It has an effect on the ability to maintain causes of action and obtain legal remedies. Generally speaking, courts will not just look at the legal rights of parties in pursuing a transaction or a lawsuit, but will look behind the activity at the motives of the persons attempting to obtain the assistance of the court. If a court feels that the reasons behind the transaction or lawsuit have the effect of abusing the power of the law, or the court, it will generally deny a party the ability to rely on a legal remedy that they will otherwise be entitled to.

Bad faith is relevant in the following areas of law:

Transactions that affect creditors - If creditors are denied the opportunity to realize on the proceeds of property that was previously owned by the debtor, they will often look at the motives of the parties involved in a purported sale, primarily when the sale is for little or no consideration. For example, if a spouse puts title to the family home in the other spouses name before embarking on a risky business venture, this will usually be treated as a good faith attempt to lessen the exposure of his or her family to creditors. However, if the same transaction takes place after a spouse has been sued for a debt, the sale will generally be held void against the creditors, allowing them to look at the equity in the house for satisfaction of debt.

Possession of property - The law of detinue allows a person who has lost possession of personal property to regain possession of that property, even if it had been transferred to another after its loss or conversion. However, the court will only order such a remedy if the person with possession of the property obtained it in bad faith - for example that they obtained it for free or for nominal consideration. In other words, a person buying a stereo out of the back of someones car has no defence to a claim in detinue where a person buying a stereo from a pawnbroker would most likely be able to show that the transaction was made in good faith even if it later turned out the pawnbroker didnt have valid title to the goods.

Punitive damages - If the more powerful party to a transaction refuses to properly deal with its legal obligations and must be sued in order to force it to pay money that is clearly owing, courts will often punish litigants who take the position that the worst thing that can happen after a trial is that they will have to pay the money owed anyway. For example, if a check is sent and cashed in error and it is clear that the person receiving the money had no right to keep it, the court would most likely rule that simply ordering the payment of the money was an insufficient remedy for the plaintiff, who was put through the time and expense of trial for no reason. In Canada, one of the leading cases of this type resulted in a record punitive damages award of $1 million (Cdn) when an insurance company pressed a claim for arson when its own experts and adjusters had come to the conclusion the fire was accidental and the lawyer advised the client that the desperate insured parties would be willing to settle for much less than what they were owed.

Remedies in equity - When a party is seeking an extraordinary remedy such as an injunction or specific performance, the court must be convinced that the party seeking the remedy has no ulterior motive for doing so. If the defending party can show that the complaining party has abused the process or the power of the court, the court will generally deny the remedy even though the complaining party would otherwise be entitled to the relief claimed.