What is good faith and fair dealing? Is this a term that is used out of habit that doesn’t carry much weight, or can and will it be enforced by the courts when violated?
According to the Louisiana Revised Statutes definitions 26:802 (6), “good faith” means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade. Another definition of good faith is “honesty”; a sincere intention to deal fairly with others. It is not just important to be fair, but the sincerity behind the intention is key. In every contract there is an implied duty of good faith and fair dealing. This means that in every contract it is suggested, but not directly expressed that the persons in the contract will deal fairly and honestly with one another. Good faith is a term that has a sincere motive without any desire to defraud others.
Fair dealing goes hand in hand with good faith when under contract. Fair dealing is not just honesty, fair dealing requires that a party cannot act contrary to the spirit of the contract even if you give the opposing party notice that you intend to do so. The term “good faith” comes from the translation of the Latin term bona fide. In the court system these two terms are used interchangeably. When the court system is determining if a party has breached a contract they have to look to see if the parties have upheld the duty of good faith and fair dealing. This means the parties must not do the following:
Cannot evade the spirit of the contract;
Cannot lose diligence on their terms;
Cannot purposely act incorrectly;
Cannot abuse their power when specifying terms of a contract; and
Cannot interfere or fail to cooperate in the other party’s performance.
The Louisiana Revised Statutes 22:1973 deals with good faith duty in claims settlement practices. An insurer owes to his insured a duty of good faith and fair dealing. The insurer has an affirmative duty to adjust claims fairly and promptly and to make a reasonable effort to settle claims with the insured or the claimant, or both. Any one of the following acts, if knowingly committed or performed by an insurer, constitutes a breach of the insurer’s duties:
Misrepresenting pertinent facts or insurance policy provisions relating to any coverages at issue;
Failing to pay a settlement within thirty days after an agreement is reduced to writing;
Denying coverage or attempting to settle a claim on the basis of an application which the insurer knows was altered without notice to, or knowledge or consent of the insured;
Misleading a claimant as to the applicable prescriptive period;
Failing to pay the amount of any claim due any person insured by the contract within sixty days after receipt of satisfactory proof of loss from the claimant when such failure is arbitrary, capricious, or without probable cause;
Failing to pay claims pursuant to R.S. 22:1893 when such failure is arbitrary, capricious, or without probable cause;
In addition to any general or special damages to which a claimant is entitled for breach of the imposed duty, the claimant may be awarded penalties assessed against the insurer in an amount not to exceed two times the damages sustained or five thousand dollars, whichever is greater.
The implied covenant of good faith and fair dealing is present in every contract including insurance contracts, banking contracts, and credit situations to name a few. In recent developments, the sixth circuit affirmed a seven and one half million dollar jury award against Irving Trust Co for a bad faith breach of a financing agreement. K.M.C., the plaintiff was a grocery retail company who had a three and one half million dollar line of credit with Irving Trust Company. In March of 1982, KMC requested an 800,000 advance on this credit line, Irving refused to advance the funds even though the 800,000 did not exceed the line of credit that K.M.C. had established with Irving Trust Company. Three days after the initial rejection of K.M.C.’s request, Irving Trust Co. decided to go ahead and advance the funds. In the three days this change in decision took, the K.M.C. Company collapsed. K.M.C. proceeded to file suit against the Irving Trust Co. for bad faith breach of a financial agreement. The damages awarded to K.M.C. were based on the difference between the value of the company before the collapse, and the value of the company after the bank’s refusal to advance funds. Although the covenant of good faith and fair dealing is implied in every contract, it is not easy to interpret in every case. It is left to the courts to determine if in fact an implied covenant of good faith has been violated, and if damages should be awarded. Statuatory obligations vary from State to State to protect consumers from bad faith insurance practices.
This information is for educational purposes only, and is not intended as legal advice. If you have legal questions about your specific contract or legal issue please reach out to us at 985-641-5010 or visit our website at www.thornhilllawfirm.com.