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What is Good Faith?

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In the legal realm, the phrase “good faith” refers to the requirement for parties to act honestly, keep their promises, refrain from making misleading and outright false statements, refrain from taking unfair advantage of the other party (or parties), and refrain from holding others to an impossible standard. Good faith applies to every area of the law, and the concept is applicable in numerous contexts, depending on the situation.

Good Faith in Business Law

Good faith has special significance in commercial law. The business world is governed by written contracts, and in every contract, there is an implied covenant of good faith and fair dealing. This means that the parties to a contract are obligated to deal with each other in a fair and honest manner, and to act in a way that does not destroy the right of the other party (or parties) to receive the benefits of the contract.

Good faith typically requires more than just honesty and fair dealing; in general, parties (to a contract) cannot act contrary to the spirit of the contract, even if they notify the other parties of their intention to do so. A breach of contract claim may arise when one party breaks the contract based on a technicality or uses specific contractual terms in isolation to justify failure to perform his/her contractual obligations, without regard to the overall circumstances and the general understanding between the parties.

There are countless examples of bad faith in contract law, here are just a few of them:

  • A party entering into a contract to produce X amount of goods when they know they lack the resources and ability to do so;
  • A party refusing to pay or delaying payment for goods or services for an unreasonable period of time;
  • A party that interferes with or fails to cooperate with another party’s ability to perform under the contract;
  • Tampering with goods that are to be delivered under a contract;
  • Willfully purchasing goods or services from a competitor after signing an exclusive agreement with one provider;
  • Lying about having performed your obligations under a contract.

Good Faith and Insurance Law

Another area where good faith is foundational is when businesses and consumers deal with insurance companies. Insurance policies are lengthy and confusing, and most people who take out a policy have very little idea what is in the fine print. However, when it comes time to file a claim, they often learn that it is very difficult to get the insurer to uphold their obligations.

Insurance companies promote themselves to the public as offering protection for worst-case scenarios. However, what they promote runs contrary to their financial interest. It is in their financial interests to minimize the amount of money they pay policyholders for covered losses. And because their policies are so complex and confusing, they often use this to take unfair advantage of policyholders.

Here are some ways an insurance company may act in bad faith:

  • Failure to Investigate a Claim Properly: Insurance companies are obligated to conduct a prompt and thorough investigation of all policyholder claims. Failing to thoroughly investigate a claim in a timely manner could be considered bad faith.
  • Unreasonable Delays: Some insurers will drag out the investigation or payment of a claim just to frustrate the policyholder in hopes that they might give up.
  • Offering Far Less Money than a Claim is Worth: Insurers are not allowed to pay less than a claim is worth just to enhance their bottom line. Unfortunately, this is an all-too-common practice in the industry. For example, insurance companies are known for making lowball settlement offers to personal injury victims because they know these victims often need money and may be motivated to settle quickly.
  • Refusing to Pay a Valid Claim: An insurer may deny a valid claim by misrepresenting the law, misrepresenting the language in a policy, or engaging in a similarly deceptive practice.

What to Do if Another Party Fails to Act in Good Faith

If a party to a contract does not act in good faith, there are legal remedies available. These may include monetary damages, specific performance requirement, cancellation and restitution, and injunctive relief. Appropriate relief depends on the specific circumstances of the case. When this occurs, it is important to have the case reviewed by an experienced attorney, so you can be advised of your rights and legal options.

At the law offices of John H. Ruby & Associates, we have extensive experience handling breach of contract cases and all other types of commercial and business disputes. We are also experienced in personal injury and several other areas of law. We work closely with our clients to thoroughly assess their case and explore every potential legal avenue toward a favorable outcome.

To schedule an initial consultation with one of our skilled attorneys, call our office today at 502-895-2626. You may also send a secure and confidential message through our online contact form or stop by our Louisville office in person.