Also known as: duties to act in good faith · duty of good faith · good faith duty
Written by attorneys · grounded in primary & secondary sources — see below
A contractual obligation requiring each party to perform and enforce the agreement honestly and fairly so that neither undermines the other's justified expectations under the bargain.
Star Wealth Bank entered a revolving credit agreement with Sky Trust LLC. After Sky Trust submitted a financial report several days late, Star Wealth refused further draws while continuing to charge commitment fees and suggesting funding might resume later. Sky Trust sued for breach. The refusal after only a minor default deprived Sky Trust of the credit facility's central benefit and therefore breached the duty.
Vivienne faced imminent foreclosure and needed cash to cure or relocate. An agent for Allied Estates offered a below-market price and threatened to tell her employer and homeowners' association about the foreclosure unless she signed immediately. The threat constituted a breach of the duty of good faith under the purchase agreement because it was used to extract assent on unfair terms.
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A mortgagor requested that casualty insurance proceeds be released for restoration of the damaged residence. The mortgagee refused and elected instead to apply the funds to the debt. Because restoration was feasible and would return the property to its original value, the refusal breached the mortgagee's duty of good faith and fair dealing.
The duty applies throughout the life of the contract, including performance and enforcement. A party breaches the duty when it exercises contractual rights in a manner that deprives the other party of the expected benefit of the agreement.
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Yes. Violation of the duty through bad-faith performance constitutes a breach of the contract itself for which damages are available. The duty is an implied term of every contract.
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No. When the insured gives an explicit written instruction to reject all offers, that directive is the direct cause of any excess judgment and bars recovery against the insurer for bad-faith failure to settle.
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No. The duty requires the lender to evaluate proposals to cure a default in a meaningful way rather than rejecting them outright under an inflexible internal policy.
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