Deal honestly; don't exploit the letter while violating the spirit. Good faith is the obligation to act with honesty, fairness, and fidelity to the purpose of an agreement or relationship. It's not just "don't lie" — it's "don't use the other party's trust or the gaps in the contract to take advantage." In law, good faith is often implied in contracts and fiduciary duties: you must perform in a way that respects the reasonable expectations of the other side. In practice, it's the norm that keeps cooperation from collapsing when the formal rules are incomplete.
Good faith is what you owe when you've agreed to work together. You share information that's material; you don't hide behind technicalities; you don't sabotage the other side's ability to perform. The opposite is bad faith: complying with the letter while undermining the spirit, or using the relationship to extract value the other party didn't agree to. Bad faith is often legal (you didn't breach the contract) but destructive (you've burned trust and made future cooperation harder). The strategic question is whether you're playing for the single game (bad faith can pay) or the repeated game (good faith pays).
The model applies beyond law. Employment, partnerships, and negotiations all rely on an implicit good-faith assumption. When one side acts in bad faith — e.g. a founder who negotiates for a soft landing while planning to leave, or a buyer who uses due diligence to learn secrets and then walks — the relationship and often the deal collapse. The discipline is to ask: would the other side feel cheated if they knew everything? If yes, you're in bad-faith territory. Good faith is the default that makes incomplete contracts and long-term relationships possible.
Section 2
How to See It
Good faith reveals itself when someone objects that the other side "didn't act in good faith" — they followed the rules but violated the spirit. Look for the pattern: formal compliance with substantive betrayal. When a party uses information, process, or timing to gain an advantage the other side didn't consent to, that's a good-faith issue. When someone says "they're technically right but it's not right," they're invoking good faith.
Business
You're seeing Good Faith when a partner or vendor complies with the contract but withholds information, delays, or interprets terms in a way that defeats the other side's reasonable expectations. The contract didn't forbid it; the relationship assumed good faith. The result is a legal win and a relationship loss. The discipline is to ask: would they have agreed if they'd known we'd do this?
Technology
You're seeing Good Faith when a platform or vendor changes terms or behaviour in a way that harms users or partners but stays within the legal fine print. "We're allowed to" is not the same as "we're acting in good faith." Users and partners rely on implicit expectations; violating them while staying legal is bad faith. The cost is trust and retention.
Investing
You're seeing Good Faith when an investor uses due diligence to extract information and then walks, or when a founder negotiates with one buyer while intending to use the offer as leverage elsewhere. The letter of the process may be satisfied; the spirit is violated. Good faith would mean not using the process in a way the other side didn't consent to. Bad faith burns bridges.
Markets
You're seeing Good Faith when a firm complies with regulation in form but structures around it in substance, or when a counterparty uses market power to force terms that weren't genuinely negotiated. Good faith in markets is the norm that contracts and regulation rely on; when it erodes, transaction costs rise and cooperation becomes harder.
Section 3
How to Use It
Decision filter
"Before you act in a deal or relationship, ask: would the other side feel cheated if they knew everything? If yes, you're in bad-faith territory. Good faith means honest dealing and fidelity to the spirit of the agreement — not just the letter. Play for the repeated game."
As a founder
You have multiple stakeholders: investors, employees, customers, partners. Good faith with each means not exploiting information or power in ways they didn't consent to. Don't use raise processes to leak terms; don't promise what you don't intend to deliver; don't hide material problems until after the close. Good faith is the basis for trust in the next round — with the same party or with others who hear the story. The cost of bad faith is reputation and future optionality.
As an investor
Due diligence is a privilege; use it in good faith. Don't extract information and then walk without cause. Don't use the process to learn secrets for a competing deal. Treat founders as you'd want to be treated — with honesty and with the spirit of the process respected. Good faith protects the ecosystem; bad faith makes every future negotiation harder.
As a decision-maker
When you're in a negotiation or partnership, ask whether your next move is consistent with good faith. Would you be comfortable if the other side knew your full strategy? If you're hiding something material or using the process in a way they didn't agree to, you're at the line. Good faith doesn't mean weakness — it means no exploitation of trust or gaps. It's the norm that makes repeat play possible.
Common misapplication: Equating good faith with "being nice" or "giving everything away." Good faith is honest, fair dealing — not self-sacrifice. You can negotiate hard and still act in good faith. The test is whether you're exploiting the other side's trust or the incompleteness of the agreement. Tough negotiation within the spirit is fine; using the relationship to extract unconsented value is not.
