Every contract creates obligations based on its express terms, but California law also recognizes an implied covenant of good faith and fair dealing. This covenant generally requires each party to avoid unfairly interfering with the other party’s ability to receive the benefits of the agreement.
Disputes can arise when conduct does not clearly violate an express contract term but allegedly frustrates the agreement’s intended benefits. Courts may examine the contract, the parties’ conduct, and whether the challenged actions deprived one party of benefits contemplated by the agreement.
How the Covenant Relates to the Contract
The implied covenant generally operates within the terms and purposes of an existing contract. It does not ordinarily create obligations that are completely independent of the parties’ agreement.
Courts may therefore begin by examining the contract and identifying the benefits the agreement was intended to provide. The implied covenant cannot generally be used to contradict an express contractual provision.
How Courts Examine the Parties’ Conduct
A dispute may involve allegations that one party used its contractual rights in a way that unfairly frustrated the other party’s expected benefits. Courts can examine the conduct in the context of the agreement as a whole.
This may include actions taken during performance, administration, or enforcement of the contract. The analysis often centers on whether the challenged conduct interfered with rights or benefits arising from the parties’ agreement.
How Contractual Discretion Can Become Relevant
Some contracts give one party discretion over decisions affecting performance or benefits under the agreement. The implied covenant can become relevant when a dispute concerns how that discretion was exercised.
Courts may examine whether the exercise of discretion was consistent with the purposes of the contract. The covenant generally does not eliminate contractual discretion, but it can affect how the exercise of that discretion is evaluated.
How Courts Evaluate the Expected Benefits
The benefits protected by the implied covenant are connected to the parties’ contractual relationship. Courts may examine what the agreement provided and what each party was entitled to receive through performance.
A claim generally cannot be based solely on a benefit that was never part of the contractual arrangement. The language and structure of the agreement can therefore help define the scope of the claimed interference.
How the Claim Relates to Breach of Contract
A claim for breach of the implied covenant may arise alongside a traditional breach of contract claim. Although the claims can involve related conduct, they focus on different ways contractual rights and benefits may allegedly have been impaired.
Courts may examine whether the implied covenant claim addresses conduct beyond the alleged violation of an express term. The specific contract and conduct at issue can determine how closely the claims overlap.
Why the Implied Covenant Matters
The implied covenant of good faith and fair dealing can become important when contractual performance involves discretion, cooperation, or conduct not addressed in every detail by the written agreement.
These disputes illustrate that contractual obligations may involve more than simply reading individual provisions in isolation. Courts can consider the agreement and the parties’ conduct when determining whether contractual benefits were improperly frustrated.
