See also Contract (implied covenant of good faith). Implicit in all contracts is a covenant of good faith and fair dealing in the course of contract performance (see, Van Valkenburgh, Nooger & Neville v Hayden Publ. Co., 30 N.Y.2d 34, 45, 330 N.Y.S.2d 329, 281 N.E.2d 142, cert denied 409 U.S. 875, 34 L. Ed. 2d 128, 93 S. Ct. 125). Encompassed within the implied obligation of each promisor to exercise good faith are ' 'any promises which a reasonable person in the position of the promisee would be justified in understanding were included' ' (Rowe v Great Atl. & Pac. Tea Co., 46 N.Y.2d 62, 69, 412 N.Y.S.2d 827, 385 N.E.2d 566, quoting 5 Williston, Contracts § 1293, at 3682 [rev ed 1937]). This embraces a pledge that 'neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract' (Kirke La Shelle Co. v Armstrong Co., 263 N.Y. 79, 87, 188 N.E. 163). Where the contract contemplates the exercise of discretion, this pledge includes a promise not to act arbitrarily or irrationally in exercising that discretion (see, Tedeschi v Wagner Coll., 49 N.Y.2d 652, 659, 427 N.Y.S.2d 760, 404 N.E.2d 1302). The duty of good faith and fair dealing, however, is not without limits, and no obligation can be implied that 'would be inconsistent with other terms of the contractual relationship' (Murphy v American Home Prods. Corp., 58 N.Y.2d 293, 304, 461 N.Y.S.2d 232, 448 N.E.2d 86). See Van Valkenburgh, Nooger & Neville v Hayden Publ. Co., 30 N.Y.2d 34, 45, 330 N.Y.S.2d 329, 281 N.E.2d 142, cert denied 409 U.S. 875, 34 L. Ed. 2d 128, 93 S. Ct. 125.
The implied covenant 'is in aid and furtherance of other terms of the agreement of the parties. Where good faith is an express condition of a contract that contemplates a wide scope of discretion on the part of one party, there is no breach if the discretionary act performed is 'not arbitrary and capricious' (Smith v Robson, 148 N.Y. 252, 255, 42 N.E. 677; see also, 3A Corbin, Contracts § 647, at 104-106). '[W]hen an [institutional decision maker] ... acts within its jurisdiction, not arbitrarily but in the exercise of an honest discretion based on facts within its knowledge that justify the exercise of discretion, a court may not review the exercise of its discretion' (Matter of Carr v St. John's Univ., 17 A.D.2d 632, 634, 231 N.Y.S.2d 410, affd 12 N.Y.2d 802, 235 N.Y.S.2d 834, 187 N.E.2d 18; see also, Matter of Harris v Trustees of Columbia Univ., 98 A.D.2d 58, 70, 470 N.Y.S.2d 368 [Kassal, J., dissenting], revd on dissenting opn below 62 N.Y.2d 956).
While most States recognize some form of the good faith and fair dealing doctrine, it does not appear that there is any uniform understanding of the doctrine’s precise meaning. “The concept of good faith in the performance of contracts ‘is a phrase without general meaning (or meanings) of its own.’” Tymshare, Inc. v. Covell, 727 F. 2d 1145, 1152, 234 U.S. App. D.C. 46 (CADC 1984) (Scalia, J.) (quoting Summers, “Good Faith” in General Contract Law and the Sales Provisions of the Uniform Commercial Code, 54 Va. L. Rev. 195, 201 (1968)); see also Burton, Breach of Contract and the Common Law Duty To Perform in Good Faith, 94 Harv. L. Rev. 369, 371 (1980). While some States are said to use the doctrine “to effectuate the intentions of parties, or to protect their reasonable expectations,” ibid., other States clearly employ the doctrine to ensure that a party does not “‘violate community standards of decency, fairness, or reasonableness,’” Universal Drilling Co., LLC v. R & R Rig Service, LLC, 2012 WY 31, 37, 271 P. 3d 987, 999; DDP Roofing Services, Inc. v. Indian River School Dist., 2010 Del. Super. LEXIS 485, 2010 WL 4657161, *3 (Del. Super. Ct., Nov. 16, 2010); Allworth v. Howard Univ., 890 A. 2d 194, 201-202 (D. C. 2006); Brunswick Hills Racquet Club, Inc. v. Route 18 Shopping Center Assocs., 182 N. J. 210, 224, 864 A. 2d 387, 395-396 (2005); Harper v. Healthsource New Hampshire, Inc., 140 N. H. 770, 776, 674 A. 2d 962, 965-966 (1996); Borys v. Josada Builders, Inc., 110 Ill. App. 3d 29, 32-33, 441 N. E. 2d 1263, 1265-1266, 65 Ill. Dec. 749 (1982); Restatement (Second) of Contracts §205, Comment a (1979). See also Summers, The General Duty of Good Faith-Its Recognition and Conceptualization, 67 Cornell L. Rev. 810, 812 (1982).
