What is The Covenant of Good Faith and Fair Dealing?

The Implied Covenant of Good Faith and Fair Dealing has been a core doctrine of contract law since time immemorial.  Basically, the covenant is a legal duty imposed on all parties to a contract that requires them to act honestly and in good faith when fulfilling their respective obligations under agreement.  It is an “implied” covenant, which means it is presumed to be an essential element of every contract, regardless of whether it is specifically mentioned in the language.

When a party to a contract acts dishonestly (in “bad faith”), it has breached the implied Covenant of Good Faith and Fair Dealing, and the other party can proceed with its legal remedies, which may include rescission and damages.

Proving a breach of the covenant can be difficult.  The non-breaching party must prove that the other party has deliberately engaged in egregious and dishonest behavior.  Claims for breach of the Covenant of Good Faith and Fair Dealing are often brought in the following situations:

–       An insurance company unreasonably denies a claim that should be covered under the policy;

–       A signatory to a non-compete agreement forms a dummy corporation in order to open a competing business.

–        A party deliberately signs a non-disclosure agreement with a business in order to access its confidential trade secrets and uses them to further its own business.

–       A salesman contacts his old employer’s clients and convinces them to transfer their business to his new employer in violation of an anti-solicitation agreement.

When a party is found to have breached the implied covenant of good faith and fair dealing, the other party can seek compensation for damages that might reasonably be foreseen by the parties when they entered into the contract.  In some cases, those damages can include an injunction and monetary damages, which are sometimes specifically spelled out in the contract itself.

Author: Seth Heyman
Seth D. Heyman is a California attorney with extensive experience in advertising and marketing law, corporate law, contracts, governmental regulations, international business, and Internet law. He has counseled numerous successful companies, both public and private, and was responsible for regulatory compliance, contract management, corporate governance, and HR best practices for multiple organizations in many diverse industries, including marketing, telecommunications, energy, and technology development. He offers insight and guidance on federal and state direct mail, TV, radio, telemarketing, and Internet marketing laws, as well as online promotions, Internet privacy, data protection regulations, and similar matters.

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