The obligation of Good Faith is cited five separate times in the Tennessee Association of Realtors (TAR) Purchase and Sale Agreement, so it must be important.
But what is this obligation of Good Faith, and what does it mean?
The concept of “Good Faith” is a very important basic obligation under contract law.
“Every contract imposes upon each party a duty of Good Faith and fair dealing in its performance.” - Restatement of Contracts (2nd) ⸹ 205
Black’s Law Dictionary defines Good Faith as “an intangible and abstract quality with no technical meaning or statutory definition”.
Admittedly, that is not a lot of help. In determining what is Good Faith, it is easier to determine what it is not.
Black’s Law Dictionary defines Bad Faith as “some intention to mislead or deceive another…or a refusal to fulfill some duty or contractual obligation…prompted by some ulterior or sinister motive”.
When a contract vests one party with a degree of discretion in performance (example: applying for a loan, performing inspections, negotiating repairs), there is an obligation of Good Faith to observe reasonable limits in exercising that discretion consistent with common standards of decency, fairness and reasonableness as related to the parties’ agreed upon common purposes and justified expectations.
The obligation of Good Faith in performance of contractual obligations is not just a boilerplate recital or words of encouragement. It is a legal obligation imposed upon the parties to a contract to use their best efforts, reasonable under the circumstances, to fulfill the agreed upon purpose of the contract.