The Complete Guide to Good Faith Agreement Templates

What is a Good Faith Agreement?

At their core, good faith agreements are contracts that embody the concept of good faith. In the contract and business law context, good faith is the honest intention to deal fairly with others. Businesses often enter into good faith agreements in order to promote the efficient and decisive completion of certain actions, such as ending a contract or purchasing a product or service .
The concept of good faith also appears in various other legal contexts, including trust law, and in the jurisdictions of the United States, Canada and Australia. Referring to good faith in these contexts allows parties to a contract or certain business arrangement to avoid the costs of having to negotiate specific terms for their agreement. Instead, the contract or business arrangement is created based on the concept of mutual honesty and fair dealing.

Essential Features of a Good Faith Agreement

At its core, a good faith agreement is a legally binding mutual promise. However, the terms of these agreements are typically much more complex. An effective good faith agreement template outlines all essential terms including: 1. Terms – These are the agreements that are made by each party over the course of negotiations. The terms will involve everything from payment details to timelines for service and schedules for communication. Each term should be defined. In some cases, your attorney may give you an option of three or four different terms. 2. Obligations – Your agreement would be moot if you did not define the obligations of each party. Essentially, the responsibilities of each party are what drive any agreement. The times at which certain conditions must be met can also be included as obligations. For example, the timing of invoices and payment might be described in the obligations section. Phases of a project might also be described. 3. Mutual Expectations – The agreement as a whole should describe the mutual expectations as they relate to the terms and obligations. This is where any party could get in the most trouble if the agreement is not detailed enough. While some good faith agreements address expectations informally or not at all, it is very important that you address all expectations realistically in your agreement.

Advantages of a Good Faith Agreement Template

A good faith agreement can carry a wide variety of terms. Much of this depends on the industry in which a company operates, the projects it has contracted for, and how negotiating parties and their counsel tackle the drafting process. But all good faith agreements have something in common: they benefit all involved.
For one, the acceptance of good faith agreements and other good faith actions instills trust in your company. Also, good faith agreements clearly define how all contracting parties will approach the project at hand. In doing so, they keep everyone on the same page throughout the project’s lifecycle. This ultimately helps prevent disputes before they even start.
Suppose one subcontractor on a general contractor’s project believes the general contractor is acting in bad faith, but the subcontractor has yet to contact any lawyers. The subcontractor can raise its concerns to the general contractor first in the hopes of resolving the issue. Only later, after the general contractor’s failed good faith attempts to remedy the problem, does the subcontractor get its attorneys involved. That’s why a good faith agreement can help prevent disputes before they happen.

How to Edit a Good Faith Agreement Template

One of the most important aspects of using templates of any kind is the ability to personalize them for your particular use. Too many agreement templates are just used in a blanket manner by people who think they can’t take the time to review and customize the language to their own situations. In the case of templates for good faith agreements, not only should they be customized, but should be reviewed for compliance with the laws that may apply based on what your agreement covers.
For example, if the good faith agreement is related to a purchase of a company or joint venture business arrangement, then those laws may apply based on the particular states or countries involved. If the deal is a multi-state one, the laws of all of them should be analyzed to determine how the good faith agreement should be prepared to address the differences in requirements for good faith agreements in those jurisdictions and, of course, in compliance with the Uniform Commercial Code. In addition, some industries have requirements for maintaining good faith and fair dealing obligations, often related to consumer protection laws. These should be reviewed and addressed where appropriate as well.
Reading the template you decide to use is the best way to know what key components you’ll want to include. You should then review it in the context of the laws, regulations and other agreements that might govern your specific arrangement. For example, even if your good faith agreement will control the ongoing relationship of the parties and their willingness to enter into transactions with one another under the circumstances specified therein, there may be a similar agreement that you’ll be bound to under your contracts with other parties.
Therefore, you’ll want to have the language match up as closely as possible without altering its intent or enforceability under the circumstances for your particular deal. It’s not the same as receiving and not changing a form agreement from all of the parties’ attorneys in which they agree upon the language prior to its execution (and thereafter when appropriate), but that is the end goal—to have a good faith agreement that every party agrees to and won’t fight over later.
In all cases, the good faith agreement you choose should allow you the freedom to determine whether any of the parties are abiding by the terms.

