Good Faith

Under modern contract law, each party to a contract is required to perform his contractual duty in good faith.

However, the definition of what good faith is not always clear. According to U.C.C. section 1-201(19), as far as merchants are concerned, good faith requires the merchant to demonstrate “honesty in fact” and to maintain “reasonable commercial standards of fair dealing in the trade.”

For contracts that are not governed by the U.C.C. performing in good faith essentially requires the parties to the contract to live up to the spirit of the agreement they made. For example:

Exotic Elixirs is a boutique juice company that has developed a line of tropical juice drinks. Exotic’s juices have been selling very well in the small markets that they have been targeting and they are now ready to market their juices in big cities. Exotic hires AdPro, a large marketing and advertising firm to run their advertising campaign. Exotic and AdPro sign a contract in which Exotic agrees to pay AdPro $250,000 and AdPro agrees to market Exotic’s juices “as aggressively as they can for a period of one year.” Soon after signing the contract, AdPro is hired by three different nationally known companies to create advertising campaigns. As a result, AdPro has little time for the Exotic account and, instead of creating an ad campaign for Exotic, AdPro sends some office staff out to staple signs advertising Exotic’s juices onto telephone poles all over the city. If Exotic sues AdPro, it will win because, while this technically may be the most aggressive advertising AdPro can do for Exotic given AdPro’s other business, its efforts to perform its contractual duties are not in good faith.

As the above example demonstrates, it is possible to uphold the technical letter of an agreement while still violating, and being held liable for, the spirit of the agreement.