Civil plaintiffs frequently invoke the so-called “implied covenant of good faith and fair dealing” to allege that the defendant, while not breaching an express provision of the relevant agreement, nevertheless acted in a way that violated the parties’ mutual expectations. Despite its regular appearance in briefs and opinions, however, the implied covenant of good faith and fair dealing has produced a significant amount of confusion among courts and litigants. Such confusion has been particularly acute in the context of agreements providing one party with sole discretion to act (or not act) in a particular manner. 

 As traditionally stated under New York law, the implied 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.” 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144, 153 (2002).  Yet, significant questions arise from this premise:  For example, what are the “fruits of the agreement” where one contracting party bargains for, and receives, the right to act in its “sole discretion”?  Can that party breach the implied covenant by exercising its contractual discretion in bad faith?

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