Good Faith Obligation
Under the UCC and common law, parties must deal honestly and fairly with each other.
While straightforward in theory, many businesses fail to actively track obligations tied to this concept - often resulting in missed deadlines, unintended renewals, penalties, or loss of contractual rights.
US Law · For business owners and foundersWhat is a Good Faith Obligation?
The good faith obligation requires parties to a contract to deal honestly and fairly with each other in performing and enforcing the agreement. Under the Uniform Commercial Code (UCC), which governs sales of goods in all US states, the duty of good faith is expressly imposed on every contract and cannot be waived.
Under common law - which covers most service, employment, and real estate contracts - courts imply a similar covenant of good faith and fair dealing into every contract. This implied covenant does not add new obligations beyond the contract's terms, but it prevents parties from exercising their rights in a way that destroys the other side's reasonable expectations of what they bargained for.
In practice, many teams rely on a contract expiry tracking system to stay on top of dates and obligations tied to clauses like this.
Key Elements
Honesty in Fact
The subjective component - you must not act with actual dishonest intent. This applies to both the performance of obligations and to the exercise of any contractual discretion you hold.Observance of Reasonable Commercial Standards
The objective component under the UCC - your conduct must meet the standards of fair dealing in your trade or industry. A wholesaler who sets prices in bad faith to squeeze out a distributor may violate this even if each individual action is technically permitted by the contract.Implied Covenant of Good Faith and Fair Dealing
Courts read this covenant into every contract by default. It does not create new duties beyond what the contract says, but it limits how a party can exercise rights the contract expressly grants. For example, a party with sole discretion to set prices cannot set them arbitrarily to harm the other side.Limits on Opportunistic Behavior
Good faith prevents a party from exploiting contract gaps, technicalities, or ambiguities to gain an advantage that was never contemplated. Courts ask: is this conduct consistent with the reasonable expectations of the parties when they made the deal?Real-World Example
NexaCloud signs a three-year software reseller agreement with Torbit Inc. The agreement gives NexaCloud "sole discretion" to set reseller pricing. After Torbit invests heavily in building a sales team and customer base, NexaCloud begins raising reseller prices every quarter, squeezing Torbit's margins to near zero - while selling directly to Torbit's own customers at a lower price.
Even though NexaCloud has "sole discretion" over pricing, courts in most states would find that exercising that discretion to systematically destroy Torbit's ability to profit from the contract violates the implied covenant of good faith and fair dealing. NexaCloud cannot use a contractual right in a way that deprives Torbit of the benefit of its bargain. Torbit likely has a viable claim for breach of the implied covenant.
This is why many businesses adopt automated deadline tracking to ensure no critical dates are missed before they pass.
Watch Out For
Exercising discretionary rights to harm the other party
Many contracts give one party broad discretion - over pricing, approval rights, performance standards, or termination. Exercising that discretion specifically to undermine the other party's reasonable expectations invites a good faith claim. Use discretionary powers within the spirit of what was bargained for.Withholding cooperation needed for the other side to perform
If your counterparty's ability to perform depends on your cooperation - providing data, timely approvals, or access - unreasonably withholding that cooperation can breach the good faith obligation even if the contract does not explicitly require it.Good faith does not rewrite a bad deal
Courts will not use the implied covenant to add terms the parties never agreed to or to save a party from a deal that turned out to be unfavorable. Good faith limits how you exercise existing rights - it does not create new rights.Don't let good faith obligation deadlines catch you off guard
Key dates tied to good faith obligations - renewal windows, expiry cutoffs, notice periods - can easily slip through the cracks when tracked manually. Missing them triggers automatic extensions, penalties, or lost rights. ExpiryEdge tracks every critical deadline and sends automated reminders before they're due - so nothing slips.
Instead of relying on spreadsheets or manual follow-ups, a centralized renewal reminder system ensures every deadline is visible, tracked, and actioned automatically.
How to Use This in Your Favor
Define discretionary standards when you have them
If your contract gives you discretion over something important - approval, pricing, renewal - define the standards you will use to exercise that discretion. "Approval not to be unreasonably withheld" is a weaker good faith constraint than undefined sole discretion, but it sets clearer expectations for both sides.Document your reasoning when exercising contract rights
When you make decisions that affect the other party - terminating for cause, rejecting deliverables, adjusting pricing - document the legitimate business reason. A paper trail showing reasoned, consistent decision-making makes a bad faith claim much harder to sustain.Frequently Asked Questions
Can you sue for breach of good faith without also having a contract breach?
In most US states, no. The implied covenant of good faith and fair dealing is a contract-based claim - you cannot pursue it independently as a standalone tort. To recover, you generally need to show both a contract and conduct that violated the covenant.
Does the duty of good faith apply to contract negotiations?
Generally no. US law does not impose a general duty to negotiate in good faith. Parties can walk away from negotiations for any reason unless they have specifically agreed to negotiate in good faith - which is itself an unusual and often unenforceable commitment.
How is good faith different from fiduciary duty?
Good faith is a baseline obligation owed by all contracting parties to each other. Fiduciary duty is a much higher standard imposed on parties in special relationships of trust - like directors, attorneys, or financial advisors. Fiduciaries must actively put the other party's interests first; contracting parties only need to deal honestly and not undermine the other side's reasonable expectations.