See Good faith and fair dealing. See also Contracts (implied covenant of good faith). In every contract there is an implied covenant of good faith and fair dealing that neither party will do anything which injures the right of the other to receive the benefits of the agreement. An implied covenant to refrain from acts that would injure a right to receive the benefit of the contract. (Brown v. Superior Court (1949) 34 Cal.2d 559, 564 [212 P.2d 878]; see also Redke v. Silvertrust (1971) 6 Cal.3d 94, 100 [98 Cal. Rptr. 293, 490 P.2d 805], cert. den., 405 U.S. 1041 [31 L.Ed.2d 583, 92 S.Ct. 1316]; Universal Sales Corp. v. Cal. etc. Mfg. Co. (1942) 20 Cal.2d 751, 771 [128 P.2d 665]; Masonite Corp. v. Pacific Gas & Electric Co. (1976) 65 Cal.App.3d 1, 9 [135 Cal.Rptr. 170].)
A plaintiff always can allege a violation of an express covenant. If there has been such a violation, of course, the court need not reach the question of whether or not an implied covenant has been violated. That inquiry surfaces where, while the express terms may not have been technically breached, one party has nonetheless effectively deprived the other of those express, explicitly bargained-for benefits. In such a case, a court will read an implied covenant of good faith and fair dealing into a contract to ensure that neither party deprives the other of 'the fruits of the agreement.' See, e.g., Greenwich Village Assoc. v. Salle, 110 A.D.2d 111, 115, 493 N.Y.S.2d 461, 464 (1st Dep't 1985). See also Van Gemert v. Boeing Co., 553 F.2d 812, 815 ('Van Gemert II') (2d. Cir. 1977) Such a covenant is implied only where the implied term 'is consistent with other mutually agreed upon terms in the contract.' Sabetay v. Sterling Drug, Inc., 69 N.Y.2d 329, 335, 514 N.Y.S.2d 209, 212, 506 N.E.2d 919 (1987). In other words, the implied covenant will only aid and further the explicit terms of the agreement and will never impose an obligation ''which would be inconsistent with other terms of the contractual relationship.'' Id. (citation omitted). Viewed another way, the implied covenant of good faith is breached only when one party seeks to prevent the contract's performance or to withhold its benefits. See Collard v. Incorporated Village of Flower Hill, 75 A.D.2d 631, 632, 427 N.Y.S.2d 301, 302 (2d Dep't 1980). As a result, it thus ensures that parties to a contract perform the substantive, bargained-for terms of their agreement. See, e.g., Wakefield v. Northern Telecom., Inc., 769 F.2d 109, 112 (2d Cir. 1985) (Winter, J.)
Modern contract law has generally recognized an implied covenant to the effect that each party to a contract will act with good faith towards the other with respect to the subject matter of the contract. See, Restatement of Law, Contracts 2d, § 205 (1981); Rowe v. Great Atlantic and Pacific Tea Company, N.Y. Ct. Apps., 46 N.Y.2d 62, 385 N.E.2d 566, 412 N.Y.S.2d 827, 830, (1978). The contractual theory for this implied obligation is well stated in a leading treatise: If the purpose of contract law is to enforce the reasonable expectations of parties induced by promises, then at some point it becomes necessary for courts to look to the substance rather than to the form of the agreement, and to hold that substance controls over form. What courts are doing here, whether calling the process 'implication' of promises, or interpreting the requirements of 'good faith', as the current fashion may be, is but a recognition that the parties occasionally have understandings or expectations that were so fundamental that they did not need to negotiate about those expectations. When the court 'implies a promise' or holds that 'good faith' requires a party not to violate those expectations, it is recognizing that sometimes silence says more than words, and it is understanding its duty to the spirit of the bargain is higher than its duty to the technicalities of the language. Corbin on Contracts (Kaufman Supp. 1984), § 570.
If it is an implied contractual obligation that is asserted as the basis for the relief sought, the appropriate legal test is not difficult to deduce. It is this: is it clear from what was expressly agreed upon that the parties who negotiated the express terms of the contract would have agreed to proscribe the act later complained of as a breach of the implied covenant of good faith -- had they thought to negotiate with respect to that matter. If the answer to this question is yes, then, in my opinion, a court is justified in concluding that such act constitutes a breach of the implied covenant of good faith. See, Martin v. Star Publishing Co., Del. Supr., 50 Del. 181, 126 A.2d 238 (1956); Danby v. Osteopathic Hospital Ass'n., Del. Ch., 101 A.2d 308 (1953) aff'd 34 Del. Ch. 427, 104 A.2d 903 (1954); Broad v. Rockwell International Corp., 5th Cir., 642 F.2d 929, 957 (1981).
Courts are reluctant to find implied covenants. Fashion Fabrics, Inc. v. Retail Investors Corp., 266 N.W.2d 22, 27 (Iowa 1978); Pathology Consultants v. Gratton, 343 N.W.2d 428, 434 (Iowa 1984). They 'must arise from the language used or be indispensable to effecting the intention of the parties.' Gratton, 343 N.W.2d at 434. While the court may find an implied term on a point not covered by the express terms of the agreement, 'there can be no implied contract on a point fully covered by an express contract and in direct conflict therewith.' Snater v. Walters, 250 Iowa 1189, 98 N.W.2d 302, 307 (1959).
The implied covenant of good faith and fair dealing rests upon the existence of some specific contractual obligation. (Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 683-684, 689-690 [254 Cal.Rptr. 211 [765 P.2d 373].) 'The covenant of good faith is read into contracts in order to protect the express covenants or promises of the contract, not to protect some general public policy interest not directly tied to the contract's purpose.' (Id. at p. 690.) As stated in Love v. Fire Ins. Exchange (1990) 221 Cal.App.3d 1136 at page 1153 [271 Cal.Rptr. 246]: 'In essence, the covenant is implied as a supplement to the express contractual covenants, to prevent a contracting party from engaging in conduct which (while not technically transgressing the express covenants) frustrates the other party's rights to the benefits of the contract.'
There is no obligation to deal fairly or in good faith absent an existing contract. (Hess v. Transamerica Occidental Life Ins. Co. (1987) 190 Cal.App.3d 941 [235 Cal.Rptr. 715]; Beck v. American Health Group Internat., Inc. (1989) 211 Cal.App.3d 1555 [260 Cal.Rptr. 237].) If there exists a contractual relationship between the parties, the implied covenant is limited to assuring compliance with the express terms of the contract, and cannot be extended to create obligations not contemplated in the contract. (Gibson v. Government Employees Ins. Co. (1984) 162 Cal.App.3d 441, 448 [208 Cal.Rptr. 511].)
But see Kessler and Fine in Culpa in Contrahendo, Bargaining in Good Faith, and Freedom of Contract: A Comparative Study (1964) 77 Harv.L.Rev. 401 (Kessler & Fine) reviewed and expanded upon a thesis first propounded in German legal philosophy in 1861, characterized by Kessler & Fine as 'the thesis that damages should be recoverable against the party whose blameworthy conduct during negotiations for a contract brought about its invalidity or prevented its perfection.' (Ibid.)
This thesis is that it has never been accepted in Anglo-American jurisprudence. Indeed, the authors' summation of the concept flatly states that 'The common law appears to have no counterpart to the German doctrine of culpa in contrahendo.' The culpa in contrahendo concept is one of repairing the damage done by bad faith negotiations, rather than awarding the damaged party the benefits or profits he would have gained had the negotiations succeeded. (Kessler & Fine, supra, at p. 405.)