Also known as:good faith and fair dealing · good faith and fair dealing duty · implied covenant of good faith and fair dealing · implied covenant of good faith · covenant of good faith and fair dealing
Written by attorneys · grounded in primary & secondary sources — see below
A contractual obligation requiring each party to act honestly and fairly when performing and enforcing an agreement. The duty prevents one party from undermining the benefits the other reasonably expected to receive. It applies to all contracts and cannot be eliminated by agreement, although parties may prescribe reasonable standards for measuring compliance.
Sources & Authorities
How it applies
Common Examples
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Cost-Cutting Delays Breach Charter
River Coastal charters a vessel from Silver Sea for multiple voyages. Silver Sea repeatedly chooses cheaper routes and minimal maintenance to cut its own expenses, causing repeated late deliveries and triggering over one hundred thousand dollars in penalties for River Coastal. River Coastal sues for breach of the duty of good faith and fair dealing. The court finds Silver Sea violated the duty by exercising its discretion in a manner that deprived River Coastal of the timely performance the contract was meant to secure.
Partnership Agreement Cannot Erase Duty
Nova Ventures LP is a limited partnership managed by Nova, Inc. The agreement lets Nova favor strategic investors using a vague reasonable-business-justification clause. Nova withholds roadmap information from minority limited partner Chen and steers a major customer to a strategic investor's portfolio company. Chen sues for breach of good faith and fair dealing. The court rejects Nova's defense because the clause effectively eliminates the nonwaivable duty rather than merely defining its standards.
Select any source to read its text and confirm it supports the definition.
Cases
Uniform Acts
Restatements
Casebooks
Conclusive Presumption Invalid in LP
Silver Screen LP finances independent films under an agreement declaring any creative decision by managing producer Carla conclusively in good faith if she approves it. Carla casts herself and friends in lead roles despite cheaper, better-qualified actors, reducing investor returns. Limited partners sue, alleging bad faith. The court refuses to enforce the clause because it eliminates the mandatory good-faith obligation rather than prescribing a reasonable measuring standard.
Threat to Breach Contract Is Improper
George Garcia contracts with Guardian Insurance to sell his business. Guardian threatens to withhold required cooperation on regulatory approvals unless Garcia accepts a lower purchase price. Garcia agrees under protest and later sues to rescind the modification. The court holds the threat improper because it constitutes a breach of the duty of good faith and fair dealing under the original contract.
Partner Must Exercise Rights in Good Faith
Gabriel Gonzalez and Gwen Gallagher form a general partnership to operate a fleet of delivery vans. Gonzalez withholds maintenance records from Gallagher to pressure her into selling her interest at a discount. Gallagher sues for breach of the duty of good faith and fair dealing. The court holds Gonzalez liable because partners must exercise rights consistently with that contractual obligation.
Limited Partner Must Act in Good Faith
Grandview Holdings LP admits Grace Gupta as a limited partner. Gupta uses confidential partnership information to launch a competing venture that undercuts the partnership's major client. The general partner sues, alleging breach of good faith and fair dealing. The court holds Gupta liable because a limited partner must exercise rights under the partnership agreement consistently with the contractual obligation of good faith and fair dealing.
Common questions
Frequently Asked
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Can a partnership agreement eliminate the duty of good faith and fair dealing?+
No. Modern partnership statutes treat the duty as a mandatory contractual obligation that cannot be eliminated. The agreement may prescribe standards for measuring performance only if those standards are not manifestly unreasonable.
Supporting sources
How does the duty interact with a clause that creates a conclusive presumption of good faith?+
Such a clause is unenforceable to the extent it effectively erases the duty. The statute permits reasonable standards for measuring good faith but forbids provisions that make the obligation meaningless.
Supporting sources
Does the duty apply when a partner exercises discretion granted by the agreement?+
Yes. Even when an agreement grants discretion, the partner must exercise it consistently with good faith and fair dealing and cannot use the discretion to deprive other partners of expected benefits.
Supporting sources
What remedies follow when a party breaches the duty in contract performance?+
The injured party may recover contract damages for the resulting loss. The breach may also support a claim that the other party's performance was excused or that a modification obtained by threat of breach is unenforceable.
…as amended, alleged that appellant was discharged in violation of both the terms of an implied employment contract and the implied covenant of good faith and fair dealing, and that the discharge was in violation of public policy and therefore tortious. The superior court sustained respondent’s demurrer to the third amended complaint and granted appellant…