Also known as: Restatement 2d Contracts §205 · Restatement (Second) Contracts §205 · good faith and fair dealing · implied covenant of good faith
Written by attorneys · grounded in primary & secondary sources — see below
A rule imposing upon each party to a contract a duty of good faith and fair dealing in its performance and its enforcement.
Ronald Reed agrees to renovate rooms for Royal Crest Hotels under a fixed-price contract. After work begins, Royal Crest repeatedly withholds scheduled payments over minor complaints while pressing Reed to accept a lower rate. Reed completes the project but loses expected cash flow and must borrow at high interest to cover costs.
Raphael Rivera and Riley Rivera form a general partnership to operate a charter service. Raphael diverts partnership funds to cover personal vessel repairs and refuses to contribute his share of operating costs. Riley must advance the full amount to keep the business running.
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Rebecca Ross, a limited partner in a real-estate venture, requests financial records needed to evaluate a proposed sale. The general partner delays production and supplies only redacted summaries. Ross cannot assess the transaction without complete data.
Rajesh Rao contracts to supply parts to Redline Automotive. When Redline faces cash-flow pressure, it threatens to stop all payments unless Rao accepts a retroactive discount. Rao agrees to the discount to avoid shutdown of his own operations.
Ralph Richardson and Royal Crest Hotels form a partnership to manage a fleet. Richardson submits inflated expense reports and refuses to provide receipts. The partnership must absorb the excess costs while Richardson retains the overpayments.
Riverstone Manufacturing admits Rebecca Ross as a limited partner. Ross negotiates a separate supply contract with a key customer at a lower price using information obtained through the partnership. The partnership loses the expected margin on the original deal.
The duty applies to both performance and enforcement of every contract. It prevents a party from exercising discretion in a manner that deprives the other party of the expected benefit of the bargain.
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Parties cannot eliminate the duty by agreement. Partnership statutes permit the agreement to prescribe standards for measuring performance if those standards are not manifestly unreasonable.
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A party's failure to act in good faith is one of the circumstances courts weigh when deciding whether a breach is material. Deliberate concealment or self-serving interpretations weigh strongly toward finding materiality.
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Prior acceptance of defective performance does not waive the right to demand adequate assurance when new grounds for insecurity arise. Each demand is evaluated on its own facts.
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A breach of the duty supports a claim for contract damages. Punitive damages are unavailable unless the conduct also constitutes an independent tort.
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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…