Under Minnesota law, the implied covenant must be regarded as a state-imposed obligation. Under Minnesota law parties cannot contract out of the covenant. See Tr. of Oral Arg. 33-34; see also In re Hennepin Cty. 1986 Recycling Bond Litigation, 540 N. W. 2d 494, 502 (Minn. 1995); Sterling Capital Advisors, Inc. v. Herzog, 575 N. W. 2d 121, 125 (Minn. App. 1998); Minnwest Bank Central v. Flagship Properties LLC, 689 N. W. 2d 295, 303 (Minn. App. 2004). And as a leading commentator has explained, a State’s “unwillingness to allow people to disclaim the obligation of good faith . . . shows that the obligation cannot be implied, but is law imposed.” 3A A. Corbin, Corbin on Contracts §654A, p. 88 (L. Cunningham & A. Jacobsen eds. Supp. 1994). When the law of a State does not authorize parties to free themselves from the covenant, a breach of covenant claim is pre-empted under the reasoning of Wolens.
Minnesota law holds that the implied covenant applies to “every contract,” In re Hennepin Cty., supra, at 502, with the notable exception of employment contracts. Hunt v. IBM Mid America Employees Fed. Credit Union, 384 N. W. 2d 853, 857-858 (Minn. 1986). The exception for employment contracts is based, in significant part, on “policy reasons,” id., at 858, and therefore the decision not to exempt other types of contracts must be based on a policy determination, namely, that the “policy reasons” that support the rule for employment contracts do not apply (at least with the same force) in other contexts. When the application of the implied covenant depends on state policy, a breach of implied covenant claim cannot be viewed as simply an attempt to vindicate the parties’ implicit understanding of the contract.
Like Minnesota, some other States preclude a party from waiving the obligations of good faith and fair dealing. Hunter v. Wilshire Credit Corp., 927 So. 2d 810, 813, n. 5 (Ala. 2005); Smith v. Anchorage School Dist., 240 P. 3d 834, 844 (Alaska 2010); Wells Fargo Bank v. Arizona Laborers, Teamsters & Cement Masons Local No. 395 Pension Trust Fund, 201 Ariz. 474, 491, 38 P. 3d 12, 29 (2002); Habetz v. Condon, 224 Conn. 231, 238, 618 A. 2d 501, 505 (1992); Dunlap v. State Farm Fire & Cas. Co., 878 A. 2d 434, 442 (Del. 2005); Hill v. Medlantic Health Care Group, 933 A. 2d 314, 333 (D. C. 2007); Chase Manhattan Bank, N. A. v. Keystone Distributers, Inc., 873 F. Supp. 808, 815 (SDNY 1994); Magruder Quarry & Co., LLC v. Briscoe, 83 S. W. 3d 647, 652 (Mo. App. 2002) (“When terms are present that directly nullify the implied covenants of good faith and reasonable efforts, . . . the contract is void for lack of mutuality”); Gillette v. Hladky Constr., Inc., 2008 WY 134, ¶31, 196 P. 3d 184, 196.
But other States permit a party to contract out of the duties imposed by the implied covenant. Steiner v. Thexton, 48 Cal. 4th 411, 419-420, 106 Cal. Rptr. 3d 252, 226 P. 3d 359, 365 (2010) (“‘ “The general rule [regarding the covenant of good faith] is plainly subject to the exception that the parties may, by express provisions of the contract grant the right to engage in the very acts and conduct which would otherwise have been forbidden by an implied covenant of good faith and fair dealing” ’”); Shawver v. Huckleberry Estates, L.L.C., 140 Idaho 354, 362, 93 P. 3d 685, 693 (2004); Farm Credit Servs. of Am. v. Dougan, 2005 S. D. 94, ¶10, 704 N. W. 2d 24, 28.
The definition of the 'covenant of good faith and fair dealing' is broad. An underlying principle implied in every contract is that each party promises not to do anything to undermine or destroy the other's rights to receive the benefits of the agreement. Shaw v. E. I. Dupont de Nemours & Co., 126 Vt. 206, 209, 226 A.2d 903, 906 (1966). The implied covenant of good faith and fair dealing exists to ensure that parties to a contract act with 'faithfulness to an agreed common purpose and consistency with the justified expectations of the other party.' Restatement (Second) of Contracts § 205 comment a (1981).
