How to Establish Good Faith in Negotiations

Three Parts:Establishing Good FaithDisplaying Good Faith in a Home PurchaseShowing Good Faith to Creditors

In many states, even if not explicitly stated, every contract contains a duty to negotiate in good faith. This means that the parties to the contract must have an honest intent to act without taking an unfair advantage. Good faith is often defined in the negative, by describing situations where one party acts in bad faith.[1] There is no precise way to establish good faith when negotiating, but acting in an honest, fair manner often will result in a good faith negotiation.

Part 1
Establishing Good Faith

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    Understand what good faith is. Good faith is the mutual understanding between parties involved in a contract or purchase negotiation that each party will not seek to act unfairly against the other. Each party promises to keep their word according to the agreed-upon terms, to not avoid their obligations, and to not use deceit to avoid implied and mutually understood terms of the contract. One party should not twist the words or phrasing of the contract to draw conclusions that were obviously not the intent of the contract or agreement.
    • For example, even if an employment contract states that a long-term employee can be fired "at will," this does not mean that the employer necessarily has the right to terminate the employee for no reason at all.
    • The "good faith" established in the employment contract means that the employee will remain employed unless they act against company policy or the company is forced to downsize due to economic reasons.[2]
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    Be honest in negotiations. By blatantly lying to try to gain an upper hand in a negotiation, you are inherently acting in bad faith and therefore violating your duty to act in good faith. However, being honest does not mean that you have to reveal more information than you want to. Instead, it means not making any false or misleading statements.
    • Negotiating honestly also extends to the language of the contract: it should be written such that all members of both parties can easily understand it.[3]
    • For example, if you are negotiating a contract for the sale of a house, telling the potential buyer that the house does not have a termite problem when you know that in fact the house does have a termite problem means you are acting in bad faith.
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    Respond to the other party. When negotiating with another party, you may need to meet with or otherwise communicate with the other side. Remember that acting in good faith means making the negotiation fair for everyone involved in the process. By refusing to communicate with the opposing party, you make the process much more difficult. A negotiation is not a fight between sides, but rather a give and take process.
    • If the other side reaches out to you for the purposes of discussing the negotiation, promptly return their phone calls or respond to letters or emails. Failure to communicate with the other side can be a legal basis for the opposing party to establish that you breached your duty to negotiate in good faith.[4]
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    Act professionally. When negotiating, it is easy to view the other party as your adversary, but in reality both parties are negotiating because they have something that the other party wants. Contracts negotiated in good faith take the form of a compromise, with both sides bending slightly to make the deal beneficial for both parties. Therefore, you should treat the other party the way you want them to treat you: with integrity and professionalism.
    • It may help to explain your motivations and demands thoroughly. You may also want to note any concessions your side is making or willing to make. These actions reduce the adversarial feeling that negotiations can have and promote professional and productive discussion.[5]
    • Resorting to name calling or making unfounded threats for the purposes of gaining the upper hand is not acting in good faith and can be used against you if the negotiation does not work out.

