All contracts have an implied covenant of good faith and fair dealing. What this means is that each party must act honestly and in good faith during the contracting process. Basically, a party cannot take any action that prevents the purpose of the contract from being achieved. 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.
A basic example of good faith is that a person will only enter a contract that they believe, in good faith, they will be able to fulfill. If a person agrees to manufacture and produce 1,000 door knobs, but does not have any of the resources or abilities to manufacture 1,000 door knobs, then it can be argued that they did not make the contract in good faith.
Some examples of the failure to act in good faith and deal fairly under a contract are:
- Willfully using another company’s services when you promised under a contract to exclusively use the services of one company;
- Tampering with goods to be delivered under a contract;
- Contracting to buy a house and then refusing to find a mortgage after being denied by one mortgage company; and/or
- Lying about performing your obligations under a contract.
As you can see, good faith doesn’t just apply to contracts between corporations or businesses. Good faith applies to just about any contractual situation, which includes the sale of a home, buying a car, or performing services (e.g. cleaning a house, landscaping a backyard, etc).
If a party fails violates the covenant of good faith and fair dealing therefore breaching the contract, they will be liable for any damages that occur. For example, if the other party tampers with goods you were supposed to receive they may have to refund you and pay for any lost profits or other consequential damages you incurred as a result of the breach.
Additionally, if the other party does not have substantial performance because they failed to act in good faith, then your obligations under the contract will likely be discharged. If this happens keep in mind that substantial performance issues are tricky and other factors will be taken into consideration. However, if part of the contract has been performed, you will likely still be held responsible for payment of the good or services that you actually received.
Above all, read the contract thoroughly to find out if there are any steps or instructions you should take if the other party does not act in good faith. If the contract does not say anything, then you can follow the local law and ask for guidance from your business lawyer.
You can read more about what you can do in the event of a failure of good faith, here:
- What is a Breach of Contract?
- How Much Will a Breach of Contract Lawyer Cost?
- What are the Penalties for a Breach of Contract?
Contracts can be hard to understand and interpret. If you have a breach of contract issue due to violation of the implied covenant of good faith and fair dealing (or any other contract-related issue), you should contact a local contract attorney to assist you. An attorney can help you reach a settlement or file a lawsuit is necessary. You should also consult with an attorney before entering into a contract so you can ensure that you are protected in the event that a dispute arises.