4.2 The Inherently Subjective Nature of Good Faith

Professor Steven J. Burton uses an example that illustrates the inherently subjective nature of good faith as it is used in the law of contract.[1]   A landlord and a tenant agree to base commercial rent payments on the amount of the tenant’s sales at the leased store.   Assume, however, that the tenant has two stores, one leased from the landlord and one the tenant owns in the same town.   If the tenant diverts customers away from the leased premises to his own store for the “‘sole purpose’ of bringing gross receipts down at the leased premises, there is good authority for concluding that (the tenant) breached the contract.”   If, on the other hand, the diversion of customers was because the store inventories differ and the customers would be better served at the other store, no breach occurs:   “Consequently, it is necessary to focus on attention on whether the discretion – exercising party used its discretion for an improper purpose, despite the well-known difficulties of an inquiry into subjective intent.”[2]