Also known as:good faith · fair dealing · covenant of good faith and fair dealing · implied covenant of good faith and fair dealing
Written by attorneys — see sources below.
An implied contractual obligation requiring each party to act honestly and refrain from conduct that would deprive the other party of the fruits of the agreement. The duty applies to performance and enforcement and is measured by honesty in fact together with observance of reasonable commercial standards.
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How its tested
Common Examples
6
Mortgage Acceleration Dispute
Gustavo Gutierrez missed two monthly payments on his home loan from Glacier Energy. The lender declared the full balance due and scheduled foreclosure. Gutierrez showed that the lender had accepted late payments for years without objection and accelerated only after he inquired about a possible refinance. The court found the acceleration violated the duty of good faith and fair dealing because the lender used the clause to pressure a borrower who had relied on the prior course of dealing.
Corporate Deposition Scheduling
Giselle Guerrero served a Rule 30(b)(6) notice on Global Dynamics describing five topics for examination. Global Dynamics designated two officers but refused to meet to discuss the scope until after the deposition date. Guerrero moved to compel. The court ordered the parties to confer because the rule requires good-faith discussion of the matters for examination before the deposition proceeds.
Georgia Gibbs filed a derivative action against Grove Manufacturing alleging self-dealing by two directors. The board formed a committee of two qualified directors who reviewed documents and interviewed witnesses. The committee concluded in good faith that continuing the suit was not in the corporation's best interests. The court granted the motion to dismiss because the determination satisfied the statutory requirements of good faith and reasonable inquiry.
Attorney Counseling Advice
Gideon Graves asked his lawyer whether a proposed transaction would violate securities laws. The lawyer explained the statutory language and advised Graves on how to structure the deal to stay within the law. The lawyer refused to draft documents that would conceal material facts. The advice complied with the duty to assist only a good-faith effort to determine the law's meaning and application.
Reporter Grand Jury Appearance
Gareth Glover, a journalist, received a grand jury subpoena seeking the identity of a confidential source. Glover appeared but refused to name the source. The prosecutor showed that the investigation was conducted in good faith and that no reporter's privilege protected the testimony. The court ordered Glover to answer because the First Amendment does not bar good-faith grand jury inquiries.
Foreclosure Process Conduct
Guadalupe Gallegos defaulted on a home loan held by Greenleaf Farms. The lender began foreclosure but repeatedly changed the required cure amount without explanation and refused to accept a payment that matched the last stated figure. The court halted the foreclosure because the lender failed to act in good faith throughout the process as required by the uniform act.
4 common questions
Students Frequently Ask...
Does the duty of good faith and fair dealing create new contract terms or only govern performance of existing terms?
The duty does not create new substantive obligations. It requires parties to perform and enforce the contract honestly and without depriving the other party of the expected benefits. Courts refuse to use the duty to rewrite express terms that allocate discretion to one party.
Can a party breach the duty of good faith and fair dealing by exercising a right expressly granted in the contract?
Yes. Even when a contract grants discretion, the party must exercise that discretion in good faith and consistent with the reasonable expectations created by the agreement. Bad-faith exercise of an express right can support a claim for breach.
Is the duty of good faith and fair dealing limited to contracts governed by the UCC?
No. The Restatement (Second) of Contracts § 205 imposes the same duty on all contracts. Most jurisdictions recognize the implied covenant under both the UCC and the common law of contracts.
Does a breach of the duty of good faith and fair dealing give rise to tort damages?
In most contract settings the claim remains contractual. Some jurisdictions allow tort recovery in insurance cases or when the breach involves an independent tort such as fraud, but the ordinary remedy is contract damages.
576 U.S. 644 (2015)
…view, is by its nature a gender-differentiated union of man and woman. This view long has been held—and continues to be held—in good faith by reasonable and sincere people here and throughout the world. The petitioners acknowledge this history but contend that these cases cannot end there. Were their intent to demean the…