---
title: "Implied Covenant of Good Faith and Fair Dealing"
type: Legal Doctrine
source: https://casebriefly.com/legal-doctrines/good-faith-and-fair-dealing
---

# Implied Covenant of Good Faith and Fair Dealing

Every contract contains an implied covenant of good faith and fair dealing that prohibits either party from doing anything to destroy or injure the other party's right to receive the benefits of the agreement.

## Description

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.

## Elements

- A valid contract exists between the parties
- One party exercises discretion or takes action affecting the other's contractual rights
- The action destroys or injures the other party's right to receive contractual benefits
- Good faith requires honesty in fact and (for merchants) fair dealing
- The covenant supplements but does not override express contract terms

## Key Case

wood-v-lucy

## Related Cases

- market-street-associates-v-frey
- eastern-air-lines-v-gulf-oil-corp
- locke-v-warner-bros

## Related Terms

- breach-of-contract
- consideration
- unconscionability

## Significance

The implied covenant of good faith is important in contracts questions involving discretionary performance, requirements contracts, and allegations of opportunistic behavior. Students must understand its scope and its limits.

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Source: [Implied Covenant of Good Faith and Fair Dealing — CaseBriefly](https://casebriefly.com/legal-doctrines/good-faith-and-fair-dealing)