Kang Haggerty News
In the May 22, 2025 edition of The Legal Intelligencer, Edward Kang writes, “Reading Between the Lines: Implied Covenant of Good Faith and Fair Dealing.”
It is not in boldface. It does not appear in the indemnity clause. And it is rarely the lead count in a complaint. But the implied covenant of good faith and fair dealing arises from a duty that is embedded in every contract, and a breach of the implied covenant claim can be a powerful tool in litigation. Too often, litigators make the mistake of tacking on a breach of implied covenant as a boilerplate claim or abandoning it in response to a motion to dismiss. Properly framed, a breach of the covenant claim is not just filler, but a remedy in cases where the contract is silent, ambiguous, or grants the opposing party discretion exercised for bad-faith advantage. In complex business disputes, especially those involving strategic behavior that may evade a literal breach, a well-pleaded covenant claim may be the best—or only—path forward.
A Backstop for Contractual Opportunism
The covenant of good faith and fair dealing is well established in American contract law. The Restatement (Second) of Contracts Section 205 states plainly: “Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” The Uniform Commercial Code adopts a similar rule for sales of goods. See U.C.C. Section 1-304.
It is important to understand what the implied covenant is and what it is not. In Market Street Associates Limited Partnership v. Frey, 941 F.2d 588 (7th Cir. 1991), a case involving bad faith exploitations of a contractual term, Judge Richard Posner explained that an obligation of good faith does not make a party a fiduciary for her counterparty—that is, “good faith” is not simply equivalent to altruism or complete candor. Rather, a good faith obligation bars one from taking “deliberate advantage of an oversight by a contract partner concerning his rights under the contract.” The duty to act in good faith prevents “sharp dealing” and “opportunistic behavior.” The point of the doctrine is to give the parties what they would have included in the deal had they foreseen the particular instance of “sharp dealing” that occasioned litigation.
The law generally permits discretion, but not sabotage. The implied covenant of good faith and fair dealing prohibits arbitrary or unreasonable exercises of discretion. It bars a party from conduct that deprives the other party of the fruits of the bargain. In cases where a party complies with the letter of the contract but exercises its discretion in a way that is opportunistic or designed to recapture benefits already conferred, the covenant offers a practical avenue for recourse.
Jurisdictional Differences in Application
The covenant of good faith and fair dealing is recognized in many jurisdictions, but its application can vary depending on the specific circumstances and types of contracts involved. In Pennsylvania, the courts recognize that every contract imposes upon each party a duty of good faith and fair dealing in its performance and enforcement. See, e.g., Stamerro v. Stamerro, 889 A.2d 1251 (Pa. Super. 2005). However, Pennsylvania does not recognize a claim for breach of covenant of good faith and fair dealing as an independent cause of action separate from a breach of contract claim. See McCabe v. Marywood University, 166 A.3d 1257 (Pa. Super. 2017); see also McHale v. NuEnergy Group, 2002 WL 321797 (E.D. Pa. Feb. 27, 2002). Instead, the implied covenant is viewed as a principle for courts to harmonize the reasonable expectations of the parties with the intent of the contracting parties and the terms of their contract. Courts have disallowed conduct that runs contrary to the spirit or abuses the terms of the agreement and destroys the opposing party’s right to receive the fruits of the bargained-for agreement based on the implied covenant arguments. See, e.g., Stamerro v. Stamerro, 889 A.2d 1251 (Pa. Super. 2005).
New Jersey is a different story. The New Jersey Supreme Court has expressly recognized a standalone cause of action for breach of the implied covenant. A party will be found to have breached the implied covenant even if the action complained of does not violate any pertinent express term, for example, when it exercises an express and unconditional right to terminate. See Sons of Thunder v. Borden, 148 N.J. 396 (1997). In cases involving breaches of the implied covenant, courts have focused on a plaintiff’s inadequate bargaining power or financial vulnerability to avoid an inequitable result otherwise permitted by a contract’s express terms. Courts have also allowed plaintiffs to proceed with a claim of breach of the implied covenant to seek redress for alleged bad faith performance and found that the parol evidence rule did not preclude plaintiffs from substantiating their allegation notwithstanding the expressed contract term. See Seidenberg v. Summit Bank, 348 N.J. Super. 243 (App. Div. 2002). Moreover, courts have also relied on the covenant to include absent terms to the contract that the parties must have intended because they were necessary to give business efficacy. See New Jersey Bank v. Palladino, 77 N.J. 33 (1978).
Practical Applications and Tips for Drafting the Claim
The implied covenant has teeth when the contract includes broad discretionary terms. Many commercial agreements give one party discretion over performance timelines, pricing, deliverables or approval rights. If that discretion is exercised in bad faith—for example, to delay payments, impose hidden costs, or sabotage performance—the implied covenant can provide a cause of action.
Similarly, the covenant excels where the contract is incomplete or ambiguous. If a contract does not specify timing, cooperation duties, or procedural requirements for performance, and one party manipulates that silence to block the other side from receiving its due, the implied covenant should apply to fill in the gap.
Courts might be skeptical of implied covenant claims that merely restate a standard breach of contract theory. To survive dismissal, a claim must be framed as distinct. If the conduct would not violate the contract if repeated word-for-word, but still undermines its purpose, it’s a candidate for a covenant theory. It is key to identify conduct that falls outside the express provisions, for example, acts of evasion, manipulation, obstruction or bad-faith discretion. Adding emphasis on reasonable expectations, any abuse of discretionary performance or evasion of express duties will help to have the claim evaluated on its own terms.
The Takeaways
Practitioners know that not all bad conduct fits neatly into a breach of contract box. The implied covenant is a flexible, equity-rooted doctrine that reaches unfair behavior designed to circumvent, rather than directly violate, contract terms. In some situations, the breach of the implied covenant of good faith and fair dealing could be the leading claim, not a complementary claim to the breach of contract claim.
Edward T. Kang is the managing member of Kang Haggerty. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at ekang@kanghaggerty.com.
Reprinted with permission from the May 22, 2025 edition of “The Legal Intelligencer” © 2025 ALM Global, LLC. All rights reserved. Further duplication without permission is prohibited. Request academic re-use from www.copyright.com. All other uses, submit a request to asset-and-logo-licensing@alm.com. For more information visit Asset & Logo Licensing.