California Contracts

Good Faith and Fair Dealing

In every contract made in California, there is an implied covenant of good faith and fair dealing. What is the implied covenant of good faith and fair dealing? It is a covenant made by each party to the contract not to do anything that will deprive the other parties to the contract of the benefits of that contract. Initially, the covenant provides that each party to the contract will refrain from doing anything that would make the other party’s performance of their contractual obligations impossible (“bad faith” acts). However, the covenant of good faith and fair dealing goes further, and imposes an affirmative duty on each party to do everything that a reasonable interpretation of the contract presupposes he will do to accomplish the purpose of the contract, even if those acts are not expressly required by the contract itself. A breach of the covenant may result in litigation, and the party who acted in bad faith may be compelled to complete his performance and/or pay damages to the other party.

The covenant is elastic and failures to act in good faith can take on almost any form, because it is the spirit of good faith and fair dealing that governs. Examples of conduct that violate the covenant are subterfuges, evasions, willfully imperfect performances, failures to cooperate in the other party’s performance, or inaction. The list of examples is unending, limited only by the limitations on people’s ability to dream up different ways to weasel out of promises they have made.

A common situation where breaches of the implied covenant of good faith and fair dealing have been found is where one party is invested with a discretionary power, the exercise of which will affect the rights of the other party. For example: Seller and Buyer enter into a contract for the purchase of a home, leaving some minor details (i.e., which kitchen appliances are to be included, or whether certain window treatments will remain) to be negotiated within a certain period of time. During that period, Seller receives a higher offer for the home from a third party. Seller, desirous of selling for the higher price, refuses to engage in any dialogue whatsoever, the decision-making period lapses, and Seller seeks to cancel the contract because the parties were “unable to agree” within the allotted time period. Seller’s conduct may be found to be a breach of the implied covenant, as general notions of fairness and good faith dictate that, where the parties have agreed to negotiate a few (relatively minor) details of the transaction, the seller is actually required to negotiate. While courts may differ over the extent to which any negotiations that occur have actually been done in good faith, there should be fairly universal agreement that the failure to negotiate at all, and then to try to get out of the contract on the basis of non-agreement, will not be condoned.

Courts look to, and promote, good faith dealings between parties to a contract. The implied covenant of good faith and fair dealing allows the courts to close any “loopholes” contained within the four corners of the agreement that a reneging party might use to try to justify non-performance of his obligations, and enforce the intent of the parties at the time the contract was made.

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