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What is implied covenant of good faith and fair dealings?

On Behalf of | Mar 4, 2023 | Business Litigation |

When you conduct business with another entity, you expect fair treatment and adherence to whatever contract you create and sign. However, not every business operates with integrity.

Therefore, the government had to step in and create a law that governed fair dealings. The implied covenant of good faith and fair dealings is this law.

What it says

This covenant states that each party to a contract should act in good faith. This means that they should adhere to the spirit or intention of the agreement. They are not allowed to misconstrue or violate the purpose of the contract or transaction with the other parties involved. This rule does not apply during the negotiation process. However, whether the contract explicitly states the agreed-upon terms or not, its performance must adhere to the intention within the contract.

Judgment challenges

This covenant has many challenges. First, the agreement may encounter wide interpretation based on the judge reviewing the case. For example, the judge may feel that because the conditions are not explicitly stated, they are not part of the agreement. In addition, the judge may believe that the parties never came to a full agreement on some terms, or they did not understand the agreement or the breach was unintentional. Courts treat each case separately, and the judge determines the application of the rule.

Failure due to interference

If another party involved in the contract prevents you from completing your contract duties, your performance is excusable. For example, if you do not receive payment, you do not have to provide your products to the nonpaying party.

The goal of the implied covenant of good faith and fair dealing is fairness. However, make sure you understand both the stated and implied terms of every contract you sign.