What Does Bad Faith Mean in Commercial Litigation?

April 15, 2022

Many terms can be used to describe different aspects of commercial litigation. One term that you may hear is ‘bad faith.’ And while the term itself can give you an…

Many terms can be used to describe different aspects of commercial litigation. One term that you may hear is ‘bad faith.’ And while the term itself can give you an idea of its meaning, there are some subtle nuances in commercial litigation that you should understand.

Bad Faith Defined

The legal definition of bad faith is the fraudulent deception of another person or the intentional or malicious refusal to perform some duty or contractual obligation.

This definition is further clarified to explain that it is different from prior judgment or negligence. Bad faith is not the same as making an honest mistake about one’s rights and duties. Rather, it is when someone else’s rights are intentionally or maliciously infringed upon. This action demonstrates bad faith. In commercial litigation, it can manifest in many different ways.

Bad Faith in Commercial Litigation

Businesses rely on contracts when completing many routine operations. These contracts imply a duty to act honestly and fairly (in good faith). When one party does not uphold this duty, they can be sued for a breach of duty.

Contract law, and especially the Restatement (Second) of Contracts, is where you find requirements related to good faith and fair business dealings. The document explains that good faith is the absence of bad faith. It explains that it may be impossible to list all potential causes of bad faith. However, it does include the following acts:

  • Evasion of the spirit of the bargain
  • Lack of diligence and slacking off
  • Willful rendering of imperfect performance
  • Abuse of a power to specify terms
  • Interference with or failure to cooperate in the other party’s performance

It must also be further clarified that bad faith is different from a breach of contract claim. Bad faith claims arise from one party acting unethically or deceptively. A breach of contract is a failure to uphold a specific requirement in the contract. So, while a breach of contract claim can identify one issue, a bad faith claim usually isn’t tied to a specific contract provision. Rather, it is a failure to uphold the spirit of the agreement itself.

When juries find that a defendant has acted in bad faith, they are often subject to hefty damages that can approach the maximum insurance policy limits. The ten largest bad faith verdicts between 2013 and 2018 averaged approximately $21 million. Commercial litigation trends show that companies with high-risk cases have grown exponentially in recent years.

Damages in bad faith cases against insurance companies can involve both traditional economic damages and punitive damages. The court often aims to make the injured party whole again by awarding economic and emotional damages.

Insurance companies owe policyholders a legal duty of good faith and fairness. Many bad faith commercial cases are taken to hold insurance companies accountable. Individuals who become a victim of bad faith by insurance companies or other organizations have legal recourse to recover losses, although many of these claims are settled through arbitration. Common bad faith commercial insurance claims include:

  • Unreasonable delays
  • Poor investigations
  • False declarations
  • Deceptive practices
  • Lowballed payments
  • Refusal to pay a valid claim

The best way to avoid commercial litigation claims of bad faith is to uphold all contracts in good faith. The following actions can help you honor good faith obligations:

  • Don’t ignore any express or implied good faith obligations.
  • Don’t assume there is no good faith obligation even if the contract doesn’t mention it.
  • Consider whether it is better to express the good faith obligation when creating contracts.
  • Identify actions required to satisfy good faith obligations.
  • Consider excluding any obligation of good faith except those included in the contract.
  • Include time limits and objective criteria in the contract, making it more enforceable.
  • Remember that good faith may be relevant even when crafting international contracts.

Many business owners secure insurance policies to protect their business. It provides a sense of security and peace of mind if anything happens. Unfortunately, these cases can sometimes result in bad faith tactics to save money.

Pursuing bad faith commercial litigation cases can become complicated quickly. And knowledgeable legal expertise is often required to navigate the complexities of these cases. These experts can help you understand the potential value of your case as well as the legal options for recourse that are available to your company. They can also help you identify the best course of action for your case’s unique factors. If you have additional questions about bad faith commercial litigation, contact Grellas Shah today.