Proposed Standards for Evaluating When the Covenant of Good Faith and Fair Dealing Has Been Violated: A Framework for Resolving the Mystery

The implied covenant of good faith and fair dealing is a well-established doctrine of contract law used as a residual \u27gap filler when express contract terms or other gap-filling principles do not address allegedly impermissible conduct. Yet despite its wide recognition and inherent usefulness, the standards by which this covenant operates have remained poorly defined, at best. Consequently, the application of this covenant has been inconsistent or ad hoc. Professors Diamond and Foss begin by identifying and exploring the myriad current approaches to the application and effect of the covenant of good faith and fair dealing. These approaches encompass the current Restatement and U.C.C., as well as judicial and academic interpretations. The authors then take issue with the suggestion that the covenant of good faith and fair dealing defies the application of clear standards or criteria. The authors argue that the covenant is both susceptible to objective standards and that such standards would greatly reduce the current ad hoc nature of this doctrine. In support, the authors provide a set of specific criteria and standards grounded in the general areas of commercial reasonableness and honesty. Finally, the authors address specific concerns regarding the appropriateness and possibility of waiver of this covenant as well as suitable remedies for its violation