Part 2
Displaying Good Faith in a Home Purchase

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    Understand "earnest money" deposits. When you're negotiating with a seller to buy a home, you'll have to submit an offer that they can either accept, counter, or reject outright. In many cases, this offer will include a good faith deposit towards the value of the home, called "earnest money." This offer shows the seller that you are serious about the home purchase and is later applied to either the purchase price or the down payment.
    • The earnest money deposit shows the seller you are serious about the home purchase, because, in many cases, if you back out of the purchase you do not get your earnest money deposit back.[6]
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    Discuss the offer with your agent. Your real estate agent is the one who will take your offer to the seller. Before making this offer, talk to your agent about your purchase offer, the amount of earnest money should offer, and other terms included in the offer (such as concessions in the contract, an offer expiration date, and other important details). Your agent will be able to advise you, based on the market, if you should make a bid on the house higher or lower than the listing price and if you should offer more, or less, earnest money.
    • Offers can be made without an agent, but this is not advisable. Your agent will have a deeper understanding of contract and real estate law in your state and will be able to craft a legally binding offer that will transfer into a purchase contract if acceptable by the seller.[7]
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    Decide how much earnest money to offer. Earnest money deposits may be either a set amount of a percentage of the home price, depending on the customs of the local market. In many cases, this amounts to either a deposit of $500-$1,000 or 1 to 3 percent of the offer price. The goal here is to offer more than other bidders, but not so much that you take a huge loss if you are forced to back out of the contract for some reason (such as if you fail to attain a mortgage loan for the home).
    • In general, it is advised to talk to your real estate agent and make an earnest money offer in the amount suggested by local customs.
    • If you offer a very low amount of earnest money, odds are your offer will be rejected.[8]
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    Get your earnest money back. You can get your earnest money back easily if the seller rejects your offer. If they accept it, you will get the advantage of having that money applied against the purchase price of the home. However, you can also get your earnest money back through contingencies in your offer contract if your offer is accepted. These contingencies state that you are able to get your earnest money back if the seller breaches your contract.
    • For example, your purchase may be contingent on the condition of the house being as good as originally stated by the seller. If there is a serious structural problem in the house revealed during the inspection, but after your offer is accepted, you will probably be able to pull out and get your earnest money back.[9]
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    Make other shows of good faith. If you are particularly interested in a home and want the buyer to consider your offer more strongly, consider making other good faith efforts. For example, you can try offering a deal where you could also buy some other difficult to sell items from the seller. These may include lawn equipment or other items that would be difficult for them to sell quickly. This solves a problem for the seller and makes their life easier, which may put your offer ahead of other, similar offers.
    • Try stating in your offer that you can close faster than other buyers. For example, if the seller suggests a 30-day closing period, let them know that you can be ready in 15.
    • You can also show commitment to the neighborhood by making a donation in the name of the seller to a local charity or organization. The amount doesn't have to be large; the action speaks louder than the cost.[10]

Part 3
Showing Good Faith to Creditors

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    Don't make good faith payments outside of a structured plan. A good faith payment paid to a creditor means a payment made below the required minimum amount due on the debt. This gesture is intended to show the creditor that you intend to repay the debt but are not able to do so yet. However, in many cases this can be as bad as not paying at all. It still is marked on your credit report as a missed payment and still allows late fees to be charged on your account.
    • In some cases, you can also be sued for a breach of contract.[11]
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    Negotiate a repayment plan. What you should do instead of just making a good faith payment is call your creditor and try to negotiate a repayment plan. After all, your creditor just wants to get their money back. In many cases, they will offer a plan that gives you a temporary reprieve from payments or lowered payments if you can prove that you are experiencing temporary hardship, like illness or the loss of a job.
    • Make sure to get this plan in writing before agreeing to it. Some disreputable creditors may deny knowledge of such a plan and simply sue you for the full balance later on.[12]
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    Follow through with the plan. Make sure to pay the repayment amounts as required and then return to regular payments when your repayment plan ends. If you are unable to do so, you breach your good faith agreement with the creditor and are again liable to be sued by the creditor or harassed by a collections agency. If you do follow the repayment plan, you may be able to have your creditor list your debt as "paid as agreed" on your credit report, which will not negatively impact your credit.[13]
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    Show good faith in bankruptcy proceedings. Bankruptcy proceedings depend on the fact that the filer has no other options and is completely unable to service their debts. This means that they rely on the filer's good faith to faithfully disclose all financial information and that they did originally intend to repay the debts being discharged. Although good faith conditions are not directly stated in the bankruptcy process, the judge may throw out the case if the filer is shown to have:
    • Falsified financial information.
    • Intentionally misled creditors.
    • Not taken any effort to work with creditors to repay debt.
    • Accrued debt specifically to have it removed through bankruptcy.
    • Hidden assets from the court.
    • Previously filed for bankruptcy in bad faith.[14]


  • When negotiating a contract, it is important to hire legal counsel to review its wording. A lawyer can analyze the document to make sure it includes provisions that establish good faith and that the intent of the contract is clear in its wording.[15]

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