Robbins: What constitutes ‘good faith’ in matters of law? (column)
“Good faith” has come up three times lately in my practice.
In the first instance, the party on the other side of a mediation accused my client of failing to act in good faith. In particular, my client wanted to revisit some concerns she had that had not yet been decided. In the second, in entering into a divorce agreement, my client agreed to act “in good faith” to try to remove his now-ex-wife from certain loan commitments. The third circumstance arose when a client offered to compromise the amount of a proposed settlement “in an abundance of good faith” in hopes of sparing the parties from tumbling down a path towards litigation.
In the first instance — where the other party asserted that my client was not acting in good faith — his contention was misplaced which will become clearer, below, after we define our terms.
In the second instance, what my client promised was earnestness; he would try his darnedest to fulfill his not-quite obligation. What good faith was intended to mean in that circumstance was that he’d do his level best.
In the third case, what was laid on the altar of compromise was a peace offering. What was intended was that my client would be an honest broker. Neither party would profit from a lawsuit and so my client offered to meet his opponent part way on the field of battle before legal swords were inexorably raised and blood was drawn.
All well and good, I suppose. And in each instance, I am confident that the other side to the discussion understood precisely what was intended. But one of my clients asked me, “What exactly constitutes good faith? Is there a more precise definition than implied in the vernacular or is it simply one of those, ‘I know it when I see it’ things?”
So what is it?
Good question. Let’s peek behind the legal curtain, shall we?
At its core, “good faith” may be legally defined as “… a term that encompasses a sincere belief or motive without any malice or the desire to defraud others.” The essence of the term is acting without intent to mislead or defraud.
To clarify the first case then, as my client acted with neither malice nor an intent to deceive, failing to act in good faith was simply not a thing. That the other party didn’t get the finality he wished for was a simple case of him not getting what he wanted. There was not the slightest scintilla of misstatement, fraud, prevarication or conniving in what my client asked. Not everything had yet been agreed to and she simply wanted to air every issue before committing to a course.
While the term good faith is admittedly a little abstract, it pops up in many areas of law and has special significance in the area of commercial law. A “good faith purchaser for value” is protected by the Uniform Commercial Code, which has been adopted in every state. Under sections 1-201 (9) and 2-403 of the code, a merchant may keep possession of goods that were purchased from a seller who did not have legal title to the goods if the merchant can show that s/he was “a good faith purchaser for value.” In order to meet this test, the person must have demonstrated honesty in the transaction and must have observed reasonable commercial standards of fair dealing in the bargain. Broadly, if the merchant proceeded in the ordinary course of business, good faith would likely be implied. If, however, the purchase occurred under suspicious circumstances, a court might reach the opposite conclusion.
Where a non-merchant purchases property that a seller lacks legal title to convey, good faith rears its head again, this time under the doctrine of an “innocent purchaser.” If a purchaser acquires property honestly and absent any knowledge of any defect in the proffered title (and without sufficient means to charge the buyer with such knowledge), then the purchaser may be deemed to be “innocent” and the transaction will not be disturbed.
Protection from fraud
In both commercial and non-commercial law, a party who “in good faith” pays a fraudulent seller fair value for property is protected from another party who claims legal title to the property. If a court upholds this good faith defense, the other party’s only recourse is against the fraudulent seller.
This is all tied up in public policy promoting the unhindered flow of commerce. If it were otherwise, every buyer of every last paperclip or widget would have to look beneath every rock and pebble to determine if the goods were, well … good.
Good faith arises too in transactions involving commercial paper (checks, drafts, promissory notes, etc.). Here, the concept is that of a “holder in due course.” Such a person is one who takes an instrument (such as a check) with the reasonable belief that the check will clear. If the holder accepts a check in payment for something of value that was exchanged for it and in good faith believes the check will clear, s/he is a holder in due course with the sole right to receive payment.
There are other places where the concept of good faith pops up. One is in the arena of labor law and, specifically, the National Labor Relations Act of 1935. Under the act, good faith is mandated in every union-employer bargaining pas de deux.
In corporate law, the “business judgment rule” is founded on good faith. Officers, directors, managers and others may escape liability to the corporation for losses incurred in corporate transactions provided they proceeded in their actions in good faith.
If I had the space, I could go on.
Good faith? Think of it as honesty and a sincere intention to play nice. It is the commitment and the practice of dealing fairly with others. To a large extent, it is as simple as that.
Rohn K. Robbins is an attorney licensed before the bars of Colorado and California who practices in the Vail Valley with the law firm of Stevens, Littman, Biddison, Tharp & Weinberg LLC. His practice areas include business and commercial transactions, real estate and development, family law, custody and divorce and civil litigation. Robbins may be reached at 970-926-4461 or at his email address, firstname.lastname@example.org.