Contract Good Faith and Fair Dealing

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Contract Good Faith and Fair Dealing

Every contract has an implied condition (i.e. unstated condition) that each party to the contract must act in good faith and would not deliberately hinder the completion of the contract. Failure to act in good faith will result in breach of contract and liability for resulting damages.

What Is Good Faith?

Good faith typically means honesty in fact in the conduct or transaction involved (e.g. not to lie, steal, and cheat).

For business owners dealing with the sale of merchandise, good faith requires honest behavior and compliance with reasonable commercial standards of fair dealing in trade.

Failure to act in good faith in this case does not mean acting in contrary to the community standards of decency, fairness, and reasonableness. Rather, it focuses on the adherence to what the parties have agreed upon in the contract and the reasonable expectations of the other party.

What Are Some Examples of Failure to Act In Good Faith?

Here are some illustrations of what failure to act in good faith is:

     • G contracts with H for H to pass out advertising pamphlets to people on the street. H just places the pamphlets on a table and leaves it out for people to take them. H then goes home.
     • S enters into a contract promising to use T’s cleaning services only, but S willfully contracts with T’s competitor and uses the competitor’s cleaning services as well.
     • K contracts with J for J to supply timber for K’s construction business. K then deliberately tempers with J’s timber supply so that J could not supply the contracted timber to K.
     • B contracts to buy a house from C on the condition that B gets a reasonable mortgage from a bank. B only applies for a loan in one bank and gets denied. B could have gone to 20 other banks to apply for a loan, but B refuses to do so.

What If the Other Party Fails to Act In Good Faith?

If the other party to a contract does not act in good faith, your obligation to perform may not necessarily be discharged. If the other party fails to have substantial performance when he/she fails to act in good faith, then your obligation will be discharged. Otherwise, you may still need to pay for the services or goods provided to you (if any) less your damages resulting from the breach.

The failure to act in good faith generally is not the only factor in determining whether the breaching party has substantially performed; substantial performance is usually determined based on all of the facts and circumstance of the case.

Do I Need an Attorney for My Breach of Contract Issue?

Contract law can be quite complicated. Additionally, every state has different lawsuit filing procedures and deadlines for breach of contract claims. An attorney can help a party conform to the applicable procedural rules and collect all the proper documents to prove a breach. Further, an attorney can help you negotiate the terms of a contract before you make or accept an offer.

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Last Modified: 11-13-2013 02:59 PM PST

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