What are the implied terms in a contract?
A contract can have two different types of terms:express or implied. Express terms are the ones actually written into the contract. As an example, if a promissory note calls for monthly payments to be made on the first of each month, this is an express term of the contract. Implied terms, on the other hand, are not written in the contract but, rather, implied by law.
As an example, many states recognize that every contract includes an implied covenant of good faith and fair dealing. This means, in general, that the parties agree to act in accordance with reasonable commercial expectations and to treat one another fairly in carrying out their obligations under the contract.
Courts commonly use the implied covenant of good faith and fair dealing when the express terms of the contract are not clear or give unfettered discretion to one of the parties to do, or not to do, a certain act. As an example, a lease may allow for the tenant to sublease a property so long as the landlord gives his or her approval. The lease gives the landlord complete discretion: he can allow the sublease or disallow it.
In this situation, the implied covenant of good faith and fair dealing dictates that the landlord must exercise his or her discretion consistent with the commercially reasonable expectations of the parties and in good faith. He or she cannot act arbitrarily or capriciously but must make thedecision based upon good faith, business reasons.
The implied covenant of good faith and fair dealing can be subject to several limitations, however. Normally, it cannot be applied to contradict the express term of the contract. Likewise, it cannot be applied to create new obligations which the parties did not bargain for. The concept is meant to be a “gap filler” that governs areas that are not clear or are left to the discretion of one party.
The law of contracts is normally governed by the state where the parties live. Not all states recognize the implied covenant of good faith and fair dealing. You should consult a lawyer knowledgeable in the state where you live to gain a complete understanding of how the implied covenant of good faith and fair dealing might apply to your contract.
Please Note: Rabin Kammerer Johnson provides these FAQ’s for informational purposes only, and you should not interpret this information as legal advice. If you want advice as to how the law might apply to the specific facts and circumstances of your case, please contact one of our attorneys.