Good faith

Abstract

Good faith is a blanket clause under which courts develop standards of fair and honest behavior. It gives ample discretion to the judiciary and entitles a court to narrow down the interpretation of statutes or contracts and even to deviate from codified rules, from the wording in the law or the contract or to fill gaps. The law and economics literature relates bad faith to opportunistic behavior and it is accepted that in specific cases where the application of default or mandatory rules leads to opportunism or where both the law and the contract are silent on risk, the judge can resort to the good faith principle. As a result the parties may delegate part of the contractual drafting to the legal system in addition to having reduced apprehension regarding the possibility of opportunistic behavior from the other side. This allows them to keep contracts relatively short and reduces the costs of defensive strategies.