When working in business, it is widely understood all contracts carry the implied duty of good faith and fair dealing. This phrase means there is a reasonable expectation that all parties involved will act fairly and honestly under the terms of the business arrangement. It also implies that neither party will violate the spirit of the contract by actively working against the other party.
When managing business contracts, it is best to work with a lawyer who focuses on business law to ensure your rights are protected in the event of a breach of duty of good faith and fair dealing. Understanding contract terms can be challenging, and if you believe the implied duty of good faith and fair dealing has been breached, it is crucial to seek advice from a seasoned litigation attorney. Contact the business litigation lawyers at Feldman & Feldman to get started on your case today.
According to Cornell Law School, the implied covenant of good faith and fair dealing (often just referred to as “good faith”) is a principle recognized by most courts in the United States and mandates each party in a contract must fulfill the agreement as intended, refraining from actions that undermine the purpose of the transaction. The rule of good faith applies or is implied in any contract without being specifically stated in the agreement. However, this only applies to the actions after the contract is signed and not the negotiation of the contract itself.
Good faith and fair dealing is more complicated to define in court because every individual will have a variation in their definition of fairness and honesty.
The application and understanding of good faith rulings depends a lot on the context of the agreement as well. Usually, courts will rule on this when it is obvious a party did something to clearly harm another party’s ability to reap the benefits from the contract or tries to undermine them in fulfilling their part of the agreement.
An example of this might be if a manufacturer of a product enters into a business deal with an e-commerce company in charge of marketing and selling that product. A breach of duty of good faith would be if the manufacturer deliberately slows production without a valid reason, causing the e-commerce company to miss important marketing opportunities and waste time for potential sales. This deliberate action breached the implied covenant of good faith and fair dealing to undermine the benefits for the secondary party in the contract and sabotage its ability to fulfill its end of the agreement.
The central aspect of implied duty is that each party in a business contract has an understanding of owing a responsibility to the other party. By definition this is an assumption or understanding by law rather than specifically stated in a contract. However, while not explicitly written down, it is inferred or commonly presumed. Often, litigation surrounding implied duty requires references to common law, industry practices and customs, statutory law, and public policy to prove a breach has occurred due to the understood but undefined nature of implied duty.
Good faith generally involves honest, fair, and trustworthy dealings in contractual business relationships and agreements. This requires both parties to cooperate and not actively work against the other party’s ability to fulfill or profit from the contract. Some main principles of good faith include:
These principles should guide the behavior of parties entering into business contract relationships to help ensure they are executed with fairness and equitability.
The Uniform Commercial Code (UCC) is the body of laws that govern all commercial transactions in the United States. This comprehensive set of laws was formed in 1892 and uniformly adopted at a state level, even though it is not federal law. The implied duty of good faith and fair dealing is a fundamental aspect of it, with UCC § 1-304 stating that every contract or duty within the UCC requires all parties to act in good faith during the performance and enforcement.
When one party breaks this implied covenant of good faith and fair dealings, it might be said they are violating the spirit of the deal. The spirit of the deal is the comprehensive look at all underlying principles, implicated intentions, and objectives of a contract that goes beyond the literal and specific terms that are written down. It reflects not just the contract but the full relationship all parties intend to join in and uphold throughout the course of the terms.
A breach in good faith and fair dealings would involve actions that go against those basic underlying principles and intentions, even if they do not go against the explicit terms of the contract. Some examples of breaching the spirit of the deal or acting in bad faith might include:
Good faith and fair dealing is an enforceable covenant that is not intended to be broken, and when breaches of this implied duty occur, it can lead to various types of litigation.
These typically depend on the extent of the breach and the nature of the contract.
Some common forms of litigation that arise from breaches in good faith include breach of contract lawsuits, fraud cases and potential criminal charges, unfair competition, partnership disputes, and / or shareholder litigation.
To claim a breach of good faith and fair dealing, a plaintiff must provide the following key elements:
Contractual disputes often require help from highly skilled legal counsel. If you have experienced a breach in the implied duty of good faith and fair dealings in your business partnership, you need to contact Feldman & Feldman to speak with one of our experienced business litigation attorneys. We have a track record of achieving successful results for our clients, which include individuals, corporations, estates, trusts, government entities, and other organizations.
No matter is too complex for us to handle and you do not have to go through this alone. We will help you find answers and protect your interests against bad-faith actors. Contact us today to schedule a consultation to discuss all your business law questions.
