when you want to make sure the discretion granted is subject to an obligation to act in good faith.

In contracts, it's better to consider lessening the grant of discretion that could be interpreted openly and making it clear that the contract is subject to good faith.

Good Faith Overview

• If you want the parties to act in good faith, expressly state it in the contract.
• Specify what it means to act in good faith, such as the actions required to meet good faith.
• Include objectives, like deadlines and time limits.
• Good faith obligations don't override the express terms of the contract.
• Good faith law is an evolving area that can be expanded or limited according to each judge, so it's important to understand the developments in good faith law so that you understand how your contract will be interpreted.
• Drafting a contract should be done with time and care, which can then save the business or the parties involved money, stress, and time. If the drafting is done clearly, it will reduce the chance of a dispute over the meaning of a good faith clause. Since good faith is open to court interpretation, it's best for the parties to avoid as much as they can heading to court.

A good faith clause in an agreement states that the parties will uphold the agreement, and if they can't for one reason or another, they will act in good faith to come to a mutual agreement.

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