Tuesday, July 5, 2011

What is really meant by "Good Faith" ?

There can be many different standard of commitment based upon the words that are used. Will or shall are firm commitments. When you talk about "efforts" you can have best efforts, reasonable efforts and commercially reasonable efforts and the only commitment out of those is the party making that commitment only needs to exercise that level of effort. Good faith is a level of commitment that is less that the different efforts standards. All it means is that the party has to exercise "good faith" in their dealings. There is no obligation that they have to agree, nor do they have to extend a level of effort to agree. It is very difficult to prove bad faith, so using good faith alone is something I don’t recommend.

If there are issues that are open and you need to use good faith as a minimum I would require that “neither party shall unreasonably delay or withhold the agreement”.  That makes the commitment subject to the standard that they must act reasonable.  A standard that they must be reasonable is more enforceable.  Another alternative could be to set a parameter in advance for the agreement.  For example if you could not determine the final price until a final design was complete you could agree to negotiate the price in good faith in the future but include a not greater than amount or a band width for agreement.  By including the parameter, if you offered to pay the price at the not greater than amount, the failure of the other side to agree would be bad faith.

I don’t like good faith commitments. Most of the time what happens is when it comes time to agree in good faith on an item you usually have less leverage.  For a good faith commitment to work both parties need to be at risk if there is failure to come to agreement.  For example it probably would work if you structured your contract where you could terminate with no liability if you failed to reach agreement on that item.   The supplier would lose what they have into the work and you would lose by having to start over again with a new supplier. It won’t work if you have a high cost of terminating the agreement.

If you really need performance on an issue, avoid using "good faith" and use a higher standard of commitment.

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