The Duty of Good Faith and Fair Dealing
Most people understand that when they sign a contract, they are bound by the agreements and obligations written in the contract. However, what most people don’t realize is that, in Utah, “all contracts contain a covenant of good faith and fair dealing.” Vander Veur v. Groove Entm’t Techs., 2019 UT 64, ¶ 9, 452 P.3d 1173, 1177. This is true, even if the contract does not include any text specifically referring to the covenant of good faith and fair dealing.
As explained by the Utah Supreme Court, the covenant operates by “inferring as a term of every contract a duty to perform in the good faith manner that the parties surely would have agreed to if they had foreseen and addressed the circumstance giving rise to their dispute.” Id. The inferred covenant provides that, “each party impliedly promises that he will not intentionally or purposely do anything which will destroy or injure the other party’s right to receive the fruits of the contract.” Id.
As an extreme example, suppose Betty signs a written contract with Sam to pay $1,500 for Sam’s mountain bike. The contract says Betty can take possession of the bike immediately, but doesn’t specifically state how or when Betty has to pay Sam. Betty, takes possession of the bike, but tells Sam she will pay him with $1,500 worth of potatoes from her garden after next harvest. Sam objects, but Betty claims she hasn’t breached the contract because the contract doesn’t specifically require her to immediately pay or to pay with cash.
Betty is wrong. She has violated the inferred duty of good faith and fair dealing that attaches to every contract in Utah. Under the circumstances, it is obvious that Sam expected to be paid in cash at the time Betty took possession of the mountain bike. It is extremely unlikely that he would have agreed to the contract if he knew he would be paid in potatoes a year from now.
Ultimately, the inferred duty of good faith and fair dealing is about equity and fairness. All parties to a contract must act in good faith and refrain from unreasonable, or unfair, practices in fulfilling the terms of a contract.