Fair dealing in contracts isn't about a specific type of agreement labeled "fair dealing contracts." Instead, it refers to the implied covenant of good faith and fair dealing, a principle in contract law that requires all parties to act honestly and fairly in carrying out their contractual duties. It's not a separate contract itself, but rather an obligation embedded within every contract.
Understanding the Implied Covenant of Good Faith and Fair Dealing
This covenant exists in almost all U.S. jurisdictions. It essentially means that parties can't deliberately undermine the purpose of the contract, even if their actions are technically within the letter of the agreement. The core idea is preventing one party from unfairly taking advantage of the other.
Key Aspects of Fair Dealing:
- Implied, Not Express: The covenant isn't typically written directly into the contract; it's implied by law.
- Focus on Intent: Courts look at whether a party acted with the intent to sabotage the agreement or gain an unfair advantage.
- Context Matters: What constitutes "good faith" and "fair dealing" depends on the specific facts of the contract and the industry it pertains to.
- Not a License to Rewrite the Contract: The covenant doesn't allow a court to rewrite a poorly negotiated contract. It only addresses situations where one party is actively trying to prevent the other from receiving the benefit of the bargain.
Examples of Violations of Fair Dealing:
- Frustrating the Other Party's Performance: A landlord deliberately delaying repairs needed for a tenant to operate their business, thereby impacting the tenant's ability to pay rent.
- Taking Advantage of Superior Knowledge: A company concealing crucial information from a supplier to obtain cheaper prices, ultimately harming the supplier's business.
- Terminating a Contract in Bad Faith: An employer firing an employee just before they are due to receive a large bonus, solely to avoid paying the bonus.
- Interfering with the Other Party’s Performance: A general contractor preventing a subcontractor from completing their work on time.
Examples of Actions Likely Not Violating Fair Dealing:
- Enforcing the Express Terms of the Contract: A company strictly enforcing a penalty clause for late delivery, as long as the clause isn't unconscionable.
- Exercising Discretion Granted in the Contract: A bank refusing to extend a loan based on reasonable financial concerns, even if the loan was initially anticipated.
- Negotiating a Better Deal: A business seeking to renegotiate a contract due to changing market conditions, as long as the original contract is honored until a new agreement is reached.
Why Fair Dealing Matters
The implied covenant of good faith and fair dealing protects the integrity of contracts and promotes ethical business conduct. It ensures that parties act honestly and reasonably, preventing exploitation and promoting trust in contractual relationships. It doesn't force parties to be generous, but it does require them to avoid actively undermining the contract's purpose.
