Clear contractual terms can help businesses distinguish between legitimate contractual discretion and conduct that may give rise to a performance dispute
Contracts establish the rights and obligations that govern commercial relationships, but performance does not always occur in a perfectly predictable environment. Parties may encounter unexpected circumstances, disagreements over contractual procedures, or situations where one side believes the other is technically complying with the agreement while undermining its purpose.
The implied duty of good faith can become relevant in these situations. Good faith disputes may arise when one party alleges that the other acted dishonestly, unfairly, or in a manner inconsistent with the parties’ contractual expectations.
Good Faith Does Not Rewrite the Contract
Virginia law recognizes an implied covenant of good faith and fair dealing in the performance of contracts. The obligation generally requires parties to act in good faith when exercising contractual rights, but it does not give either party the ability to rewrite the agreement or create obligations that the contract does not contain.
This distinction is important in commercial disputes.
A business generally cannot use an allegation of bad faith to avoid an unfavorable contractual term simply because the agreement no longer benefits it. Similarly, the implied duty does not ordinarily allow a party to demand performance that contradicts the express terms of the contract.
The analysis therefore begins with the agreement itself and the rights it gives each party.
When Can Good Faith Become an Issue?
Good faith concerns may arise when a contract gives one party discretion to make a decision that affects the other party.
For example, an agreement may allow a business to approve a request, evaluate performance, determine whether certain conditions have been satisfied, or exercise a contractual option. While the contract may grant discretion, the party exercising that discretion may still be expected to do so consistently with the parties’ contractual relationship.
A dispute may develop if one party believes the other used contractual discretion for an improper purpose or acted in a way that deprived the other party of an expected contractual benefit.
Whether such conduct constitutes a breach depends on the contract, the nature of the discretion involved, and the facts surrounding the decision.
Express Contract Terms Remain Central
Courts generally examine the language of the agreement when determining what the parties agreed to do.
If the contract clearly permits a particular action, a party may have difficulty establishing a good faith claim simply by arguing that the decision was unfavorable or commercially unreasonable.
The implied covenant cannot typically be used to contradict an express contractual provision. Businesses should therefore distinguish between conduct that violates an actual contractual obligation and conduct that merely produces an undesirable commercial result.
This is one reason precise drafting matters. Agreements should identify important rights, obligations, approval procedures, and discretionary powers as clearly as possible.
The Parties’ Conduct May Provide Important Context
The way parties perform a contract can become relevant when a dispute develops.
Emails, meeting records, performance reports, notices, and other communications may show how the parties interpreted their responsibilities or exercised contractual rights. These records may help establish the circumstances surrounding a disputed decision.
Businesses should be cautious, however, about assuming that every disagreement over business judgment amounts to bad faith. A party may make a poor decision without acting dishonestly or violating the implied covenant.
The specific facts and contractual language remain important to the analysis.
Jabaly Law helps businesses examine the contractual language and circumstances surrounding the parties’ performance when good faith disputes arise.
Our business attorneys and commercial litigation attorneys assist companies with evaluating contractual rights, obligations, and potential disputes involving commercial relationships.
Contact Jabaly Law today to schedule a consultation.
Frequently Answered Questions
Can a party waive a contractual right by repeatedly failing to enforce it?
Potentially. A party’s repeated conduct may raise questions about waiver or modification, depending on the circumstances and the terms of the agreement. The effect of that conduct depends on applicable law and the parties’ communications.
Does the implied duty of good faith apply to every business decision made during a contract?
Not necessarily. The duty generally relates to the performance of contractual obligations and the exercise of contractual rights. It does not automatically provide a basis to challenge every business judgment or unfavorable decision.
Can a good faith claim exist if a party technically complied with the contract?
It may depend on the conduct involved and the contractual right being exercised. A party’s technical compliance with one provision does not necessarily resolve whether its broader conduct was consistent with the obligations imposed by the agreement and applicable law.
