By Bruce Jervis
It is frequently stated that every contract contains an implied warranty of good faith and fair dealing. This sounds quite civilized and reasonable, but what exactly is the scope of this warranty? It is an implied warranty, so we never see it in writing. At what point does prickly insistence on one’s contractual rights cross the line to become unfair dealing?
The U.S. Court of Appeals for the Federal Circuit has enunciated an answer. In the context of a federal construction contract, at least, the government breaches the implied warranty of good faith and fair dealing when the government’s conduct has the effect of reappropriating a benefit conferred under the contract. The government need not specifically intend to reappropriate that benefit, but its action or inaction has that effect.
The Federal Circuit concluded that the U.S. Navy breached the implied warranty when it refused to issue change orders that were justified by inaccurate contractual representations regarding subsurface conditions.
But is good faith required in every situation? Can the scope of the implied warranty be modified by the express terms of the contract? In another case this week, a Michigan court ruled that when a project owner reserved the right to terminate a contract at its sole discretion, the court would not entertain the contractor’s argument that the owner had terminated in bad faith. The term “sole discretion” would be enforced according to its plain meaning.
What is your opinion? Is the implied warranty of good faith and fair dealing a vague concept used as a fall-back argument when nothing else seems to fit? Or, is it a clear, implicit term of every agreement? If so, should the parties be allowed to modify or limit the implied warranty under the express terms of the contract? I welcome your comments.