A contract between two parties contains express agreements or covenants that describe the obligations of each party to perform under the contract. But in addition to the express covenants, contracts also contain implied covenants. Arizona recognizes an implied duty of good faith and fair dealing in every contract. The exercise of good faith should result in the fulfillment of the reasonable expectations of the parties at the time they formed the contract. Alternatively, acting in bad faith “violate(s) community standards of decency, fairness or reasonableness.” These concepts are applied to a variety of contracts but are most relevant in contracts where one party has discretion in performing his obligations. The court must interpret what constitutes bad faith in the contract when a dispute arises.
The purpose of these implied covenants is to prevent one party from acting in such a way that the counterparty is deprived of the benefits that he intended to receive under the contract. In Arizona, this duty is construed broadly. The implied duty can be breached by almost any type of conduct that prevents the aggrieved party from obtaining his bargained-for benefits. Arizona courts view implied covenants as a part of the contract in the same way that express terms are a part of the contract. However, they are also distinct obligations, so the breach of an implied covenant is a separate and independent cause of action from the breach of express covenants in the contract.
The leading case in Arizona on the implied duty of good faith and fair dealing is Wells Fargo Bank v. Arizona Laborers, 201 Ariz. 474, 60, 38 P.3d 12 (2002). In that case, a borrower secured funding for a commercial project with a bank and a collection of pension funds in a triparty agreement. The funds provided permanent financing for the loan. The borrower was subsequently in default on the permanent loan. The funds claimed that the bank had an implied duty to disclose that the buyer had financial troubles. While the bank was not required to make such disclosures under any provision of the agreement, the Court found that the failure to disclose might have been contrary to the Funds’ justified expectation under the agreement, and therefore could constitute a breach of the implied covenant of good faith and fair dealing.
Discuss your contract with an experienced attorney to determine whether the other party has complied with the implied covenants of good faith and fair dealing.
Chernoff Law handles business and real estate litigation matters throughout Arizona. Contact us by calling 480-719-7307 to discuss your legal matter.