Also known as: good-faith requirement · good faith requirements · duty of good faith · good faith obligation
Written by attorneys — see sources below.
A duty imposed upon each party to a contract to perform and enforce the agreement honestly and fairly so as not to deprive the other party of the expected benefits.
Valley Ag contracted to buy produce from Steve at a fixed price. After market prices fell, Valley Ag began rejecting later shipments for trivial defects even though it had accepted comparable produce earlier. Steve sued for breach. The rejections breached the duty because they were made to force a price reduction rather than to enforce the contract terms.
Star Wealth Bank held a revolving credit line with Sky Trust LLC. After a minor reporting default, the bank blocked further draws while continuing to charge commitment fees. Sky Trust sued. The bank's conduct breached the duty because it exploited the technical default to undermine the credit facility's purpose.
Union Creative held a mortgage from Continental Culture. After missed payments, the lender mailed a cure letter with an unremarked acceleration notice attached. Continental tendered the arrearages before any acceleration took effect. The lender's refusal to accept the tender breached the duty because the acceleration procedure lacked good faith notice.
Interactive Data Corp. employed Glenn Gross under a contract allowing termination without cause. The company fired him shortly before a large commission payment became due. Gross sued. The termination breached the duty because it was used solely to deprive him of compensation earned under the contract.
Interactive Data Corporation hired John Foley in June 1976 as an assistant product manager at a starting salary of $18,500. As a condition of employment Foley signed a confidential and proprietary information agreement. The company's president told Foley that if he performed his job well he would have a long and rewarding employment with the firm. Over the next six years and nine months Foley received steady salary increases, promotions, bonuses, awards, and superior performance evaluations, rising to branch manager of the Los Angeles office with an annual salary of $56,164 plus a merit bonus. In January 1983 Foley learned that his new supervisor, Robert Kuhne, was under investigation by the FBI for embezzlement from his former employer, Bank of America. Foley reported the information to Vice President Richard Earnest because he was worried about working for Kuhne in a supervisory position. Earnest told Foley not to discuss rumors and to forget what he had heard. In early March 1983 Kuhne informed Foley that the company had decided to replace him for performance reasons and offered a transfer to another division. Foley was later told he could continue as branch manager if he agreed to a performance plan, but when Kuhne met with him the next day Kuhne instead gave Foley the choice of resigning or being fired. Foley was discharged on March 13, 1983. Foley filed suit against Interactive Data Corporation alleging three causes of action: tortious discharge in violation of public policy, breach of an implied-in-fact contract to terminate only for good cause, and tortious breach of the implied covenant of good faith and fair dealing. The superior court sustained the company's demurrer without leave to amend and dismissed the action. The Court of Appeal affirmed the judgment. The Supreme Court granted review.
View caseErnest Pestana, Inc. leased space to Gabriel Gonzalez. The lease required landlord consent to any assignment. When Gonzalez proposed a financially responsible assignee, the landlord refused without stating a commercial reason. Gonzalez sued. The refusal breached the duty because it arbitrarily prevented Gonzalez from realizing the lease's value.
In 1970, the Perlitches entered into a 25-year sublease with Robert Bixler for 14,400 square feet of hangar space at the San Jose Municipal Airport to conduct an airplane maintenance business. The sublease covered an original five-year term plus four five-year options to renew. The rental rate was to be increased every ten years in the same proportion as rents increased on the master lease from the City of San Jose. The premises were to be used by Bixler for the purpose of conducting an airplane maintenance business. The lease provided that written consent of the lessor was required before the lessee could assign his interest, and that failure to obtain such consent rendered the lease voidable at the option of the lessor. Subsequently, the Perlitches assigned their interest to Ernest Pestana, Inc. In 1981, Bixler agreed to sell the business, equipment, inventory, improvements, and the existing lease to Jack Kendall, Grady O'Hara, and Vicki O'Hara. The proposed assignees had a stronger financial statement and greater net worth than Bixler and were willing to be bound by the lease terms. Bixler requested consent from Ernest Pestana, Inc., but the lessor refused, claiming an absolute right to withhold consent arbitrarily and demanding increased rent and other more onerous terms as a condition of consent. The proposed assignees filed suit for declaratory and injunctive relief and damages, alleging that the refusal was unreasonable. The trial court sustained the demurrer without leave to amend. The Court of Appeal affirmed.
View caseNo. The duty applies throughout performance and enforcement of the contract. It prevents a party from exercising contractual rights in a manner that deprives the other party of the expected benefits of the bargain.
Supporting sources
Yes. When a buyer accepts initial deliveries without objection but later rejects comparable goods after market prices drop, the rejections violate the duty if they serve as a pretext to renegotiate price rather than to enforce quality terms.
Supporting sources
Yes. A lender violates the duty when it refuses to consider late payments or alternative proposals under a rigid internal policy and proceeds directly to foreclosure without meaningful review.
Supporting sources
Yes. Repeated demands for duplicative documentation, unnecessary examinations, and pressure for a low settlement can breach the duty when they create unjustified obstacles to payment rather than serving legitimate verification needs.
Supporting sources
…& Brody, Inc. [espousing the majority rule] was decided,... there has been an increased recognition of and emphasis on the duty of good faith and fair dealing inherent in every contract." ( Id., 147 Cal. App.3d at p. 329.) (6) Thus, "[i]n every contract there is an implied covenant that neither party shall do anything which will…