Implied Covenant Laws

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 What Is A Legal Contract?

A legal contract is any agreement that is enforceable under contract laws. While most legal contracts are written and signed, some jurisdictions recognize oral agreements as legal contracts. However, it is generally best for a contract to be formalized in writing, especially for considerably valuable subject matters or complex arrangements.

Legal contracts may be used by both individuals as well as organizations, such as businesses and corporations. Any legal contract must be entered into in such a way that is considered to be fair for both parties, as well as free of any:

  • Fraud;
  • Coercion; and/or
  • Misrepresentations.

In order for a contract to be legally valid, it must fulfill all of the requirements for a valid contract. These requirements are set forth by state and federal laws and include:

  • Offer And Acceptance: One party must make an offer, and the other must accept the offer. Both the offer and acceptance must be done in a way that is clear and unambiguous;
  • Assent: Both parties must mutually assent, or agree, to the terms of the contract. They should be clear regarding the terms, words, and definitions that are used in the agreement; and
  • Consideration: Each party must exchange something of value. An example of this would be how one party is generally providing a service or goods in exchange for monetary payment.

There are many reasons why a contract can be invalidated, mainly if one of the requirements listed above was not met. An example of this would be how if only one party assented to the agreement, the contract is not considered to be legally binding.

Under specific circumstances, a court can declare a contract void. What this means is that the contract is canceled, as if it never existed, and the parties might then be released from their duties. In other cases, the court may declare the contract “voidable,” which means that the parties can cancel the contract at their own discretion.

What Does Good Faith And Fair Dealing Mean In Terms Of Contract Law?

According to the laws governing contracts, all contracts include the implied covenant of good faith and fair dealing. What this means is that each party to the contract must act honestly and fairly, and must also show good faith towards each other during the contract process. In other words, one party cannot participate in an act that would prevent the purpose of the contract from being met.

In terms of business owners who manage the sale of merchandise using contracts, the term “good faith” applies to them in that it requires that they behave honestly. Additionally, they must comply with all of the reasonable commercial standards of fair dealing within their industry.

An example of conduct that demonstrates good faith would be when a person only enters into a contract that they believe, in good faith, they will be able to fulfill. If a person agrees to manufacture and distribute 1,000 pieces of hardware, but they do not have any of the resources or the capabilities to manufacture 1,000 pieces of hardware, the other party can argue that they did not enter into their contract in good faith. As such, they will have violated the implied covenant of good faith and fair dealing.

Cases involving a failure to act in good faith will largely be determined based on the individual facts of that case. However, there are some circumstances that frequently reoccur more than others, making these types of cases similar to each other.

Some general examples showing the failure to act in good faith and deal fairly under a contract include:

  • When one party tampers with any of the goods that are to be delivered under a contract;
  • When one party to a contract promises to use the services of one company exclusively, but breaks that promise by intentionally using the services of multiple companies;
  • If one of the parties lies about performing their obligations under the contract; and
  • If one party contracts to purchase a home, is denied by a mortgage company, and then refuses to use a different mortgage company in order to go through with the sale.

Good faith does not only apply to contracts between corporations or business entities; rather, good faith applies to nearly any type of contractual situation, which includes:

  • Selling a house;
  • Purchasing a car; and/or
  • Performing services, such as cleaning a house, landscaping a backyard, and the like.

What Is An Implied Covenant In A Contract?

In a contract context, an implied covenant is an agreement that is not specifically stated in the contract terms. Rather, the agreement is simply assumed to be true by both or all parties who are entering into the contract.

The most common type of implied covenant would be the “Implied Covenant of Good Faith and Fair Dealing” in a contract. As was previously discussed, this type of implied covenant assumes that the parties will generally deal with one another in an honest and forthcoming manner, and will not resort to deceptive tactics or trickery when negotiating a contract.

Implied covenants can cover a considerably wide variety of different contract matters, but they are commonly a significant feature of real estate contracts, as well as employment contracts. An example of this would be how an implied covenant can be associated with the following matters:

An implied covenant is not necessarily the same thing as an implied warranty. An implied covenant is, essentially, an agreement between two or more parties to a contract. Generally speaking, both parties are held to the same standards that are set forth by the implied covenant. An example of this would be how with the implied covenant of good faith and fair dealing in a contract, both parties to the contract are expected to exercise the same fairness to one another.

Alternatively, an implied warranty may only impose a duty upon one party, generally the seller or the party who is supplying the product and/or services. Essentially, it is a guarantee that the buyer is receiving what is being promised in the contract. An example of this would be how the agreement that a residential home is technically called the “Implied warranty of habitability,” and not the implied covenant of habitability. The exception to this would be if the buyer also has a duty to maintain the property in habitable condition.

What If An Implied Covenant Is Broken Or Breached?

This will largely depend on the nature of the subject matter, as well as the legal jurisdiction that the violation occurs in. All jurisdictions enforce the implied covenant of good faith and fair dealing in a contract; as such, a party can generally recover damages for losses if the good faith covenant is violated.

However, different states have different rules associated with specific implied covenants and implied warranties. An example of this would be how not all jurisdictions enforce the implied warranty or covenant of quiet enjoyment.

Do I Need A Lawyer For Issues With Implied Covenant Laws?

If you need help drafting a contract, or if you have been involved in a contract violation, you should hire a qualified contract lawyer for help.

An experienced attorney will be able to review the contract and implied covenant laws in your area in order to determine how your legal rights and options may be affected by those laws.


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