Frequent Errors When Drafting Good Faith Agreements

Even experienced lawyers can stumble when drafting a good faith agreement. The most common errors are:

• A failure to define what happens if the parties cannot reach final agreement. As a practical matter, litigation can be avoided if the parties are sure of their standing at the time they enter into a good faith agreement. An un-enforceable agreement accomplishes nothing.
• Poor drafting with a result that the intention of the party is not clear. This is particularly true where an option for either party to terminate is poorly expressed or completely omitted. The most common options are an absolute unilateral termination right with no reason required and a termination right where one party must express dissatisfaction in writing to the other party.
• Since a good faith agreement is usually for a limited duration , the failure to provide a specific short extension term if agreement is not reached or a description of the criteria which will be used if no agreement is reached.
• The parties usually require that they continue diligent efforts in a specified area if an agreement is not reached. A typical example of a failure to include diligence is where the work of a consultant is being continued by one of the parties if an agreement is not reached.
• There is usually a stipulation that the parties will inform each other about the progress of the negotiations and matters which may hinder any further negotiations. The common error is to require only the failure of good faith without a requirement to keep the other party informed about the status of the talks and giving prior notice if serious difficulties are encountered.
• Since the good faith party cannot be in the same position as a litigant, the party freely entering into a good faith agreement must try in good faith to resolve the issues and to stand behind its contractual obligations.

Legal Implications of Good Faith Agreement

In most circumstances, good faith agreements are not legally binding upon the parties and they make it clear that none of them are legally binding. The parties do this by clearly stating that nothing in the agreement will bind either of them or establish any legal obligations on the part of either of them to the other and that nothing in the agreement is an offer or an acceptance of an offer. These statements clarify that no party has any legal obligations to any other party.
But these are not the only important aspects of good faith agreements.
Jurisdiction – If the parties agree that their good faith agreement is governed by the laws of a certain jurisdiction, any issues related to it will be determined according to the laws of that jurisdiction.
Enforceability – If a dispute arises over a good faith agreement, it can be presented to a court of law, which will determine if the agreement embodied by it is enforceable.
In some jurisdictions, good faith agreements are not enforceable. In the United States, those jurisdictions that have adopted the Restatement of Contracts approach (the "Restatement") have addressed the enforceability of good faith agreements in Section 90 of the Restatement. This section provides that an offer which the offeror should reasonably expect to induce action or forbearance of a definite and substantial character may make an offer binding even if there is no acceptance. This section holds that while an offer is generally not enforceable until it is accepted, a good faith agreement which provides a detailed plan for future performance with terms that are sufficiently definite can be binding even though it appears incomplete.

Templates for Good Faith Agreements

The spectrum of good faith agreements that can be built using the template is broad, and covers a variety of agreements and business relationships. Below are some examples of real agreements and contracts that were implemented in the preparation of this guide.
Example One
One example of where the good faith agreement template was used was in the creation of a ‘good faith’ contract for the joint development of a new technology by two individual entrepreneurs. For the purposes of this guide, Professor M, who was pursuing a PhD and had developed some innovative software algorithms, sought to enter into a joint venture with Mr. W, who had been working for a large tech firm for many years. The two had met at a technology and innovation conference where Mr. W was one of the speakers.
Once the project had been identified, Professor M reached out to Mr. W and they entered into an agreement for their development project. Because both Professor M and Mr. W have established technology careers, they were able to negotiate the terms of their agreement easily and each contribute something of value – Mr W would contribute his business savvy and acumen to help grow and develop the technology, while Professor M would contribute the technology itself and his similar business experience to apply it successfully to the real world.
Through the use of the good faith agreement template , Professor M and Mr. W were able to put together a comprehensive list of items to ensure that their relationship would be a successful one. The agreed upon terms covered issues such as ownership, profit sharing, and division of work. Finally, agreement was reached on a non-disclosure and non-competition agreement in order to protect both parties as they began to operate the business together.
Example Two
This example involves the formation of a new business between clients of the San Francisco office of Aktien, LLP. In this scenario, the agreement templates provided by the guide were used to create a partnership agreement for a new restaurant to be formed by the clients. One of the clients, Mike, was partnered with two others in the business. The second client, Andy, is the third co-partner of the new restaurant. In this case, both Mike and Andy had full time jobs, but had always wanted to open a high-end restaurant together.
In developing their restaurant, a variety of agreements needed to be implemented to make their vision a reality. The restaurant owners used the good faith agreement project template to develop a website, graphics, and other marketing materials for their restaurant. Mike, Andy, and the rest of their partners agreed that they would be responsible for these items, as well as for the design of the restaurant property itself.