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What does the covenant of “good faith and fair dealing” mean in a contract, and can it be waived?

On Behalf of | Jun 15, 2021 | Franchise Law |

All contracts have an implied covenant of “good faith and fair dealing” between the parties involved that’s designed to encourage equity and fair play. 

Understanding what this means can help you both avoid significant legal problems and know your rights in a dispute.

What exactly is the covenant of good faith and fair dealing?

The concept of “good faith and fair dealing” essentially refers to a principle by which neither contracted party should take any measures that would injure or destroy the other party’s rights under any shared agreement. 

“Good faith” refers to the need for a contracted party to be honest when carrying out their contractual obligations. The concept of “fair dealing” requires contracted parties to honor the “spirit” of the contract — even when the contract itself is silent about an issue. Parties may take the implied “good faith and fair dealing” clause to mean that neither party should purposely do something incorrectly, exhibit a lack of diligence or abuse their discretion in their dealings with each other.

Can the covenant of good faith and fair dealing be waived?

Since the covenant of good faith and fair dealing is an implied part of the contract that requires each party to “play nice” with one another, it can’t be waived. The contracted parties can, however, sometimes supersede the covenant with a written agreement that spells out the understanding in more specific terms.

Some jurisdictions also allow contracted parties to waive, alter, or limit their fiduciary duties when done so by mutual consent. This may occur when there’s a fiduciary duty between parties, and their obligation to exercise good faith is more easily identifiable or concrete. 

Understanding your contractual rights

Making sense of contracts can be challenging. Misunderstandings may unnecessarily expose you to legal liability, and conflicts over the exact meaning of “good faith and fair dealing” are common. If trouble with a contract arises, don’t hesitate to seek experienced assistance.