According to the laws governing contracts, all contracts include the implied covenant of good faith and fair dealing. What this means is that each party to the contract must act honestly and fairly, and also show good faith towards one another during the contract process. In other words, a party cannot participate in an act that would prevent the purpose of the contract from being achieved.
As for business owners who manage the sale of merchandise using contracts, the term “good faith” applies to them in that it requires that they behave honestly and comply with the reasonable commercial standards of fair dealing within their industry.
A basic example of conduct that demonstrates good faith is when a person only enters into a contract that they believe, in good faith, they will be able to fulfill.
For instance, if a person agrees to manufacture and distribute 1,000 door knobs, but they do not have any of the resources or the capabilities to manufacture 1,000 door knobs, then the other party can argue that they did not enter into their contract in good faith. Thus, they will have violated the implied covenant of good faith and fair dealing.
What are Some Examples of the Failure to Act in Good Faith?
There are many different scenarios that can amount to a failure to act in good faith. Oftentimes, such cases will be determined based on the individual facts of that case. There are certain situations, however, that frequently reoccur more than others that can make these types of cases seem similar to one another.
Some general examples that show the failure to act in good faith and deal fairly under a contract include:
- If a party tampers with any of the goods to be delivered under a contract;
- When a party to a contract promises to use the services of one company exclusively, but breaks that promise by intentionally using the services of multiple companies;
- If one of the parties lies about performing their obligations under the contract; and
- When a party contracts to purchase a home, gets denied by a mortgage company, and then refuses to use a different mortgage company in order to go through with the sale.
As is evident from the above examples, good faith does not only apply to contracts between corporations or business entities. In actuality, good faith applies to just about any type of contractual situation, which includes when selling a house, purchasing a car, or performing services (e.g., cleaning a house, landscaping a backyard, etc.).
What Actions Can I Take If the Other Party Fails to Act in Good Faith?
When one of the parties to a contract violates the covenant of good faith and fair dealing, it will be considered a breach of the contract. Therefore, that party can be held liable for any damages that occur due to their breach.
For instance, if one party tampers with the goods that the other party was supposed to receive, then they may have to refund them and pay for any lost profits. Depending on the circumstances, the breaching party might also be responsible for paying other kinds of consequential damages that the non-breaching party incurred as a result of the breach.
In addition, if the other party’s failure to act in good faith prevents them from substantially performing their portion of the contract, then the non-breaching party’s obligations under the contract will likely be dismissed. It is important to keep in mind, however, that substantial performance issues are tricky to litigate and the court will likely consider other factors before discharging the parties’ contract.
On the other hand, if part or most of the contract has been substantially performed, then the non-breaching party will most likely still be held responsible for payment of the goods or services that they already received.
Finally, as a good practice for all contract cases, it is crucial that a party reviews their contract thoroughly before filing a claim. The terms of a contract will usually provide the proper instructions or steps that a party should take when another party fails to act in good faith.
On the off-chance that a contract does not give any instructions to its parties, then it might be a good idea to check out some of the local contract laws and also to contact a business attorney for further guidance on the matter.
The following articles provide some more information about what potential options a person might have when faced with the contract issue of a party failing to act in good faith:
- What is a Breach of Contract?
- How Much Does a Breach of Contract Lawyer Cost?
- What are the Penalties for a Breach of Contract?
Do I Need to Hire an Attorney for Help with My Breach of Contract Issue?
Contract terms are often hard to understand and can be difficult to interpret. If you are involved with a claim based on a violation of the implied covenant of good faith and fair dealing, or any other contract-related issue, then you should contact a contract lawyer in your area for assistance.
An experienced contract lawyer can help you to either reach a settlement with the other party, or alternatively, file a lawsuit against them if a settlement cannot be reached.
Additionally, you should also consult with a lawyer before entering into any contracts, so that they can review it to ensure your rights are being properly protected under its terms in the event that a conflict arises in the future.