Other than stating the underlying principles, little can be said in general as to what constitutes a breach of the covenant. Although we have stated that a covenant of good faith is implied in every contract, an action for its breach is really no different from a tort action, because the duty of good faith is imposed by law and is not a contractual term that the parties are free to bargain in or out as they see fit. Cf. Ainsworth v. Franklin County Cheese Corp., 156 Vt. 325, 331-32, 592 A.2d 871, 874-75 (1991).
'Good faith' is a concept that 'varies . . . with the context' in which it is deemed an implied obligation. Restatement (Second) of Contracts § 205 comment a (1981). Contextual and fact-specific, the implied good-faith covenant has been the subject of many decisions that have informed the substance of this cause of action. The implied promise by its nature protects against 'a variety of types of conduct characterized as involving 'bad faith' because they violate community standards of decency, fairness or reasonableness.' Id. As the Restatement points out, [a] complete catalogue of types of bad faith is impossible, but the following types are among those which have been recognized in judicial decisions: evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of a power to specify terms, and interference with or failure to cooperate in the other party's performance. Id. § 205 comment d. Further, bad faith inheres in 'harassing demands for assurances of performance, rejection of performance for unstated reasons, willful failure to mitigate damages, and abuse of a power to determine compliance or to terminate the contract.' Id. § 205 comment e. Additionally, 'subterfuges and evasions violate the obligation of good faith in performance even though the actor believes his conduct to be justified.' Id. § 205 comment d. Finally, the covenant of good faith 'also extends to dealing which is candid but unfair, such as taking advantage of the necessitous circumstances of the other party.' Id. § 205 comment e.
In the end, good faith is ordinarily a question of fact, one particularly well-suited for juries to decide. J. Calamari & J. Perillo, Contracts § 11-38 (c) (1987) . It follows that a jury instruction on point will feature few precise analytical elements. Rather, such an instruction will ask the jurors to judge the context within which the alleged offensive conduct occurred.
Under Florida law, the implied covenant of good faith and fair dealing is a part of every contract. County of Brevard v. Miorelli Eng'g, Inc., 703 So. 2d 1049, 1050 (Fla.1997) ('Every contract includes an implied covenant that the parties will perform in good faith.'). See also Scheck v. Burger King Corp., 798 F. Supp. 692, 694 (S.D.Fla.1992) ('Scheck II '); Barnes v. Burger King Corp., 932 F. Supp. 1420, 1437-1438 (S.D.Fla.1996). 'Good faith means honesty, in fact, in the conduct of contractual relations.' Harrison Land Dev., Inc. v. R & H Holding Co., Inc., 518 So. 2d 353, 355 (Fla.Dist.Ct.App.1988). '[A] party's good-faith cooperation is an implied condition precedent to performance of a contract; where that cooperation is unreasonably withheld, the recalcitrant party is estopped from availing himself of his own wrong doing.' Bowers v. Medina, 418 So. 2d 1068, 1069 (Fla.Dist.Ct.App.1982). The Florida District Courts of Appeal have held unequivocally that the rights conferred by the implied covenant of good faith and fair dealing are limited. The Florida appellate courts recently held that an action for breach of the implied covenant of good faith cannot be maintained in the absence of breach of an express contract provision. Hospital Corp. of America v. Florida Med. Ctr., Inc., 710 So. 2d 573, 575 (Fla.Dist.Ct.App.1998).
The Hospital Corp. of America court held that where a contract had been fully performed by one party (because the sole remaining provision was an unlawful restraint of trade), the implied covenant of good faith could not provide a cause of action. 'With respect to [a] breach of an implied duty of good faith, a duty of good faith must relate to the performance of an express term of the contract and is not an abstract and independent term of a contract which may be asserted as a source of breach when all other terms have been performed pursuant to the contract requirements. See Bernstein v. True, 636 So. 2d 1364 (Fla. 4th DCA 1994) (covenant of good faith not actionable where contract not enforceable).' Id. In Bernstein v. True, 636 So. 2d 1364 (Fla.Dist.Ct.App.1994), the court refused to recognize a cause of action for breach of the implied covenant where the contract had expired, holding that 'the [defendants] cannot breach a contract that had expired.' Id. at 1366. The court refused to consider what obligations the parties may have had under the implied covenant even though they had no express obligations under the expired contract. Bernstein therefore suggests that breach of an express provision is necessary to ground a claim for breach of the implied covenant.
