The Duty of Good Faith and Fair Dealing: What Every Business Owner Should Know

You follow the contract to the letter, but the other side is making life hard on purpose. They’re finding every possible way to slow things down, create obstacles, and make your business relationship miserable: all while technically staying within the contract terms. Are you stuck?

Not necessarily. There’s a legal principle that might help: the duty of good faith and fair dealing. And if you’re a business owner, understanding this concept could save you serious headaches (and money) down the road.

What Is the Duty of Good Faith and Fair Dealing?

Think of the duty of good faith and fair dealing as the “don’t be a jerk” rule for business contracts. It’s an unwritten promise that exists in virtually every business agreement, whether you know it or not.

Here’s the plain-English version: when you sign a contract, both parties automatically agree to play fair, be honest, and not sabotage each other’s ability to get what they bargained for. You don’t have to write this into your contract: it’s already there by law.

This duty kicks in after you’ve signed the deal (not during negotiations, where you’re expected to look out for yourself). It means you can’t use sneaky tactics, exploit technicalities, or deliberately make the other party’s life difficult just because the contract doesn’t explicitly forbid it.

Why This Matters for Your Business

As a business owner, this duty protects you from partners, suppliers, or customers who might try to game the system. But it also means you have responsibilities too.

Protection for You: Let’s say you have a distribution agreement with a supplier. The contract doesn’t specify delivery times beyond “reasonable,” so your supplier starts taking six weeks to fulfill orders they used to handle in one week: just to pressure you into renegotiating better terms. That’s likely a violation of good faith, even though they’re not technically breaking the contract.

Responsibilities for You: On the flip side, if you’re the one with leverage, you can’t abuse it. If your contract with a vendor gives you broad discretion over something, you can’t use that discretion purely to hurt them or force them out of business.

How Texas Handles Good Faith and Fair Dealing

Here’s where Texas gets interesting: and where many business owners get confused. Unlike some other states, Texas takes a more limited approach to this duty.

In Texas, you generally can’t sue someone just for violating the duty of good faith and fair dealing as a standalone claim. Instead, Texas courts typically require that the bad faith conduct also violates another part of the contract or amounts to fraud, breach of fiduciary duty, or another recognized legal wrong.

However, this doesn’t mean the duty is meaningless in Texas. It still matters for:

• Interpreting contract terms when they’re ambiguous
• Determining whether someone has breached their contract
• Calculating damages in certain cases

Bottom Line for Texas Business Owners: Don’t assume you can act in bad faith just because Texas law is more restrictive. The duty still exists, and violating it can still create legal problems: they just might be labeled differently.

Good Faith vs. Bad Faith: Real-World Examples

Understanding the difference between good faith and bad faith isn’t always obvious. Here are some concrete examples:

Good Faith Behavior

• Communication: A contractor discovers unexpected issues that will delay the project and immediately notifies the client with a detailed explanation and revised timeline
• Flexibility: A landlord agrees to reasonable modifications to lease terms when the tenant’s business model changes due to market conditions
• Problem-Solving: Two partners work together to find solutions when their joint venture faces unexpected challenges
• Transparency: A seller provides complete information about known defects or issues, even if not specifically asked

Bad Faith Behavior

• Deliberate Delays: A party intentionally slows down their performance to pressure the other side into concessions
• Exploiting Technicalities: Using minor contract ambiguities to avoid clear obligations or to demand unreasonable interpretations
• Withholding Information: Hiding relevant facts that would affect the other party’s decisions or performance
• Sabotage: Actively interfering with the other party’s ability to fulfill their obligations or benefit from the contract

Common Mistakes Business Owners Make

Many business owners misunderstand how the duty of good faith and fair dealing works. Here are the biggest mistakes:

Mistake #1: Thinking “Legal” Means “Okay”

Just because your contract allows something doesn’t mean you can do it in bad faith. If you have the right to approve or reject certain decisions, you can’t use that right purely to harm the other party.

Mistake #2: Assuming You Can’t Be Held Accountable

Some business owners think that if they follow the letter of the contract, they’re bulletproof. But courts look at the spirit of the agreement too, especially when one party is clearly trying to prevent the other from getting what they bargained for.

Mistake #3: Ignoring Industry Standards

Just because your contract doesn’t mention industry customs doesn’t mean you can ignore them. Courts often consider what’s normal and expected in your industry when determining whether you’ve acted in good faith.

Mistake #4: Poor Documentation

When disputes arise, you’ll need to prove your actions were reasonable and in good faith. Many business owners fail to document their decision-making process, making it harder to defend themselves later.

Mistake #5: Thinking Small Violations Don’t Matter

A pattern of minor bad faith actions can add up to a major legal problem. Don’t assume that small slights or technical violations won’t come back to bite you.

Protecting Your Business: A Practical Checklist

Here’s your action plan for dealing with the duty of good faith and fair dealing:

Before Signing Contracts

• Include clear definitions for subjective terms like “reasonable” and “good faith”
• Specify timelines, procedures, and standards wherever possible
• Consider adding dispute resolution clauses that encourage cooperation
• Review industry standards that might apply to your agreement

During Contract Performance

• Communicate clearly and promptly about any issues or changes
• Document your decision-making process, especially for discretionary actions
• Consider the other party’s legitimate interests, not just your own
• Respond to requests and concerns in a timely manner
• Follow industry customs and standards unless your contract says otherwise

When Problems Arise

• Address issues directly rather than using passive-aggressive tactics
• Look for win-win solutions before taking hardline positions
• Keep detailed records of all communications and actions
• Consider mediation before jumping to litigation
• Consult with legal counsel if the stakes are significant

Red Flags to Watch For

• The other party is using technicalities to avoid clear obligations
• Sudden changes in behavior or communication patterns
• Requests that seem designed to create difficulties rather than solve problems
• Actions that prevent you from getting the main benefits you expected

The Bottom Line

The duty of good faith and fair dealing isn’t about being nice: it’s about business relationships that work. When parties act in good faith, contracts are more likely to succeed, disputes are less common, and everyone gets more of what they bargained for.

As a business owner, understanding this duty helps you protect yourself from bad actors while making sure you don’t accidentally become one yourself. It’s not always about what you can legally get away with: sometimes it’s about what makes good business sense.

Remember: while Texas law is more restrictive than some states, the basic principles still apply. Acting in bad faith can still create legal exposure, damage business relationships, and cost you money in the long run.

If you’re dealing with a situation where you think someone is violating their duty of good faith and fair dealing: or if you’re unsure whether your own actions might cross the line: it’s worth getting professional legal advice. The stakes are often higher than they appear on the surface.