What It Does
The effect of a good faith clause depends on the conduct covered and the standard the agreement adopts.
Sets a performance standard: The clause may require honesty in fact, fair dealing, reasonableness, cooperation, diligence, or another defined level of conduct.
Constrains discretion: A party given discretion to approve, value, consent, renew, terminate, or determine a condition may need to exercise that discretion within the express standard.
Supports cooperation: A clause can require information sharing, further assurances, approvals, access, negotiations, or other actions needed to carry out the agreement.
Governs negotiations: A provision may require good faith negotiations over a renewal, price adjustment, dispute, extension, or unresolved term. Negotiating in good faith does not necessarily require reaching a deal.
Preserves the bargain: The implied covenant may prevent conduct that defeats the benefits the contract was intended to provide, but it generally cannot create a new obligation or contradict an express term.
Shapes proof: A dispute may turn on the decision-maker's knowledge, purpose, process, records, timing, communications, and stated reasons. The clause should identify the information and standards that matter.
Affects remedies: The agreement may provide damages, equitable relief, a cure process, a valuation adjustment, or another remedy. The good faith standard does not automatically determine the available remedy.
Interacts with objective standards: Good faith, reasonableness, commercial standards, and best judgment are not interchangeable. The definitions and governing law control.
A useful review question is: what decision or performance does the clause govern, what conduct is prohibited or required, and what remedy follows if the standard is not met? The answer should come from the agreement, not from the label alone.
When You'll See It
Discretionary decisions: Pricing adjustments, consent rights, approvals, valuation decisions, renewals, termination rights, and service-level determinations may use a good faith or reasonableness standard.
Commercial performance: Services, supply, distribution, licensing, partnership, and joint venture agreements may require cooperation, diligence, or fair dealing.
Negotiation obligations: Renewals, extensions, transition plans, dispute resolution, earnouts, purchase-price adjustments, and unresolved commercial terms may include a duty to negotiate in good faith.
M&A agreements: Parties may use good faith in interim operating covenants, access and cooperation obligations, valuation adjustments, earnouts, closing conditions, and post-closing assistance.
Financing documents: A lender or borrower may be subject to a defined standard when exercising business judgment, making a consent decision, or determining compliance.
Employment and incentive arrangements: Discretion over compensation, performance, termination, or benefits may be paired with a good faith or fair dealing standard, subject to applicable law.
Dispute-resolution provisions: Mediation, escalation, and settlement steps sometimes require good faith participation before arbitration or litigation.
Further assurances and implementation: Parties may promise to take additional steps needed to give effect to the transaction, with good faith and cooperation stated as a performance standard.
Examples
Fuelstream, Inc. and Summit Trading Limited
Payment Agreement
Express cooperation standard · Mutual performance obligations
Mutual
2011
the parties hereto covenant, warrant and represent to each other good faith, complete cooperation, due diligence and honesty in fact
Technical Communications Corporation and Fleet National Bank
Line of Credit Agreement with Letter of Credit and/or Acceptance Financing Agreement
Defined decision standard · Honesty in fact
One-Sided
2004
good faith shall be defined (using a subjective standard) as honesty in fact with regard to the conduct or transaction concerned
Negotiate
Identify the decisions, duties, negotiations, approvals, and information-sharing obligations covered by the standard.
Choose the intended test, such as honesty in fact, reasonable conduct, commercial standards of fair dealing, or a defined purpose-based standard.
Define the information the decision-maker may consider and require a record of the process where the decision affects price, renewal, consent, or termination.
State whether the duty applies to negotiation, performance, exercise of discretion, post-termination conduct, or each of those stages.
Coordinate good faith with objective milestones, service levels, valuation formulas, response times, and other measurable obligations.
Specify cure rights, escalation, valuation review, damages, equitable relief, or another remedy rather than leaving the consequence unclear.
Preserve the distinction between a duty to negotiate honestly and an obligation to reach agreement.
Avoid a vague standard that can convert every disagreement over a business decision into a breach claim.
Define the scope of any discretion and state which express choices remain available when the decision is made in good faith.
Preserve rights to act in a party's own economic interest where the agreement intends to allow that conduct.
Identify safe harbors, objective factors, timelines, and required notices so the decision can be audited against the agreed process.
State whether a determination is subjective, objective, or based on a specified commercial standard.
Prevent the clause from overriding conditions, termination rights, liability limits, integration language, or the agreed remedy structure.
Check whether the governing law limits, expands, or otherwise affects the implied covenant and any express good faith obligation.
Use Playbooks to compare discretionary decisions, cooperation duties, and negotiation standards against approved review guidance, then use GC AI for Word to review the relevant provisions in the document. Counsel should confirm the governing law and the clause's interaction with express rights before relying on the analysis.
Red Flags
The agreement uses good faith without identifying whether it means honesty in fact, fair dealing, reasonableness, cooperation, diligence, or another standard.
A party has broad discretion, but the contract does not state the factors, process, information, or limits that govern the decision.
The clause requires good faith negotiations but does not say whether the duty applies to a renewal, price, settlement, extension, or another defined subject.
The review treats the implied covenant as a free-standing duty to provide terms the parties never agreed to.
The express standard conflicts with a clear discretion, termination, liability limit, valuation formula, or remedy provision.
The agreement requires cooperation but does not identify response times, notice, records, access, or further-assurance steps.
A subjective honesty standard is applied as if it were an objective reasonableness test, or an objective standard is treated as a purely subjective one.
The clause creates a duty to reach agreement when the text only requires an honest negotiation process.
An integration clause, waiver provision, or no-oral-modification clause is assumed to eliminate the implied covenant without checking the governing law.
The clause is used to assess conduct outside contract performance, such as pre-contract negotiations, without a separate legal basis.
FAQs
This content is for informational purposes only and does not constitute legal advice.