Second misapplication: Assuming the other side will act in good faith. Good faith is what you owe; it's not always what you receive. The discipline is to act in good faith yourself (for reputation and repeated game) while structuring deals so that bad faith is harder or less rewarding for the other side. Trust but verify where the stakes are high.
Buffett has built a reputation on good faith: clear communication with shareholders, no spin, and deals that are fair to the other side. His acquisition approach — no auction, no re-trading — is designed to signal good faith so that sellers come to him first. He has said that reputation takes decades to build and minutes to destroy. Good faith is the strategy that preserves optionality and trust.
Bezos emphasised long-term thinking and customer trust. Acting in good faith with customers (e.g. honest product representation, fair returns) was a strategic choice: it reduced transaction costs and built a flywheel of trust. With partners and employees, the same principle — don't exploit the gap between letter and spirit — was part of how Amazon sought to scale without burning relationships.
Section 6
Visual Explanation
Good Faith — Honest dealing and fidelity to the spirit of the agreement. Don't exploit the letter while violating the spirit. The default that makes incomplete contracts and repeat play work.
Section 7
Connected Models
Good faith sits with trust, reciprocity, and process. The models below either depend on it (trust, reputation), operationalise it (Golden Rule, due process), or explain why it pays (skin in the game, incentives).
Reinforces
Trust
Trust is the expectation that the other party will act in good faith. Good faith is what you do to earn and keep trust. When you act in good faith, you reinforce trust; when you act in bad faith, you destroy it. The two are mutually reinforcing.
Reinforces
Golden Rule
Treat others as you'd want to be treated. Good faith is the application in deals and agreements: would you accept this behaviour if you were on the other side? The Golden Rule is a test for good faith. If you wouldn't accept it, don't do it.
Reinforces
Due Process
Fair process is part of good faith. When you owe someone a process (notice, hearing), acting in good faith means giving them a real opportunity, not a sham. Due process is the structure; good faith is the spirit with which you implement it.
Leads-to
Skin in the Game
When you have skin in the game, your incentives align with the other side's — and good faith is more likely. Skin in the game doesn't guarantee good faith, but it reduces the incentive to exploit. Good faith is the norm; skin in the game is a structural support for it.
Tension
Section 8
One Key Quote
"In every contract there exists an implied covenant of good faith and fair dealing."
— Judge Benjamin Cardozo, Wood v. Lucy, Lady Duff-Gordon (1917)
Cardozo stated what many legal systems assume: the contract is not only the written terms but also the implied obligation to perform in good faith. You can't use the letter to defeat the spirit. The quote is the legal anchor for good faith in contract; the strategic use is the same — assume the obligation and act accordingly.
Section 9
Analyst's Take
Faster Than Normal — Editorial View
The test: would they feel cheated if they knew everything? If yes, you're in bad-faith territory. Good faith doesn't mean giving away the store — it means not exploiting trust or gaps in the agreement. Use the test before you act.
Good faith is the default that makes incomplete contracts work. We can't specify every contingency. Good faith fills the gaps: perform in a way that honours the other side's reasonable expectations. When good faith erodes, contracts get longer, enforcement gets costlier, and cooperation gets harder.
Play for the repeated game. Bad faith can pay once — you exploit, you win the round. Then the other side (and others who hear) won't trust you. Good faith is the strategy when reputation and future deals matter. In venture, hiring, and partnerships, the repeated game is the norm. Act accordingly.
Don't assume the other side will act in good faith. You owe good faith; they may not. Structure deals so that bad faith is harder or less rewarding — clear terms, escrow, milestones. Trust but verify. Your good faith is for your reputation and your conscience; their behaviour is a separate variable.
Section 10
Test Yourself
Is this mental model at work here?
Scenario 1
An investor conducts extensive due diligence, receives proprietary information, then declines to invest and later backs a competitor using insights from the diligence.
Scenario 2
A company changes its API in a way that breaks some integrations. The terms of service allowed changes with notice. The company gave 30 days' notice.
Axelrod's tit-for-tat and the repeated game: cooperation pays when you expect to meet again. Good faith is the cooperative strategy; the book explains why it can be stable and rewarding.
[Incentives](/mental-models/incentives)
Incentives can push toward bad faith (short-term gain from exploitation) or good faith (long-term gain from reputation). The tension is between the one-off payoff and the repeated-game payoff. Good faith is the strategy when the repeated game matters.
Tension
Reputation
Reputation is the record of whether you've acted in good faith. Good faith builds reputation; bad faith destroys it. In markets and relationships, reputation is the asset that good faith protects. The two are linked: you act in good faith in part to protect and build reputation.
