Contracts II Class 5: Implied Duty of Good Faith & Fair Dealing

Implied Duty of Good Faith & Fair Dealing

Definition

• Implied Obligation: All contracts entail a duty to perform in good faith and use fair dealing.
• Concept emerged in the latter half of the 20th century.
• Application is often vague.

Legal Foundations

• Restatement (Second) of Contracts § 205 and UCC § 1-304 establish that every contract includes a duty of good faith and fair dealing.

Understanding Good Faith

• Good Faith varies depending on context:
• Steven J. Burton refers to it as being “opaque, vague and too limiting.”
• UCC Definitions:
• Good Faith (General): Honesty in fact and observance of reasonable commercial standards of fair dealing (UCC §1-201(b)(20)).
• Merchant Good Faith: Same as general but specific about industry standards (UCC §2-103(1)(b)).

Subjectivity vs Objectivity in Good Faith

• Honesty in Fact: SUBJECTIVE requirement.
• Reasonable Commercial Standards: OBJECTIVE requirement.
• Jurisdictions differ on whether subjective, objective, or both criteria must be satisfied in cases of common law.

Case Law Insights

• Seidenberg v. Summit Bank: Illustrates application of good faith in contract disputes.
• Plaintiffs claim breach based on implied terms rather than express ones.
• Analyzed how courts interpret the implied duty of good faith to protect party expectations and limit discretionary power.

Key Court Rulings in Seidenberg

1. Cannot contradict express contract terms.
2. Must not unreasonably frustrate the contract's purpose (Rest.2d § 205).
3. The application of bad faith must be defined - subjective malice vs. objective standards.

Locke v. Warner Bros., Inc.

• Court discusses necessity of balancing subjective and objective standards for good faith.
• Analyses on discretionary power under contracts and whether subjective good faith is a requirement were pivotal in their rulings.

Considerations in Contract Review & Interpretation

• Focuses on drafting analysis, especially around identifying ambiguities in contracts.
• Examples of ambiguities should be assessed critically to prevent potential breaches of the implied duty of good faith.