As a business owner or high-income professional, your contracts are the backbone of your operations, safeguarding your interests and ensuring that both parties fulfill their obligations. However, there’s an often-overlooked aspect of contracts that could significantly impact your rights and remedies: the implied covenant of good faith and fair dealing.
What is the Implied Covenant of Good Faith and Fair Dealing?
In every contract governed by New York State law, there exists an implicit promise that neither party will do anything to destroy or injure the right of the other party to receive the fruits of the contract—the benefits for which they bargained. This is known as the implied covenant of good faith and fair dealing. It is an unwritten, yet legally enforceable, promise that ensures both parties act in a way that upholds the essence of their agreement.
When Does a Breach Occur?
A breach of the implied covenant of good faith and fair dealing occurs when one party interferes with the other party’s ability to enjoy the benefits of the contract. For instance, consider a business owner who denies their co-owner the voting rights explicitly granted in their corporate ownership agreement. If the denial of voting rights is not directly addressed by the express terms of the contract, but undermines the co-owner’s ability to fully realize the benefits of their ownership, it could constitute a breach of this covenant.
Distinguishing Breach of the Implied Covenant from Breach of Contract.
It’s important to understand that a breach of the implied covenant of good faith and fair dealing is distinct from a breach of contract. A breach of contract occurs when one party fails to perform their duties as explicitly outlined in the agreement. In contrast, a breach of the implied covenant involves conduct that, while not expressly prohibited by the contract, still prevents the other party from receiving the full benefit of the bargain.
When is a Breach Claim Duplicative?
Not every breach of the implied covenant gives rise to a separate cause of action. If the conduct alleged in a claim for breach of the implied covenant is identical to that alleged in a breach of contract claim, and both claims seek the same remedy, the breach of the implied covenant claim may be dismissed as duplicative.
For example, in the case Brown v. Erie Insurance Company, the court found that the plaintiff’s claims for breach of contract and breach of the implied covenant were duplicative. The plaintiff merely alleged that the defendant failed to pay the full amount due under the insurance policy, which was essentially a breach of the express terms of the contract. Because the plaintiff did not allege any independent wrongs separate from the contract’s express terms, the court dismissed the claim for breach of the implied covenant as duplicative.
However, if a party can demonstrate that the other’s conduct involved distinct actions that deprived them of the benefits they were entitled to under the contract, and those actions are not explicitly covered by the contract’s terms, a separate claim for breach of the implied covenant may be viable.
Why Does This Matter for Your Business?
Understanding the implied covenant of good faith and fair dealing is vital for protecting your business interests. This covenant acts as a safeguard against underhanded tactics that might not be explicitly prohibited by your contract but still harm your ability to receive what you bargained for.
If you believe that a business partner or other contracting party has engaged in behavior that undermines your contract’s benefits, you may have grounds for a legal claim, even if the specific conduct is not addressed in the contract. In such cases, it’s essential to consult with a knowledgeable attorney who can assess the situation and determine whether you have a viable cause of action.
If you are facing concerns related to a similar issue or if you have questions about your Business Litigation situation, please feel free to contact us here. We have many years of experience handling such matters and will be able to assist you in resolving the dispute.
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This post is not intended as legal advice, but rather for educational purposes.