It is a truth universally acknowledged that even the most well-written agreement never covers all potential issues that may arise in the future, and that when the rubber hits the road, the parties to the agreement never interpret its terms the same way. Agreement terms that seemed clear and sufficient to the parties at a time when they were both excited about entering into business with each other look significantly different after some major change or shift in circumstances. When circumstances change, the parties often find that the agreement does not cover the exact situation they are now facing. Instead, depending on how their contract is interpreted, one of the parties may be able to take advantage of the contractual silence or ambiguity and act in a way that causes detriment to the other.

How to handle the silent or ambiguous contract is a universal dilemma. Each legal system approaches the issue somewhat differently, but generally there are two approaches. The first approach is simply to disregard the issue and stick to the express terms of the agreement. With this approach, the parties only have to follow the express agreement and are otherwise free to act as they wish, independent of the consequences of their action to the other party. If their agreement did not document or foresee a situation, they are each free to act in a way they believe is in their own best interest (provided, however, that statutory law may provide gap-filler provisions).

The other approach is to recognize that even though parties may have failed to address everything in the agreement expressly, they still have some type of obligations towards each other to act fairly. We refer to this obligation as the “implied covenant of good faith and fair dealing” (hereinafter referred to as the “good-faith covenant”). We'll call the first approach the “cowboy approach” and the second one the “cuddled approach.” Not to hold you in suspense: The U.S. has adopted a kind of cuddled cowboy approach — courts recognize the good-faith covenant, but they will not go so far as to fill in reasonable terms where the parties themselves failed to do so.

The Implied Duty of Good Faith and Fair Dealing in the U.S.

In the United States, references to contracting parties' implied obligation to act in good faith can be found as far back as the late 1800s. See, e.g., Brakeley v. Tuttle, 3 W.Va 86 (WV, July Term 1868). Today, the good-faith covenant is implied in every agreement. It has been synthesized in the Restatement (Second) on Contracts § 205, and a good-faith covenant has been codified in the Uniform Commercial Code (UCC) (Section 1-203) with respect to agreements that fall within the scope of the UCC. The Restatement (Second) on Contracts explains that “[e]very contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” Very similarly, UCC Section 1-203 states that “[e]very contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.”