The Florida appeals courts have also refused to recognize the implied covenant as a viable cause of action in the at-will employment context. Kelly v. Gill, 544 So. 2d 1162 (Fla.Dist.Ct.App.1989). Since an at-will employee can be terminated at the will of either party, this also suggests that the Florida courts do not recognize breach of the implied covenant in the absence of breach of an express contract provision. The Florida appellate courts have also held that 'the implied obligation of good faith cannot be used to vary the terms of an express contract.' City of Riviera Beach v. John's Towing, 691 So. 2d 519, 521 (Fla.Dist.Ct.App.1997). In Riviera Beach, 'the contract explicitly absolved the city of responsibility and liability' for vehicles not owned by the city; thus, the implied covenant of good faith could not be relied on to recover the cost of towing a car not owned by the city. Id. Similarly, the Florida courts have held that the good faith obligation of the Uniform Commercial Code 'may not be imposed to override express terms in [a] contract.' Flagship Nat'l Bank v. Gray Distrib. Sys., Inc., 485 So. 2d 1336, 1340 (Fla.Dist.Ct.App.1986).
Thus, the Florida courts have refused to allow a cause of action for breach of the implied covenant of good faith and fair dealing under two circumstances. First, where the party alleged to have breached the implied covenant has in good faith performed all of the express contractual provisions. See Hospital Corp. of America, 710 So. 2d at 575; Bernstein, 636 So. 2d at 1366. Second, where the implied duty of good faith alleged to have been breached would vary the express terms of the contract. See Riviera Beach, 691 So. 2d at 521; Flagship Nat'l Bank, 485 So. 2d at 1340. Under Florida law, therefore, the implied covenant of good faith and fair dealing confers limited rights. As the court has previously stated, 'the 'covenant' is not an independent contract term. It is a doctrine that modifies the meaning of all explicit terms in a contract, preventing a breach of those explicit terms de facto when performance is maintained de jure.' Alan's of Atlanta, Inc. v. Minolta Corp., 903 F.2d 1414 (11th Cir.1990) (applying Georgia law) (citations omitted). No independent cause of action exists under Florida law for breach of the implied covenant of good faith and fair dealing. Where a party to a contract has in good faith performed the express terms of the contract, an action for breach of the implied covenant of good faith will not lie. More specifically, a cause of action for breach of the implied covenant cannot be maintained (a) in derogation of the express terms of the underlying contract or (b) in the absence of breach of an express term of the underlying contract. See Riviera Beach, 691 So. 2d at 521; Hospital Corp. of America, 710 So. 2d at 575.
In Thebest Laundry & Cleaning Co. v. Duffy, 293 Ill. App. 252, 12 N.E.2d 235, in passing on a contract the court said: 'In Grossman v. Schenker, 206 N.Y. 466, 100 N.E. 39, the court said (p. 469): 'A contract includes not only what the parties said but also what is necessarily to be implied from what they said. (Milliken v. Western Union Tel. Co., 110 N.Y. 403, 408, 18 N.E. 251.) Thus the words 'cash on delivery' with no other promise to pay 'imply a promise and create an obligation' to make payment upon delivery. So the word 'sold' in a written agreement implies not only a contract to sell but also a contract to buy (Butler v. Thomson, 92 U.S. 412, 414, 23 L. Ed. 684); and a contract to buy with no express promise to sell implies the latter obligation. (Hudson Canal Co. v. Pennsylvania Coal Co., 75 U.S. (8 Wall.) 276, 289, 19 L. Ed. 349.) 'What is implied in an express contract is as much a part of it as what is expressed' (Bishop on Contracts (2d ed.), sec. 241); for 'the law is a silent factor in every contract.' (Long v. Straus, 107 Ind. 94, 95, 6 N.E. 123.)</i>''
And the Supreme Court many years ago announced the law as above stated. Daughetee v. Ohio Oil Co., 263 Ill. 518, 105 N.E. 308; Stoddard v. Illinois Imp. Co., 275 Ill. 199, 113 N.E. 913. In the Daughetee case, the court construed an oil and gas lease, by which the lessee was given the exclusive right to explore plaintiff's land for gas and oil, to mean that the lessee was required to use reasonable diligence to develop oil and gas on the lands. And in the Stoddard case where lands were leased for a stone quarry it was held that the lessee should quarry stone with reasonable diligence for a term covered by the lease if the stone could be found and quarried at a profit, and that if the lessee retained possession of the property but quarried no stone he was liable in damages for the amount of stone at the price fixed in the lease which could by reasonable diligence have been quarried and sold at a profit.