Beware the contract you never signed: the implied covenant of good faith and fair dealing.

AuthorAndreason, Rod
PositionLegal Brief

No matter what your written contract says, your business could still be liable for doing--or not doing--things you never even discussed before signing the contract. This is due to the "implied covenant of good faith and fair dealing," an obligation Utah courts can insert into any contract you sign. The implied covenant has taken some companies by surprise, costing them millions of dollars. Fortunately, the Utah Supreme Court recently narrowed and focused what the implied covenant means to you and your business.

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The formal definition of the implied covenant is that parties cannot "intentionally or purposely do anything which will destroy or injure the other party's right to receive the fruits of the contract" Courts have also said "a party's actions must be consistent with the agreed common purpose and the justified expectations of the other party." In plain English, this means it you do (or fail to do) something that stops the other side from getting what it was expecting under your contract, you may be liable for the resulting harm.

How does it work in real life? If your contract requires you to remove underground storage tanks when selling a property, even if the contract doesn't state a deadline, you may be liable if you wait until the buyer's financing fails. In another example, if you change the business you put in a leased space to a less successful one, and the landlord proves you intended to reduce the business there in favor of another business you own, you may be liable--even if you had the contractual right to put any business in the leased space that you wanted.

Now, courts say this doesn't mean you have to do something inconsistent with your contract's written terms. In addition, this shouldn't force you to exercise a contract right to your detriment just to benefit the other side. Also, the implied covenant is not supposed to "establish new, independent rights or duties not agreed upon by the parties."

But how do you know when you're harming "the justified expectations of the other party?" Can't courts just say you weren't "playing fair"? How do you know-when the other side has gone too far, giving you the right to demand payment and perhaps file a lawsuit if they don't fix the problem?

The Utah Supreme Court just made answering these questions easier. In Young Living Essential Oils, LC v. Marin, the court admitted that having judges insert new terms into contracts is "fraught with peril, as its misuse...

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