When "Good Faith" Is Not Enough

"I acted in good faith" is one of the most frequently heard defenses in Philippine business litigation — and one of the most frequently rejected. Courts in the Philippines recognize good faith as a defense in many legal contexts, but they apply a substantive standard: good faith is not simply an absence of bad intention. It requires reasonable diligence. It requires inquiry. It requires verification. A party who closes their eyes to obvious red flags, or who fails to take the steps a reasonable and prudent person would take, cannot claim good faith.

This principle appears across numerous areas of Philippine law. In property law, as discussed in the Torrens system context, a buyer cannot claim to be a buyer in good faith if they failed to investigate when the circumstances demanded it. The Supreme Court in multiple decisions has stated that a purchaser cannot close their eyes to facts that would put a prudent man on guard. Red flags — an occupied property, a price below market value, a seller who is unable to produce original documents — require inquiry, and a failure to inquire defeats a claim of good faith.

In corporate and contract law, officers and directors who approve transactions without reviewing relevant documents or consulting appropriate advisors may find their "good faith" defense unavailable under the business judgment rule. The rule protects decisions made after adequate information-gathering and deliberation — not decisions made without inquiry.

In tax law, the BIR and the courts have held that reliance on an accountant's advice, without any review of the underlying computation or filing, does not insulate a taxpayer from liability when errors are discovered. Taxpayers are presumed to know their own obligations.

The practical takeaway is that good faith is earned through action, not assumed through intention. If you are entering a significant transaction, taking a major business action, or making a decision that carries legal risk, the right response is to document your inquiry, consult professionals where appropriate, and act with the diligence that the situation demands. Intent without diligence is not a defense — it is an explanation.