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Simple English definitions for legal terms
duty of good faith
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A quick definition of duty of good faith:
The duty of good faith is a rule that says people who make decisions for a company must do so with honesty and responsibility. They cannot make choices that benefit themselves instead of the company. Breaking this rule can happen if someone ignores their duties, acts for their own benefit, or breaks the law on purpose. Even though shareholders cannot sue for breaking this rule, it can still be a problem if it goes against the duty of loyalty. The Uniform Commercial Code also says that every contract or duty must be done with good faith.
A more thorough explanation:
The duty of good faith is a principle that requires directors and officers of a corporation to act with a conscious regard for their responsibilities as corporate fiduciaries. This means that they must act honestly and in the best interest of the corporation when making decisions.
Examples of violating the duty of good faith include:
- Intentionally neglecting the usual duties of a director or officer
- Acting for a purpose other than the benefit of the corporation
- Intentionally violating the law
For instance, if a director of a company decides to award a contract to a friend's company instead of the one that offers the best value to the corporation, they would be violating the duty of good faith.
It's important to note that there is no private shareholder right of action for a violation of the duty of good faith. However, its violation may also raise a claim under the duty of loyalty.
The Uniform Commercial Code section 1-304 also provides that every contract or duty within the Uniform Commercial Code imposes an obligation of good faith in its performance and enforcement. This means that parties to a contract must act honestly and fairly when performing and enforcing the terms of the contract.