The Implied Covenant in Every Contract – Do You Know Where to Find it?

Sometimes agreements are more fickle than the parties involved would like them to be, and should they break the contract, the implied covenant of good faith and fair dealing could serve as a basis for a lawsuit.

implied covenantThis implied covenant has come up many times in both sports and entertainment law. Most recently, the implication of good faith and fair dealing has been the subject of discussions in the Miss USA Pageant. Univision, and later NBC, dropped the pageant, owned by Donald Trump, after the business magnate and presidential candidate made disparaging comments about Mexican immigrants. Trump has filed a lawsuit against Univision, and has threatened one against NBC, because he believes the networks breached the implied covenants of good faith and fair dealing in contracts giving them the right to air the pageant, according to The Hollywood Reporter.

What is an implied covenant of good faith and fair dealing?

This implied covenant comes up in entertainment and sports law, where agreements aren’t always as strong as they could be, and are subject to the behavior of both parties – whom are often placed under societal magnifying glasses due to their celebrity status.

So what is an implied covenant of good faith and fair dealing? Essentially, it is the assumption that when a contract is signed, each party will deal with the other fairly, honestly and in good faith. This means that if one party uses “shifty means” to avoid responsibilities, violates the agreement or denies what the other party understood to be part of the deal, then the implied covenant has been broken. As mentioned, Trump’s pending lawsuit against Univision isn’t the first time this has come up in the sports and entertainment worlds, and it likely won’t be the last.

An alternative to interpreting ambiguous contracts

Smaller-scale implied covenant breaches can lead to legal action as well. Sunny Brenner, a partner at a Los Angeles law office, wrote about good faith and fair dealing in entertainment and sports in the ALM’s Law Journal Newsletters. In the case he described, he represented a film production company that was suing a visual-effects provider. The contract between the two parties required that the effects provider create for the production company “first class digital visual effects.” However, nowhere in the agreement was an explanation given for what exactly these sort of effects would look like.

The provider was not offering the production company the quality effects it had expected, and was asked to invest in upgrades that would essentially allow it to put together the first class effects it promised to provide. However, the effects-provider refused to pay for these upgrades, and arbitrators, reluctant to break down the meaning of “first class digital visual effects,” instead based their decision on the implied covenant of good faith and fair dealing. It was decided that, though the contract didn’t require the effects-provider to invest in upgrades, it did mandate that the company manufacture “first class digital visual effects,” which was only possible through upgrades. Thus, the investments the effects-provider was asked to make were required under the implied covenant of good faith and fair dealing.

The emergence of implied covenants in U.S. contract law

The implied covenant of good faith and fair dealing has become an important part of U.S. contract law. The concept arose in a 1933 case, The Kirke La Shelle Company, Appellant, v. The Paul Armstrong Company et al.

The New York Court of Appeals stated “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, which means that in every contract there exists an implied covenant of good faith and fair dealing.”

Since then, the implied covenant was incorporated into the Uniform Commercial Code, ensuring the concept is recognized in cases across the country. Any agreement in sports and entertainment should be made with the knowledge that there is an implied covenant of good faith and fair dealing. Attempts to get out of or subvert the deal in any way could appear as a breach of that covenant, and lead to legal action.

Email this to someoneShare on LinkedIn7Tweet about this on TwitterShare on Facebook1Share on Google+0Pin on Pinterest0Share on StumbleUpon0Share on Tumblr0Share on Reddit0

Anthony R. Caruso is a business transactional attorney in New York and New Jersey with experience in structuring, negotiation and completion of legal deals involving business, entrepreneurs, athletes and performers.

Comments are closed.