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Businesses often assume that their contractual obligations begin and end with the words appearing in the agreement. New York law, however, generally recognizes an implied covenant of good faith and fair dealing in every contract, which can create potential liability even when the challenged conduct does not expressly violate a written provision.

The implied covenant generally prevents a party from exercising contractual rights in a manner that deprives the other party of the benefit of its bargain. While it cannot be used to rewrite a contract or create obligations inconsistent with its express terms, recent decisions illustrate that implied-covenant claims may remain viable where a party allegedly exploits contractual discretion or a gap in the agreement to frustrate the parties’ reasonable expectations.

For businesses, this is particularly important in agreements that provide one party with substantial discretion over matters such as pricing, approvals, performance standards, renewals, termination rights, or other aspects of an ongoing relationship.

Businesses should therefore consider:

• Clearly defining contractual rights and obligations rather than relying on assumptions;
• Carefully drafting provisions that grant one party discretion;
• Documenting legitimate business reasons when exercising contractual discretion;
• Reviewing termination, renewal, pricing, and approval decisions for consistency with the agreement's overall purpose; and
• Avoiding conduct that technically complies with contractual language but could be viewed as intentionally depriving the other party of the expected benefit of the agreement.

The broader takeaway is that contract compliance is not always limited to literal compliance with the written terms. Even a carefully drafted agreement may leave room for an implied-covenant claim where one party allegedly uses contractual discretion to undermine the bargain itself.

Thoughtful drafting—and careful administration of the agreement after it is signed—can reduce the risk that an ordinary commercial dispute becomes a broader claim for breach of the implied covenant of good faith and fair dealing.

Outside Legal Counsel LLP advises businesses, executives, and boards on commercial agreements, contract drafting and negotiation, business disputes, and strategies to minimize contractual risk. Contact us today.

This newsletter is for informational purposes only, is not legal advice, and may be considered attorney advertising.

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