Also known as: duties of good faith · good faith duty · implied covenant of good faith
Written by attorneys · grounded in primary & secondary sources — see below
An implied contractual obligation requiring each party to act honestly and fairly when performing and enforcing the agreement. The duty prevents a party from exercising discretion in a manner that evades the spirit of the bargain or deprives the other party of the expected fruits of the contract.
Harper Builders contracted with Meridian Lodging to renovate a hotel using specified premium materials. Harper invoiced for the premium items but installed cheaper substitutes and lied about the quality when questioned. Meridian stopped payment and treated the contract as breached. The court found Harper's concealment and misrepresentation violated the duty of good faith in performance.
An employment contract allowed termination without cause. The employer threatened to fire the employee solely to avoid paying earned commissions that were due under the agreement. The employee resigned under the threat. Because the threat constituted a breach of the duty of good faith and fair dealing, the employee recovered the lost commissions.
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After a casualty loss, the mortgagee refused to release insurance proceeds for restoration even though restoration was feasible and would restore the property's value. The mortgagee instead applied the funds to the debt. Because the refusal resulted from a breach of the duty of good faith and fair dealing, the court ordered release of the funds for restoration.
An at-will employee had a valid contract entitling him to commissions upon completing certain sales. The employer terminated the employee immediately before the commissions vested, solely to avoid payment. The termination breached the implied duty of good faith and fair dealing, allowing the employee to recover the commissions as contract damages.
In a close corporation, the majority shareholders reduced the minority shareholder's salary and excluded him from management decisions without legitimate business purpose. The actions frustrated the minority's reasonable expectations of equal participation and return on investment. The court held that the majority violated the duty of utmost good faith and loyalty owed to the minority.
Corporate officers diverted small packaging business opportunities to themselves after full disclosure to and acquiescence by all shareholders. The diversions caused no harm to the corporation and used no corporate assets. The court found no breach of the duty of good faith because the transactions were conducted openly and without concealment.
Yes. The duty requires observance of reasonable commercial standards of fair dealing in addition to honesty in fact. A party may not use literal compliance with contract language to evade the spirit of the bargain or to deprive the other party of expected benefits.
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Yes. Compliance with express terms does not excuse conduct that undermines the contract's central purpose or that is undertaken solely to avoid paying amounts rightfully due. Courts examine whether the party exercised discretion in a manner inconsistent with fair dealing.
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Yes. Even when a contract permits termination without cause, the duty limits the employer's discretion. Termination undertaken solely to deprive the employee of earned commissions or other contract benefits constitutes bad faith and gives rise to contract damages.
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A mortgagee may breach the duty when it refuses to release proceeds for feasible restoration that would restore the property's value. Courts may order release of the funds when the refusal lacks a legitimate commercial purpose and harms the mortgagor without significant benefit to the mortgagee.
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…when minority stockholders in a close corporation bring suit against the majority alleging a breach of the strict good faith duty owed to them by the majority, we must carefully analyze the action taken by the controlling stockholders in the individual case. It must be asked whether the controlling group can…