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What purpose does a “good faith and fair dealing” clause serve?

On Behalf of | Sep 20, 2021 | Business Formation |

Every contract features an implied “good faith and fair dealing” covenant. That covenant serves as a mutual promise that each party will do their best in carrying out their responsibilities as per the agreement. This clause also serves as a commitment that each party will be respectful of one another when taking any action, including enforcing terms or conditions outlined in the agreement.

As an implied covenant, it’s unlikely that any contract will explicitly outline the above-referenced commitments. A breach of contract lawsuit may ensue if either party fails to uphold these obligations.

What do the concepts “good faith” and “fair dealing” refer to?

Contracted parties often ask what it means to exercise “good faith and fair dealing” once they find themselves facing a breach of contract lawsuit because they failed to live up to their obligations. The basic explanation is that each party should avoid doing anything to infringe upon the other party’s rights.

A party looking to exercise “good faith” must be honest in dealing with the other contracted party. The best way for them to exercise “fair dealing” is to honor the “spirit” of the contract. Parties can exercise “good faith and fair dealing” by ensuring they perform their due diligence and don’t abuse their power.

Is it possible to waive the “good faith and fair dealing” covenant?

Contracted parties may find it challenging to waive a “good faith and fair dealing” covenant since it’s an implied agreement and simply demands that parties are transparent and respectful in their interactions. Contracted parties can supersede such an agreement with an additional written one, though. Generally, there has to be a fiduciary relationship in place that makes it necessary for one party to employ good faith more than another.

Contracts are notoriously complex. It can be quite a costly mistake to misinterpret such an agreement on your own when there’s significant money on the line. Take this into mind before signing or pulling out of any potential agreement.