What Is “Bad Faith” in Business Decisions?

Posted in Business Litigation

By Tony Liu, Founder and Principal Business Trial Attorney 

In Summary

High-level business leaders often get accused of “acting in bad faith” when making tough decisions—especially when frustration runs high. But California law distinguishes emotion from illegality. What matters is whether your decision had a rational business purpose. If your intent is being questioned, an experienced Orange County business litigation lawyer can help protect your reputation, your company, and your legacy.

What Is “Bad Faith” in Business Decisions Under California Law?

Bad faith is widely misunderstood. Many business owners think that if someone accuses them of acting out of anger, annoyance, or disappointment, they have automatically crossed a legal line. That isn’t true as a Newport, CA business litigation lawyer can explain.

Definition: Bad faith in a business decision means acting with intent to harm the company, conceal material information, or pursue personal benefit at the company’s expense. Emotion alone does not constitute bad faith.

Under California law—including fiduciary standards found in the Corporations Code—bad faith is about motive, not mood.

This distinction matters for business leaders who:

• Make high-pressure decisions
• Manage underperforming or toxic partners
• Must act quickly to protect the business
• Fear being blamed for outcomes beyond their control

The law recognizes that running a company is not a calm, emotionless exercise. Judges in Orange County—particularly in the Business & Complex Litigation panel—review decisions through a practical lens: Was the leader trying to protect the business, or punish a person?

Does Frustration or Anger Equal Bad Faith?

No.
And this is where many business owners breathe a sigh of relief.

You can be frustrated. You can feel betrayed. You can be fed up with a partner who’s draining resources or harming your reputation.

Emotion does not invalidate a decision.

California courts know that business leadership is messy. They don’t expect CEOs, founders, or board chairs to operate like machines.

This matters deeply for business owners who value:

• Integrity
• Win-win relationships
• Long-term fairness
• Transparent communication

When someone accuses you of bad faith, they’re usually trying to weaponize your frustration. But the law looks at your purpose, not your feelings.

What Does “Good Faith” Require Under the Business Judgment Rule?

The Business Judgment Rule is one of the strongest legal shields available to California business leaders. It protects you from liability if you made a decision based on:

1. A rational business purpose
2. Reasonably informed judgment
3. Intent to benefit the company—not yourself personally

This rule recognizes that:

• Leaders must sometimes make decisions quickly
• Decisions may cause conflict or hurt feelings
• Even a reasonable decision can have imperfect results

According to the Harvard Law School Forum on Corporate Governance, courts generally defer to board decisions when they are made with proper process, transparency, and documentation—because courts do not want to interfere with legitimate business judgment.

The rule protects business owners from Monday-morning quarterbacking by disgruntled partners, investors, or minority members who want to reinterpret history.

How Do Courts Evaluate Board Decisions Driven by Conflict or Emotion?

Courts look beyond emotional context. They evaluate:

• The process: Did you review facts, financials, and relevant information?
• The documentation: Did meeting minutes or emails show good-faith analysis?
• The motive: Were you trying to protect the company or retaliate?
• The impact: Did the action advance or protect the company’s interests?

This is where many business owners misunderstand their position.

You can be upset. You can be angry. You can be exhausted by a partner’s misconduct.

What matters is how you made the decision, not how you felt while making it.

This is a critical point for high-achieving executives who often fear:

• Being blamed for something they didn’t do
• Having their reputation attacked publicly
• Losing control of their company
• Facing stress-heavy litigation

California judges focus on intent, structure, and diligence—not emotion.

Case Spotlight: Why California Courts Reject the “They Were Angry” Argument

In Tuli v. Specialty Surgical Center, the board was fed up with a partner who had:

• Contributed nothing for years
• Continued to collect profits
• Sent threatening letters to investors
• Undermined the stability of the company

The board removed him.
He sued—claiming they acted out of personal animosity. 

The court rejected the claim.

Why?
Because the board acted to protect the business. Their frustration was irrelevant.

The court focused on:

• Their documented rationale
• The harm the partner caused
• The board’s duty to preserve investor confidence
• The absence of personal gain by the decision-makers

This case affirms a powerful principle for California business owners: Emotion is human. Retaliation is illegal. Protecting the business is justified.

7 Red Flags Courts Look For When Evaluating Bad Faith

Use this as a checklist to evaluate your own decision:

1. You made a decision without reviewing key financial or operational information.
2. Your action created a personal benefit you didn’t disclose.
3. The decision contradicted prior board patterns or policies.
4. You acted suddenly with no documented reason.
5. The choice appeared retaliatory or aimed at harming a partner.
6. You excluded required decision-makers from the vote.
7. No meeting minutes, documents, or emails show your business rationale.

If none of these apply, you likely acted in good faith.

How to Protect Yourself If Someone Accuses You of Acting in Bad Faith

Here’s what California business owners should do the moment accusations arise:

1. Document your business rationale.

Create a memo or timeline outlining what you knew and considered.

2. Gather meeting minutes, emails, or notes.

These details matter. Courts rely on them heavily.

3. Clarify any conflicts of interest.

If none exist, document that fact.

4. Consult legal counsel early.

Engage an Orange County business litigation lawyer before conflict escalates.

5. Prepare for mediation or litigation.

California’s courts—especially in Orange County—favor early dispute resolution.

What This Means for California Business Owners Facing Partner Conflict

Many executives in California share a specific internal struggle:

• You believe in fairness.
• You value long-term relationships.
• You expect partners to act with integrity.
• You assume everyone plays by “win-win” rules.

But when a partner violates those expectations—takes advantage of your trust, fails to contribute, or jeopardizes your reputation—you may have to act decisively.

This often triggers three emotional reactions:

1. Shame (“How did I let this happen?”)
2. Anger (“I trusted them—I shouldn’t have.”)
3. Fear (“What if they blame me? What if investors think I’m unstable?”)

These emotions are real.
But they are not evidence of bad faith.

What matters is:

• Whether your decision protected the company
• Whether you evaluated the facts
• Whether you acted without improper motive
• Whether you documented your process

California courts—and Focus Law—understand the difference between a leader under pressure and a leader acting with bad intent.

Frequently Asked Questions 

1. What is considered bad faith in a business decision?

Acting with intent to harm the company, conceal critical information, or serve your own interests at the company’s expense. Poor judgment or emotion is not automatically bad faith.

2. Can frustration or anger make a decision “bad faith”?

No. Emotion does not determine legality. Courts review motive, process, and documentation—not your feelings.

3. How do California courts decide whether a board acted in good faith?

They assess whether the decision had a rational business purpose, was reasonably informed, and did not provide a hidden personal benefit.

4. Am I personally liable if someone claims I acted in bad faith?

Possibly—but only if evidence supports improper motive or self-dealing. If your actions were taken to protect the business, the Business Judgment Rule may shield you.

5. Can I remove a partner who’s hurting the company?

Yes, with proper documentation and authority. California law permits removal when misconduct or non-performance harms the business.

Conclusion: Your Leadership Is Not Defined by Someone Else’s Accusations

Business leadership in California isn’t gentle. It isn’t always peaceful. And it certainly isn’t emotionless.

You can be frustrated and still act in good faith.
You can be angry and still fulfill your fiduciary duty.
You can be decisive and still be legally protected.

The key is intent, process, and documentation—not how you felt in the moment.

If your leadership is being questioned, or if someone is accusing you of acting in bad faith, Focus Law is here to help you protect:

• Your reputation
• Your business
• Your long-term legacy
• Your peace of mind

For guidance tailored to your situation, schedule a consultation with an experienced Orange County business litigation lawyer.