Meaning
Implied legal requirements that demand parties to a contract act honestly and fairly without taking unfair advantage of each other govern the execution of agreements. Under the doctrine of mandatory good faith, parties cannot exploit technical loopholes to subvert the contract’s obvious purpose. It applies to all stages of contract performance.
This requirement does not apply once a contract has been terminated or before the parties enter formal negotiations.
Contractual Obligation
Written agreements cannot anticipate every scenario that may arise during a business relationship. When disputes emerge, this implicit standard ensures that neither side can behave in a way that destroys the other party’s rights. It forces parties to cooperate when unexpected problems occur.
This obligation protects the transaction’s value.
Judicial Interpretation
Courts analyze the actions of parties against the standard of honest commercial conduct. This review focuses on whether one side acted with an intention to mislead. While the explicit terms of the contract are highly important, this implied standard prevents their abusive application.
If a party behaves in a deceptive manner, a court may find them in breach even if they did not break any explicit terms. This provides a safety net for fair dealings.
Corporate Behavior
Commercial entities must train their teams to communicate openly during negotiations. This prevents allegations of deception if a deal fails. It is a matter of administrative prudence.
Written records must prove honesty.
