Duty of Good Faith: Know When It Has Been Violated

The duty of good faith is often subject to interpretation in courts.  There is no set jurisprudence nor a widely-adopted view of what constitutes good faith.  However, the duty of good faith is universally adopted as being owed by directors and officers in their corporate capacities.  There are, however, some instances universally recognized by courts when conduct goes so far outside the scope of the duty of good faith.  As a director or officer of a corporation, you must avoid these situations.

The first instance of violating the duty of good faith is acting with a purpose other than advancing the best interests of the corporation.  This is a reflection of the duty of loyalty.  If a director or officer places their interests first, there is no way they can then avail themselves by stating such an action was done in good faith.  Therefore, acting for interests other than the corporation means the action is automatically out of the protection of good faith.

Another instance of violating the duty of good faith is by acting illegally.  It does not matter if the director or officer believes the action is still in the best interests of the company or if they believe the law should be overturned.  There are two main categories where an action is illegal in the corporate context that an officer or director may attempt to assert that it is still done in good faith.  The first is when such an action creates criminal liability by the corporate manager, and the second is when criminal liability emerges for unlawful acts of employees under their control, even if direct power was not exercised.  Criminal liability by either type of actor is outside the duty of good faith.

Finally, a third example of bad faith is when a corporate actor intentionally fails to act in the face of a known duty to act.  This means that if the corporate actor knew of a situation that required a reaction, and did not react, he acted in bad faith.  A reaction is needed in certain situations whereby the corporation faces a crisis, and a lack of reaction in and of itself constitutes bad faith.

In sum, directors and officers of a corporation must be aware of certain actions that under no circumstances are permissible.  This includes acting with a purpose other than advancing the best interests of the corporation, acting illegally, or failing to act when it is so required.  If you are a shareholder in a corporation, you must understand these duties owed to you.  If you feel as though a corporate actor has acted in bad faith, you may be able to bring suit against them to make up for the harm caused.  Call the Trembly Law Firm at (305) 431-5678 today to schedule a consultation.