Implied covenant of good faith and fair dealing

The Implied covenant of good faith and fair dealing is a general assumption of the law of contracts, that people will act in good faith and deal fairly without breaking their word, using shifty means to avoid obligations, or denying what the other party obviously understood. A lawsuit (or one of the causes of action in a lawsuit) based on the breach of this covenant is often brought when the other party has been claiming technical excuses for breaching the contract or using the specific words of the contract to refuse to perform when the surrounding circumstances or apparent understanding of the parties were to the contrary.

Modern use

The implied covenant of good faith and fair dealing is particularly important in the United States, where it has been incorporated into the Uniform Commercial Code and adopted by the American Law Institute as part of the Restatement (Second) of Contracts.

An example of this covenant would be when an employer fires a long-time employee without cause and says that it can fire him or her at its whim because the employment contract states that the employment is “at will.” However, the employee was encouraged to join the company on the basis of retirement plans and other conduct which led him or her to believe that the job was permanent barring misconduct or financial downturn. Thus, there could be a breach of the implied covenant, since the surrounding circumstances implied that there would be career-long employment. Another instance would be if a merchant were to sell a product to a consumer, then later disable it or reduce its functionality after the point of sale.
Although most United States jurisdictions view the breach of the implied covenant of good faith and fair dealing solely as a breach of contract, a minority of United States jurisdictions hold that such a breach can also sound in tort in extreme circumstances. In the context of insurance, this tort is known as insurance bad faith.