This verse obligates us to give someone the benefit of the doubt when we see him performing an action that could be interpreted in his favor.
If an average mitzvah observer does or says something and the chances of a favorable judgment and unfavorable judgment are equal, we must grant him a favorable judgment. If the person in question is a God-fearing man, we must judge him favorably even if the unfavorable side outweighs the favorable one. If you assume that this person action was improper related in that manner to others, besides violating the prohibition of Evil Speech, also violate this commandment.
Often, a narrative may consist of entirely true facts, but because the action or words referred to taken out of context, a completely distorted picture is conveyed. Also, many things are said or done in anger that under normal circumstances would not have been said or done. It is unfair to judge such incidents without taking the circumstances into consideration.