Buzz Archive:
The Implied Covenant of Good Faith and the Exercise of Contract Rights

by Glen Banks, Fulbright & Jaworski L.L.P., 10/2/2007

All contracts governed by New York law (and most other state contracts) imply a covenant of good faith and fair dealing in the course of performance. The covenant embraces a pledge that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract. Good faith performance of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party while bad faith may be overt or may consist of inaction and has been recognized to include evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of a power to specify terms and interference with or a failure to cooperate in the other party's performance.

The covenant is often invoked by a party who is unhappy with the intention of the other party to the contract to take action. A claim concerning the covenant is often raised in a situation where one party to the contract intends to take action that is not prohibited by the express terms of the contract and the other party seeks to prevent or attack such action by claiming it violates the covenant.

For PE or venture investors: What would an investor do to take action with respect to a portfolio company to protect or advance the investor's interests? Glen Banks, a partner in the New York office of Fulbright & Jaworski L.L.P. provides his insight.