Implied Covenant of Good Faith and Fair Dealing

The implied covenant of good faith and fair dealing is a doctrine recognized in every American jurisdiction that imposes on each contracting party a duty not to do anything that will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract. It is implied by law in every contract, regardless of whether the parties expressly included it.

Under the UCC, good faith is defined as honesty in fact and, for merchants, observance of reasonable commercial standards of fair dealing in the trade (UCC Section 1-201(b)(20) and Section 2-103(1)(b)). The Restatement (Second) of Contracts Section 205 similarly requires good faith in performance and enforcement. The duty applies to the exercise of discretion under a contract — when one party has discretion in determining the terms of performance, that discretion must be exercised in good faith and not used to deprive the other party of the expected benefits.

The doctrine has particular importance in contracts where one party has significant discretion, such as output and requirements contracts, franchise agreements, and employment contracts. In Market Street Associates v. Frey, Judge Posner explored how the duty interacts with the duty to disclose, holding that deliberate silence intended to exploit an opponent's oversight of a contractual provision could violate good faith. In Wood v. Lucy, Lady Duff-Gordon, Judge Cardozo found an implied promise to use reasonable efforts based on the entire purpose and structure of the contract.

The implied covenant does not create independent obligations beyond the contract. It cannot be used to override express contract terms or to manufacture obligations the parties never agreed to. Rather, it governs how existing contractual rights and duties are exercised and performed. Courts use it to fill gaps, police opportunistic behavior, and ensure that the spirit of the agreement is honored alongside its letter.