/im-PLIED KUH-vuh-nuhnt uv GOOD FAYTH and FAIR DEEL-ing/·doctrine
Also known as:implied covenants of good faith and fair dealing · covenant of good faith and fair dealing · duty of good faith and fair dealing · good faith and fair dealing
Written by attorneys · grounded in primary & secondary sources — see below
A duty imposed by law upon each party to a contract requiring honest performance and enforcement that does not deprive the other party of the expected benefits.
Sources & Authorities
How it applies
Common Examples
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Lender Withholds Draws After Minor Default
West Investments drew funds under a revolving credit line with Bright Finance. After West filed one compliance certificate a few days late, Bright Finance refused all further draws while continuing to collect commitment fees and offering only vague assurances that funding might resume. West sued for breach. The court held that Bright Finance violated the implied covenant by using a technical default as a pretext to frustrate the central purpose of the credit agreement.
Partnership Agreement Attempts to Erase Good Faith
Maya, Luis, and Chen formed a software partnership. Their agreement stated that no partner would owe any fiduciary duties and that Maya could unilaterally expel the others. Luis challenged the provisions after expulsion. The court held the attempted elimination of the good-faith obligation invalid because the statute preserves that duty as nonwaivable.
Select any source to read its text and confirm it supports the definition.
Cases
Uniform Acts
Restatements
Casebooks
Hornbooks
Study Supplements
Dictionaries
Limited Partner Seeks to Waive Good Faith
In a limited partnership, the agreement purported to eliminate the contractual obligation of good faith and fair dealing for limited partners under the statute. A limited partner later claimed the waiver allowed self-dealing conduct. The court refused to enforce the waiver, holding that the statute permits only reasonable standards, not outright elimination of the duty.
Threat to Breach Contract Used as Leverage
Ira Irving threatened to stop performance under an existing supply contract unless the buyer agreed to a higher price. The buyer signed the modification under protest and later sued to rescind it. The court set aside the modification because the threat constituted a breach of the duty of good faith and fair dealing under the original contract.
Partner Exercises Rights Inconsistently with Good Faith
Ivan Ivanov, a partner in a consulting firm, exercised a contractual right to inspect books in a manner that deliberately disrupted ongoing client work and withheld information needed for a pending deal. The other partners sued. The court held that the manner of exercising the right violated the statutory obligation of good faith and fair dealing.
Limited Partner Acts Adversely to Partnership
Idina Iverson, a limited partner, used partnership information to steer a client opportunity to her separate business while the partnership was actively pursuing the same client. The general partner sued. The court held that Idina's conduct breached the statutory obligation of good faith and fair dealing that limits how limited partners may exercise rights under the agreement.
Common questions
Frequently Asked
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Does the implied covenant create new substantive obligations beyond the contract terms?+
No. The covenant requires only that parties perform and enforce existing obligations honestly and in a manner consistent with the reasonable expectations created by the agreement. It does not add new duties or override express terms.
Supporting sources
Can a partnership agreement eliminate the obligation of good faith and fair dealing?+
No. Partnership statutes expressly prohibit elimination of the obligation, although they permit parties to prescribe reasonable standards for measuring performance if those standards are not manifestly unreasonable.
Supporting sources
When does a threat to breach an existing contract constitute improper duress?+
A threat to breach is improper when it violates the duty of good faith and fair dealing under the contract with the recipient. Courts examine whether the threat was made to extract an unfair modification rather than to protect a legitimate interest.
Supporting sources
Does the covenant apply to enforcement decisions as well as performance?+
Yes. The duty governs both performance and enforcement, so a party may not use a technical default or literal contract language as a pretext to deprive the other party of the central benefits of the bargain.
Supporting sources
Is a limited partner bound by the obligation of good faith even when acting solely in that capacity?+
Yes. The statute requires every limited partner to discharge duties and exercise rights consistently with the contractual obligation of good faith and fair dealing, regardless of the absence of other fiduciary duties.
Supporting sources
40 Cal. 3d 488, 709 P.2d 837Property
…objection to the assignment. (See Schweiso v. Williams, supra, 150 Cal.App.3d at p. 886.) This rule is consistent with the implied covenant of good faith and fair dealing which is implied in every contract. (See Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 371-372 [6 Cal.Rptr.2d 467, 826 P.2d 710].) The…
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