Implied covenant of good faith and fair dealing (often simplified to good faith) is a rule used by most courts in the United States that requires every party in a contract to implement the agreement as intended, not using means to undercut the purpose of the transaction. The rule applies in the performance of a contract, not to the negotiation of the contract, and the rule applies to generally any contract automatically without being stated in the agreement.
This rule is infamously hard to pin down as courts repeatedly alter its application and meaning because good faith and fair dealing depend heavily on the context of the agreement. Typically, courts find that a party breaches this rule when they act in ways that obviously undermine the benefits to the other party from the contract or if one party attempts to sabotage another in performing their end of the agreement. For example, if a famous athlete signs an agreement only allowing one company to use their image on products in exchange for a part of the profits, a court would likely find that the company must attempt to make and sell those products even if the contract did not explicitly say as much. This is because the athlete only makes profit if products are sold which naturally implies the company makes and sells the items.
The key part of this rule is fairness, and there are gray areas between what should be implied and what might actually be misunderstandings. Courts must decipher whether a party is attempting to skirt performance or the parties actually did not have a meeting of the minds. Given this difficult challenge and the case-by-case analysis, one must look at the laws and cases for the specific jurisdiction to determine how the court defines and applies the implied covenant of good faith and fair dealing.
[Last updated in March of 2022 by the Wex Definitions Team]