Legal Definitions - implied covenant of good faith and fair dealing

The implied covenant of good faith and fair dealing is a rule that requires all parties in a contract to act in good faith and not use means to undermine the purpose of the transaction. This rule applies to the performance of a contract and is automatically included in any contract without being stated. However, it does not apply to the negotiation of the contract.

For example, if a famous athlete signs a contract with a company allowing only that company to use their image on products in exchange for a part of the profits, the company must make and sell those products even if the contract does not explicitly say so. This is because the athlete only makes a profit if products are sold, which implies that the company must make and sell the items.

The key part of this rule is fairness, and it can be difficult to determine whether a party is attempting to avoid performance or if there was a misunderstanding. Courts must analyze each case to determine whether a party has breached the implied covenant of good faith and fair dealing.