Good Faith Definition

Learn more about what Good Faith means in business.

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The term “good faith” is an important legal concept that may come up in the course of running your business. You may think you know what these words mean. However, the good faith business definition is likely a little different than you might expect.

Use our guide below to learn more about the good faith definition and how it can impact your business.

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Good Faith Definition in Contracts: An Overview

As a business owner, there are a few things you should know about the definition of good faith. Here’s some important information to help you better understand how the duty of good faith can impact your small business.

Definition of Good Faith in Business

In the context of a contractual relationship, good faith is a particular type of legal duty. Often, this is referred to as the duty of good faith and fair dealing.

According to the Legal Information Institute (LLI), “good faith may require an honest belief or purpose, faithful performance of duties, observance of fair dealing standards, or an absence of fraudulent intent.”

In short, good faith describes honesty and fairness in someone’s conduct during the course of a contractual relationship.

Implied Duty of Good Faith Meaning

The duty of good faith is implied in most contractual agreements. Because this is an implied duty, this means that the legal duty exists even if there are no express terms of the contract stating that the parties agree to act with good faith.

Thus, when entering into contracts for your small business, be aware of this duty of good faith even if there’s no specific clause addressing it.

Breach of Duty of Good Faith Examples

So you might be wondering how exactly a breach of the duty of good faith might come up. Courts assess the duty of good faith and fair dealing on a case by case basis.

However, some common examples of actions that could constitute a breach of the duty of good faith include:

Evading the spirit of the agreement
Interfering with the other party’s ability to comply with their obligations under the contract
Failing to perform your own obligations on purpose or for no valid reason
Failing to act with reasonable diligence

When in doubt, be sure to act with honesty and full cooperation to better avoid breaching your duty of good faith.

Good Faith Definition: Why It Matters

Understanding the duty of good faith is crucial to the success of your business.

When it comes to contractual agreements, not only is it important to understand the explicit terms of the agreement, but you need to also be aware of the implied ones. Failure to comply with the implied duty of good faith can get your business in hot water that can result in potentially damaging legal implications.

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Disclaimer – The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.