Chapter 8 - § 8.1 • DEFINITION

• Jurisdiction: Colorado

§ 8.1 • DEFINITION

"[E]very contract contains an implied duty of good faith and fair dealing."¹ A party may be subject to liability for breaching the implied duty of good faith and fair dealing, just as he or she may be for breaching duties expressly written in a contract. But not every breach of a contract, even if done in bad faith, is a breach of the implied duty. Further, the duty of good faith and fair dealing may be breached even though no express term of the contract is breached.

The duty of good faith and fair dealing principally applies when one party has discretion in performing the contract. A party breaches the duty of good faith and fair dealing when it exercises its discretion in a manner inconsistent with the reasonable expectations of the other party to the contract.

Applying the duty of good faith and fair dealing "often 'fails to give effect to some hornbook rules governing the construction of contracts,' including 'the precept that contracts which are free from ambiguity are to be enforced as written.'"² Colorado courts still apply the duty of good faith and fair dealing to "promote[] 'the central policy underlying contract law, that of construing contracts so as to effectuate the parties' intentions.'"³ However, the implied duty cannot be used to inject new substantive terms or conditions into a contract.⁴

A breach of the duty of good faith and fair dealing is an action sounding in contract, not tort, even though the duty is an implied one. This differentiates this cause of action from the cause of action for bad faith breach of an insurance contract, which is a tort addressed in Chapter 5 of this book.⁵

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Notes:

^[1] Amoco Oil Co. v. Ervin, 908 P.2d 493, 498 (Colo. 1995). The UCC similarly provides: "Every contract or duty within this title imposes an obligation of good faith in its performance and enforcement." C.R.S. § 4-1-304. Colorado courts have not drawn any clear distinction between the common law duty and the duty imposed by the UCC. See, e.g., ADT Sec. Servs., Inc. v. Premier Home Protection, Inc., 181 P.3d 288, 293 (Colo. App. 2007) (alternately citing the UCC, Amoco Oil, and the Restatement (Second) of Contracts § 205).

^[2] Amoco Oil, 908 P.2d at 498 (quoting Davis v. M.L.G. Corp., 712 P.2d 985, 990 & n.7 (Colo. 1986)).

^[3] Id. (quoting Davis, 712 P.2d at 991).

^[4] City of Boulder v. Pub. Serv. Co. of Colo., 996 P.2d 198 (Colo. App. 1999).

^[5] See Goodson v. Am. Standard Ins. Co. of Wis., 89 P.3d 409, 414 (Colo. 2004) ("In...