The Implied Covenant of Good Faith and Fair Dealing Under U.S. Law

How to handle the silent or ambiguous contract is a universal dilemma. Each legal system approaches the issue somewhat differently, but generally there are two approaches. The first approach is simply to disregard the issue and stick to the express terms of the agreement. With this approach, the parties only have to follow the express agreement and are otherwise free to act as they wish, independent of the consequences of their action to the other party. If their agreement did not document or foresee a situation, they are each free to act in a way they believe is in their own best interest (provided, however, that statutory law may provide gap-filler provisions).

The other approach is to recognize that even though parties may have failed to address everything in the agreement expressly, they still have some type of obligations towards each other to act fairly. We refer to this obligation as the “implied covenant of good faith and fair dealing” (hereinafter referred to as the “good-faith covenant”). We'll call the first approach the “cowboy approach” and the second one the “cuddled approach.” Not to hold you in suspense: The U.S. has adopted a kind of cuddled cowboy approach ' courts recognize the good-faith covenant, but they will not go so far as to fill in reasonable terms where the parties themselves failed to do so.