implied contractual covenant of good faith and fair dealing
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Also known as:implied covenant of good faith and fair dealing · covenant of good faith and fair dealing · good faith and fair dealing covenant · good faith covenant · implied good faith covenant · duty of good faith and fair dealing
Written by attorneys · grounded in primary & secondary sources — see below
A duty imposed by law upon each party to a contract requiring honest performance and enforcement that does not destroy or injure the other party's right to receive the fruits of the agreement.
Sources & Authorities
How it applies
Common Examples
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Landlord Disrupts Tenant Access
Innovate Pharmaceuticals leased retail space from Insight Consulting under a percentage-rent lease. Insight closed entrances and conducted disruptive renovations for months to attract a replacement tenant. Innovate's sales fell sharply, prompting a breach suit that succeeded because Insight's management choices frustrated the lease's central purpose.
Insurer Delays Claim Payment
Ines Ibarra purchased disability coverage from Iris Energy's affiliate. After filing a claim, the insurer demanded duplicate records and unnecessary exams while pushing a low settlement. Ibarra prevailed on a breach claim because the repeated obstacles prevented her from obtaining the policy's promised protection.
Select any source to read its text and confirm it supports the definition.
Cases
Restatements
Casebooks
Hornbooks
Lender Blocks Draws After Minor Default
Isaiah Ishikawa's startup obtained a revolving credit line from Icarus Aviation. After a late compliance filing, the lender refused further draws yet continued collecting fees. Ishikawa recovered damages because the lender's enforcement tactics deprived him of the financing benefit the agreement was meant to provide.
Employer Terminates to Avoid Commissions
Irene Ingalls sold software under an at-will employment contract that entitled her to commissions on closed deals. Her employer fired her days before a large commission vested. Ingalls recovered the lost commission because the termination was used solely to deprive her of the contract's expected benefit.
Foley v. Interactive Data Corp.47 Cal. 3d 654, 254 Cal. Rptr. 211, 765 P.2d 373
Common questions
Frequently Asked
4
Does the implied covenant apply only during contract formation?+
No. The duty governs performance and enforcement after the contract is formed. Conduct that occurs after signing can still breach the covenant when it frustrates the other party's expected benefits.
Supporting sources
Can a party breach the covenant by exercising an express contractual right?+
Yes. Even when a contract grants discretion, such as a termination clause or rejection right, the party must exercise that right honestly and not as a pretext to deprive the other side of the bargain's fruits.
Supporting sources
Does the covenant create new affirmative obligations not stated in the contract?+
No. It does not add terms or require one party to maximize the other's profits. It only prohibits conduct that undermines the contract's central purpose or the reasonable expectations created by the agreement.
Supporting sources
What remedy follows a breach of the implied covenant?+
The injured party may recover contract damages for the loss caused by the bad-faith performance or enforcement. Punitive damages are unavailable unless the conduct also constitutes an independent tort.
…1, 9 (2003). Despite the existence of significant jurisprudence with respect to goodfaith in the contractual context of the covenant of good faith and fair dealing, see, e.g., Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P. , 624 A.2d 1199 (Del.1993), Delaware decisions have shown a reluctance to importing these contractual…