There May Be More In That Contract Than You Think

Photo of Patrick Closson
Patrick C. Closson
Director and Chair, Corporate Department and Chair, Healthcare Group
February 1, 2011

In a recent opinion issued by the New Hampshire Supreme Court, the Court, for the second time in two years, reaffirmed the concept that people who enter a contract have duties beyond those set forth in the agreement.  While this concept is not new, the Court’s recent opinions clarify how judges will look at these issues and serve as a reminder that parties that enter into contract need to do so with the expectation that they will fulfill their obligations.

It is generally assumed that when you enter into a contract that you will be subject to the terms of that contract.  While this assumption is mostly correct, the terms set forth in a contract are not the only source of a contracting party’s duties and obligations.  Under New Hampshire law, as reflected in various opinions issued by the New Hampshire Supreme Court, parties to a contract are subject to certain additional obligations of good faith and fair dealing with regard to how the terms of a contract are carried out.  These principles serve as a baseline with regard to the parties’ conduct.

The law relating to the duty of good faith and fair dealing has evolved to become a set of general doctrines that apply to all contracts and all contracting parties.  Among these doctrines are a set of principles relating to a party’s performance of its contractual obligations.  Specifically, all parties to a contract are obligated to refrain from behavior that is inconsistent with the common standards of decency, fairness, reasonableness and the agreed upon common purpose and justified expectation of the agreement articulated in the contract.  Fundamentally, if a party fails to act in a manner that is consistent with the spirit of the contract, such action may be viewed as a violation of the covenant of good faith and fair dealing.  Absent this set of fundamental standards of conduct, people would be free to manipulate and undermine the purposes of the contracts that they enter into.

Courts have provided some guidance with regard to the type of conduct that would constitute a breach the duty of good faith and fair dealing:

•  Engaging in actions that evade or are inconsistent with the spirit of the agreement set forth in the contract;
•  Failing to act diligently when diligent action is required;
•  Willfully rendering an imperfect performance that would frustrate the purpose of the agreement; and
•  Interfering with or failing to cooperate with the other party’s performance of the contract.

The covenant of good faith and fair dealing creates a tension with the common understanding that the terms of a contract dictate the relationship between the parties to a contract.  Although this tension exists and parties cannot waive their rights under the covenant of good faith and fair dealing, parties to a contract can address the covenant through careful drafting of the terms of the contract.  In particular, the parties can articulate the purpose of the contract and, to the extent applicable, their expectations.  The parties can also describe what actions are required to be performed in order to achieve the agreed upon purpose and meet each party’s expectation.  The parties can also describe what actions must be taken in order for the parties to be considered to be acting in a diligent manner.  These types of provisions, although not always easy to craft, will allow the parties to be proactive with regard to addressing their implied duties of good faith and fair dealing when entering into a contract.