Also known as: implied obligations of good faith · implied good faith obligation · implied covenant of good faith · duty of good faith
Written by attorneys — see sources below.
A duty imposed upon each party to a contract requiring honest performance and fair dealing in both performance and enforcement of the agreement.
River Coastal charters a vessel from Silver Sea for multiple voyages under an agreement requiring timely deliveries. Silver Sea repeatedly selects weather routes that cut its fuel costs but cause repeated late arrivals, triggering over one hundred thousand dollars in penalties for River Coastal. River Coastal sues, claiming the routing choices breached the implied obligation.
Island Manufacturing agrees to supply parts to Imperial Motors under a long-term contract. When Imperial Motors requests a price adjustment permitted by a separate clause, Island Manufacturing threatens to stop all future deliveries unless Imperial Motors waives the adjustment right. Imperial Motors claims the threat breached the implied obligation.
Icarus Aviation mortgages its hangar to Interlink Communications. After a storm damages the hangar, insurance proceeds are paid to the lender. Interlink refuses to release the funds for repairs even though restoration is feasible and would restore the property value, electing instead to apply the money to the debt balance. Icarus Aviation claims the refusal breached the implied obligation.
Ike Ingram is sued for an auto accident with policy limits of fifty thousand dollars. The insurer refuses a reasonable settlement demand within limits despite clear liability and risk of excess judgment. After an excess verdict, Ike Ingram claims the insurer's refusal breached the implied obligation.
Mr. and Mrs. Comunale were struck in a marked pedestrian crosswalk by a truck driven by Percy Sloan. Mr. Comunale was seriously injured, and his wife suffered minor injuries. Sloan was insured by defendant Traders and General Insurance Company under a policy that contained limits of liability in the sum of $10,000 for each person injured and $20,000 for each accident. Sloan notified Traders of the accident and was told that the policy did not provide coverage because he was driving a truck that did not belong to him. When the Comunales filed suit against Sloan, Traders refused to defend the action, and Sloan employed competent counsel to represent him. On the second day of the trial Sloan informed Traders that the Comunales would compromise the case for $4,000, that he did not have enough money to effect the settlement, and that it was highly probable the jury would return a verdict in excess of the policy limits. Traders refused, and the trial proceeded to judgment in favor of Mr. Comunale for $25,000 and Mrs. Comunale for $1,250. Sloan did not pay the judgment, and the Comunales sued Traders under a provision in the policy that permitted an injured party to maintain an action after obtaining judgment against the insured. In that suit judgment was rendered in favor of Mr. Comunale for $10,000 and in favor of Mrs. Comunale for $1,250. This judgment was satisfied by Traders after it was affirmed in Comunale v. Traders & General Ins. Co., 116 Cal.App.2d 198 [253 P.2d 495]. Comunale obtained an assignment of all of Sloan's rights against Traders and then commenced the present action to recover from Traders the portion of his judgment against Sloan which was in excess of the policy limits. The jury returned a verdict in Comunale's favor, but the trial court entered a judgment for Traders notwithstanding the verdict.
View caseIra Irving works for Imperial Motors under an employment agreement that permits termination without cause. Imperial Motors fires Ira Irving just before a large commission payment becomes due, citing the at-will clause. Ira Irving claims the termination breached the implied obligation.
Interactive Data Corporation hired John Foley in June 1976 as an assistant product manager at a starting salary of $18,500. As a condition of employment Foley signed a confidential and proprietary information agreement. The company's president told Foley that if he performed his job well he would have a long and rewarding employment with the firm. Over the next six years and nine months Foley received steady salary increases, promotions, bonuses, awards, and superior performance evaluations, rising to branch manager of the Los Angeles office with an annual salary of $56,164 plus a merit bonus. In January 1983 Foley learned that his new supervisor, Robert Kuhne, was under investigation by the FBI for embezzlement from his former employer, Bank of America. Foley reported the information to Vice President Richard Earnest because he was worried about working for Kuhne in a supervisory position. Earnest told Foley not to discuss rumors and to forget what he had heard. In early March 1983 Kuhne informed Foley that the company had decided to replace him for performance reasons and offered a transfer to another division. Foley was later told he could continue as branch manager if he agreed to a performance plan, but when Kuhne met with him the next day Kuhne instead gave Foley the choice of resigning or being fired. Foley was discharged on March 13, 1983. Foley filed suit against Interactive Data Corporation alleging three causes of action: tortious discharge in violation of public policy, breach of an implied-in-fact contract to terminate only for good cause, and tortious breach of the implied covenant of good faith and fair dealing. The superior court sustained the company's demurrer without leave to amend and dismissed the action. The Court of Appeal affirmed the judgment. The Supreme Court granted review.
View caseYes. The duty requires parties to observe reasonable commercial standards of fair dealing so that neither undermines the agreed allocation of risks and benefits.
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No. The duty limits how a party exercises discretion but does not eliminate an express termination right. Termination solely to deprive the other party of earned compensation violates the duty.
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No. The duty arises only after a contract is formed and governs performance and enforcement, not the bargaining process itself.
An insurer that breaches the duty by failing to settle within policy limits when reasonable may be liable for the full excess judgment entered against the insured.
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Yes. A consistent course of accepting late payments without objection can render abrupt acceleration inconsistent with good faith, supporting injunctive relief against foreclosure.
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…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…