Contract Good Faith and Fair Dealing

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 What Is the Contractual Requirement of "Good Faith and Fair Dealing”?

Every contract contains an implied duty of good faith and fair dealing. This duty requires that neither party do anything that will suppress or harm the other party’s right to receive the contract’s benefits. When deciding whether the duty of good faith and fair dealing was breached, courts analyze the facts and determine what is fair under the circumstances.

Contracts cannot cover every conceivable situation between the parties nor provide detailed terms for every aspect of each party’s obligations. Instead, the law holds that there are implied duties to cover situations not discussed in the written contract. Even if a contract does not explicitly require one party to cooperate or to refrain from interfering with the other, the implied duty of good faith and fair dealing still guides the business relationship.

“Good faith” is generally defined as honesty in a person’s conduct. The obligation to perform in good faith exists even in contracts that allow either party to terminate the contract for any reason. “Fair dealing” usually requires more than just honesty. It generally requires that a party cannot act contrary to the “spirit” of the contract nor conduct themselves in a way contrary to the other party’s interests.

The duty of good faith and fair dealing means, for example, that parties cannot evade the spirit of the bargain, abuse their power when specifying the terms of a contract, lack diligence or slack off, perform incorrectly on purpose, or interfere with or fail to cooperate in the other party’s performance.

Breaching the Implied Duty of Good Faith and Fair Dealing

A party can be found in breach of the implied duty of good faith and fair dealing if their conduct is shown to obstruct, undermine, or work in opposition to the other party’s ability to fulfill, or profit from, its performance of the contract.

Since implied duty has no specific definition, the courts can determine its scope. When a court weighs whether the duty of good faith and fair dealing has been violated, it must analyze the facts and decide what is fair under the circumstances. This is done on a case-by-case basis.

Issues relating to the implied duty of good faith and fair dealing are fact-sensitive. Several factors impact the court’s application of the implied contractual duty. These include the following:

  • Type of claim at issue
  • Length and complexity of the agreement
  • The sophistication of the parties
  • Bargaining power of the parties
  • The motivation behind the defendant’s actions

A basic example of conduct that demonstrates good faith is when a person only enters into a contract that they believe, in good faith, they will be able to fulfill. If, on the other hand, a person agrees to manufacture 20,000 umbrellas, but they cannot make that many, then the other party can argue that the first party did not enter into their contract in good faith. They have violated the implied covenant of good faith and fair dealing.

What are Some Examples of the Failure to Act in Good Faith?

Many different scenarios can amount to a failure to act in good faith. There are certain situations, however, that frequently reoccur. It is a breach of the covenant of good faith:

  • If a party tampers with any of the goods to be delivered under a contract
  • If a party agrees to perform a service they are incapable of doing
  • When a party to a contract promises to use the services of one company exclusively but breaks that promise by using the services of a different company
  • If one of the parties lies about performing their obligations under the contract
  • If one party fails to do their best to complete the contract. For example, if a party contracted to buy a car but they were turned down on their first loan application, they will have breached the duty of good faith if they refuse to try another lender
  • To be negligent in performing the duties of the contract
  • To be lazy or slack off
  • To intentionally perform poorly or incorrectly
  • To interfere with or fail to cooperate with the other party’s performance

As the above examples show, good faith does not only apply to contracts between corporations or business entities. Good faith applies to any contractual situation, including when selling a house, purchasing a car, or making an employment agreement.

Breach Can Be Due to a Failure to Act in Support of the Other Party

Imagine you’re the leader of a successful pop music band. A company wants to hire you to perform at an employee training event. Your band’s music requires steady electrical connections for the guitars, the amps, the keyboard, the lights, and more. The company that hired you is in dispute with its electricity provider, and when the two cannot reach an agreement, the company decides not to pay its bill.

The company warns you might have to perform without power, and you insist that they reach at least enough of an agreement with the power company to ensure that there will be ample electricity on the day of the concert. The company refuses to negotiate with the utility provider. You cannot perform, and the company refuses to pay you your contractual fee because the band didn’t perform.

In this situation, the company may be liable for breach of the duty of good faith and fair dealing—even though you didn’t perform your end of the bargain. Their failure to act made it virtually impossible for the band to fulfill the contract. Nothing is written in the contract between the company and the band that requires the company to help you. The implied covenant of good faith and fair dealing governs the parties’ performances.

Most executives and companies do not realize that the duty of good faith and fair dealing requires that parties not interfere with or fail to cooperate in the other party’s performance.

Each party to a contract must do everything it assumes it will do to accomplish its purpose. This means that your performance under a contract is excused— does not need to happen—if your performance is prevented or hindered by the other party to the contract.

What Damages Can I Collect If the Other Party Fails to Act in Good Faith?

When one of the parties to a contract violates the covenant of good faith and fair dealing, it will be considered a breach of the contract. Therefore, that party can be held liable for any damages that occur due to their conduct. For instance, if Party A meddles with Party B’s ability to receive the services that are the subject of the contract, then Party A may have to refund whatever Party B paid for the services and may also be required to pay for any profits Party B lost due to the circumstances.

Depending on the circumstances, the breaching party might also be responsible for paying other consequential damages that the non-breaching party incurred due to the breach. (Consequential damages are those that a breaching party should have expected when they breached the contract. Examples include lost profits, the value of lost time, and damage to reputation.)

Because the covenant of good faith is a contract term (even if implied), recovery in cases where the covenant has been breached is usually limited to contract remedies. Some courts have held; however, that tort damages can be available for breach of the covenant of good faith and fair dealing in the limited circumstances where there is a special relationship between the parties, such as those arising from elements of public interest and fiduciary responsibility, as well as cases involving franchisors and franchisees where one party acted in bad faith.

If one of the parties committed fraud, they could even face criminal charges and penalties.

Do I Need to Hire an Attorney for Help with My Breach of Contract Issue?

Contract terms are often complex and can be difficult to interpret. If you are involved with a claim based on violating the implied covenant of good faith and fair dealing or any other contract-related issue, you should contact a contract lawyer in your area for assistance.

An experienced contract lawyer can help you either reach a settlement with the other party or file a lawsuit against them if a settlement cannot be reached.

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