What to Know about Good Faith or Bad Faith – an illustrated easy guide

The implied covenant of good faith and fair dealing is implied in every contract.  The implied covenant of good faith and fair dealing is what makes business work.  It requires people to deal with one another fairly.  Businesses and people can trust each other to enter into contracts because good faith requires them to help them get the benefit of their bargain.

Attorney Thomas Howard has helped clients for years enforce their rights under contracts.  And each and everyone of those contracts had something in common – but it was not a term written into any of the contracts.  Our business attorney have helped countless clients with their contracts, below he explains good faith in an easy to understand and Illustrated way.

What is good faith and fair dealing?

A duty of good faith and fair dealing is a tenant of contract law, which often comes up in insurance. Insurance is basically the business of selling contracts that protect against risk. Here’s some relevant case law regarding good faith insurance contract, a well litigated issue:

• Therefore, an insurer has a duty to act in good faith and fairness to its insured, which requires that it not elevate its own self-interest above the interest of the insured. Monical v. State Farm Insurance Co., 211 Ill.App.3d 215, 569 N.E.2d 1230, 155 Ill.Dec. 619 (4th Dist. 1991).
• “The insurer’s duty to deal fairly with the insured arises out of the contractual relationship, and thus an insured may sue his insurer for breach of that duty.” Garcia v. Lovellette, 265 Ill.App.3d 724, 639 N.E.2d 935, 937, 203 Ill.Dec. 376 (2d Dist. 1994).
• While a fiduciary relationship exists between an insured and a broker who acts as the agent for the insured, Illinois law does not classify an insurer as a fiduciary of its insured. Robacki v. Allstate Insurance Co., 127 Ill.App.3d 294, 468 N.E.2d 1251, 1253, 82 Ill.Dec. 471 (1st Dist. 1984); Nielsen v. United Services Automobile Ass’n, 244 Ill.App.3d 658, 612 N.E.2d 526, 531, 183 Ill.Dec. 874 (2d Dist. 1993).
• Thus, it is not the duty of the insurer to inform the insured of his or her duties. Foamcraft, Inc. v. First State Insurance Co., 238 Ill.App.3d 791, 606 N.E.2d 537, 539, 179 Ill.Dec. 705 (1st Dist. 1992).
• Likewise, the law has not imposed on an insurer the duty of reviewing the adequacy of an insured’s coverage. Connelly v. Robert J. Riordan & Co., 246 Ill.App.3d 898, 617 N.E.2d 76, 79, 186 Ill.Dec. 837 (1st Dist. 1993).
• A property insurer similarly has no duty to sell its insured full coverage. Nielsen, supra, 612 N.E.2d at 529.

Unwritten duties of good faith are implied in every contract.

Any party to a contract has an unwritten duty to help the other party obtain the benefit of their end of the bargain.  A benefit of the bargain is what you get out of the deal.  Let’s take a quick second to explain the very basics of what forms a contract.

A contract had 3 basic elements

• Offer & Acceptance: This is what you buy. Pizza, coffee, plumbing, Netflix, or even legal services.  The offer is what the seller in the contract brings to the table.  It brings the buyer in the door.  The Buyer is accepting the offer.
• Consideration: This is often money.  In the picture, the coffee is $3.50.  The consideration is two-way, however.  The offer is a consideration as well.  The pizza is half the deal, so is the NetFlix subscription.  Very often the consideration is goods or services in exchange for payment of money.
• Meeting of the Minds: This is the most complex of the three basic contract elements, and where Good Faith resides.  The intent of the parties to the contact is important. Both intended to get what is called the “benefit of their bargain.” This means you do not get tricked into the deal. You are not making a mistake regarding the terms of the contract.

Meeting of the Minds and Good Faith

Would you enter into a deal to buy a house if you knew every time it rains the basement floods with 3 feet of water?  Perhaps you would if you negotiate a discount for installing a dewatering system.

But would you buy the house with the leaky basement if you did not know about it?  That’s where people get into trouble because they feel as if they are tricked.

They lacked the requisite meeting of the minds on the deal because if the buyer knew about the basement flooding, he never would have purchased the house.  That is a lack of meeting of the minds that gets to the heart of contract formation.

What if the seller knows about the water in the basement, and lies on the disclosures and says that to the best of his knowledge there is no water in the basement?

That is fraud, a/k/a bad faith.  The Seller lying about the leaky basement injured the Buyer.  The Buyer can sue the seller for fraud or breach of contract and recover the damages.  The damages would be the cost of repairing the leaky basement.

Interference in the Contract – Bad Faith

The “duty of good faith and fair dealing requires the party vested with contractual discretion not to injure other parties to the contract by action or omission and not to act inconsistently with other parties’ rights.” Id, citing Brzozowski v. Northern Trust Co., 248 Ill.App.3d 95 (1993).

Sometimes contracts have certain rights that may spring into effect.  These are called contingencies. For example, take your employer’s stock price.

Imagine your job has a contract to that will pay you a bonus if you do a great job and the stock price rises above $100.  If that happens, your employer will pay you one-million dollars.

You have 3 months to get the stock price above $100, and you’re doing amazing!  But your company does not want to pay you. They notice that your contract requires their help.

Instead of helping you maximize profits, the company sits back and waits and takes no action. If the company does not do their part, you will fail and not get your bonus.

The duty of good faith and fair dealing requires the company to help you hit your target when they must cooperate to do so. The company cannot interfere, not help, and put you in a position to fail, then say you did not earn your bonus.

That is performing the contract opportunistically to deprive you of your one million dollars.

Good Faith Case Law Round up

1. A party cannot take advantage of a condition precedent the performance of which he has helped render impossible. Barrows v. Maco, Inc., 94 Ill.App.3d 959, 966 (1^st 1981).
2. Bad faith, or opportunistic advantage-taking, is the lack of cooperation depriving the other contracting party of his reasonable expectation. Hentze v. Unverfehrt, 237 Ill. App.3d 606,(1992).
3. A party that participated in the hinderance of the condition, and they may not now claim the benefit of the failure of the required event. Yale Development Co. v. Oak Park Trust & Savings Bank, 26 Ill.App.3d 1015 (2^nd 1975).

Good Faith Means You Do What You Promised

To conclude, good faith helps our economy have trust in the trillions of dollars of contracts that we depend on in our daily lives.

As the American Bar Association said in their blog,

The theory behind this principle is that a party cannot interfere with or fail to cooperate with your performance and then complain about it.

From the pension funds, to pizza orders, and everything in between, all depend on good faith and fair dealing in their contracts.

So if you ever get the advice to take a dive, or to not perform your end of the bargain – you may have to explain to the person that you have a duty of good faith and fair dealing to live up to your end of the bargain.

You may also want to avoid doing business with them. If you have a contract dispute, call our offices.