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CONTRACT LAW: The Implied Duty of Good Faith and Fair Dealing

By definition, an implied duty or covenant imposes obligations and provides for certain rights which are not expressly set out in a contract. In California, courts will interpret most contracts in such a manner as to impose a duty of good faith and fair dealing on both parties. So what are the parameters of this obligation?

First, this duty will not typically be imposed on parties to a contract if they have expressly agreed to a provision which conflicts with this responsibility. Parties are free to enter into contracts, even ones which are unfair. In addition, this implied duty is not applicable during pre-contractual negotiations. Therefore, courts will not usually attempt to rewrite the terms of an agreement by imposing a duty of good faith and fair dealing where there is a conflicting provision in the agreement or one of the parties has merely negotiated a bad bargain, although other legal doctrines could potentially be asserted to invalidate such contracts.

Assuming a contract does not include language contrary to this implied duty, California courts will normally require that each party:

  1. refrain from doing anything which will deprive the other party of the benefits of their agreement; and,
  2. perform all acts which their contract presupposes each party will do to accomplish the purpose of the agreement, even if the act is not expressly set out in the terms of the contract.

See April Enterprises, Inc. v. KTTV, et al., 147 Cal. App. 3d 805, 816, 195 Cal. Rptr. 421, 425 (1983).

Beyond imposing a responsibility to act honestly in carrying out contractual terms, courts will interpret the implied duty of good faith and fair dealing in light of the very purpose(s) of a contract. This goal enables courts to mold this implied duty to the facts of each case. In doing so, California courts typically utilize an “objectively reasonable” standard. For example, if a provision of an agreement provides for a party to exercise their discretion in some manner, that party must act “reasonably” in exercising their discretion. A failure to act, which affects the other party’s rights, or an arbitrary decision without a valid reason, may violate this implied duty even when carrying out a discretionary right.

It has also been established that a party need not breach an express provision of a contract in order to be held liable for damages pursuant to this implied obligation. Instead, the elements a complainant must prove to prevail on a claim for breach of the implied duty of good faith and fair dealing include:

  1. that there was a contract;
  2. that the plaintiff fulfilled all or substantially all of their responsibilities set out by the contract, or that she was excused from performing them;
  3. that the defendant unfairly interfered with the plaintiff’s right to receive the benefits of the contract; and,
  4. that the plaintiff was harmed by the defendant’s conduct.

See California Civil Jury Instructions (CACI) 325, Spring 2013 Ed.

The possibilities for finding a violation of the implied covenant of good faith and fair dealing are nearly endless; it is only limited by people’s imagination in coming up with new ways to avoid fulfilling their promises. If a party to a contract engages in subterfuge, evasion, intentionally performs imperfectly, fails to accommodate the other party’s performance, or simply fails to act, that party could be held liable for damages.
In sum, the law does often impose obligations on parties to an agreement which go beyond the four-corners of the contract itself. Because of this, it is important to have an experienced professional draft or at least review agreements to ensure the language is consistent with the intentions of the parties. If the purpose of the contract is ambiguous, courts may have difficulties determining whether a violation of an implied duty has occurred, leading to an inequitable result.

For additional information related to contracts in California, feel free to contact the experienced San Diego business attorneys at Gehres Law Group, P.C. using our Contact Page or call us at 877-333-2420.

By | 2017-09-12T00:46:15+00:00 March 6th, 2014|Business Contracts|Comments Off on CONTRACT LAW: The Implied Duty of Good Faith and Fair Dealing