Good Faith in Contracts: Honesty and Fair Dealing
What Does Good Faith Mean in Contracts?
Good faith is a legal obligation to deal honestly and fairly with the other party to a contract. In most U.S. jurisdictions, every contract includes an implied covenant of good faith and fair dealing — even if the contract does not explicitly mention it.
The Implied Covenant
The Uniform Commercial Code (UCC Section 1-304) requires good faith in the performance and enforcement of every contract within its scope. The Restatement (Second) of Contracts (Section 205) similarly imposes a duty of good faith and fair dealing on all contract parties.
Good faith generally means:
- Honesty in fact. Not lying or concealing material information.
- Fair dealing. Not taking actions that undermine the other party's ability to receive the benefits of the contract.
- Consistency with reasonable expectations. Acting in a manner consistent with what the other party would reasonably expect based on the agreement.
What Bad Faith Looks Like
- Exercising discretionary authority under the contract to deny the other party its expected benefits
- Using a technicality to avoid performance while the other party has substantially performed
- Deliberately delaying performance to gain leverage
- Interfering with the other party's ability to perform so you can claim they breached
- Invoking a termination clause when the true purpose is to renegotiate better terms
What Good Faith Does Not Require
Good faith does not require:
- Altruism or self-sacrifice
- Giving up contractual rights you legitimately hold
- Continuing a relationship beyond the contract term
- Accepting performance that does not meet the contract's standards
What to Watch For
- Discretionary clauses. Any clause giving one party discretion ("at Company's sole discretion") is subject to the good faith requirement. Discretion cannot be exercised in bad faith.
- Satisfaction clauses. When performance must be to one party's "satisfaction," most courts require that dissatisfaction be in good faith, not a pretext for avoidance.
- Termination for convenience. Even a right to terminate for convenience must be exercised in good faith.
When to Consult a Lawyer
Consider consulting an attorney if you believe the other party is acting in bad faith — using the contract's terms to undermine the deal rather than fulfill it.
This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.