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The Invisible Term In Every Contract-Good Faith & Fair Dealing By Vivian Torres, Guest Writer

On Behalf of | Sep 8, 2023 | Blog, Firm News

The Invisible Term In Every Contract Good Faith & Fair Dealing

What is a Contract?

Whether between a homeowner and a contractor, a buyer and a seller, or an employee and an employer, a contract is a legally enforceable agreement that contains one or more promises between two or more parties. There are three core elements: (1) offer; (2) acceptance; and (3) consideration. An offer is an expression of willingness to enter a bargain which will allow another person – or a business – to understand that a bargain is proposed. Meanwhile, acceptance is an expression of agreement to an offer or proposal. Acceptance can take the form of a promise to pay or a performance. For instance, someone can accept another person’s offer to walk their dog in 2 ways: by saying “I agree to walk your dog for $20” or by merely walking the dog.

Lastly, consideration means that something of value is exchanged in the contract. So using the dog walking example, consideration will take form in the exchange of the walking of the dog and payment of $20. It is also imperative that throughout the formation of a contract, there is a “meeting of the minds.” This phrase means that there is mutual agreement from both parties about everything when forming the contract.

The Implied Covenant of Good Faith & Fair Dealing.

There is something in contract law called the implied covenant of good faith and fair dealing. It is a rule that requires every party in a contract to carry out the agreement as intended. It is an “invisible” part of every contract in New Jersey and everyone needs to know about it. Neither party cannot do anything that will destroy or injure the right of the other party to receive the contract’s intended benefits. Good faith is generally deemed as honesty in a party’s conduct during the agreement. Meanwhile, fair dealing generally requires that a party cannot act contrary to the agreement. In imposing the duty of good faith and fair dealing on the contract’s parties, the parties cannot:

  • Lack diligence
  • Perform their duties incorrectly, or in a delayed way
  • Abuse their power
  • Interfere with or fail to cooperate in the other party’s performance

To show breach of the implied covenant of good faith, a claimant, whether a person or a business – must prove three things. First, that a contract existed. Second, that the other party acted in bad faith with the purpose of depriving the claimant the contract’s rights or benefits. Third, the claimant must prove that the other party’s conduct caused the claimant to suffer damage or injury.

For Example?

Here’s an example of a breach of the implied covenant of good faith and fair dealing that can occur in employment relationships:

A graduating college senior named Pat applied for a job opening at a place called X in October of her fall semester. Pat submitted the application and X ’s recruiter then granted Pat an interview. After the interview, the recruiter told Pat by email that X would like to extend a post-graduation offer. The recruiter also detailed the work hours, compensation, health benefits, office location and responsibilities of the job at X in that same email. Finally, the recruiter told Pat that the job’s start date would be discussed later in the year.

Fast forward a few months, it is now April, and Pat’s spring semester is almost coming to an end. Pat reaches out to X’s recruiter asking about the start date. But the recruiter tells Pat that because of the economy, the offer they had extended to her 6 months ago was no longer available. Now Pat has a month left to graduation and no longer has a job. For the past 6 months she did not apply to anything because she was rightfully under the assumption that she had secured a job. The next day Pat was in class when she overheard a classmate tell a friend that he had just received an offer at X. The classmate gloated that because his dad was good friends with the recruiter at X, he got a job there. Pat then realized that the reason why she lost their job offer was not because of the “economy”, but because Pat was wrongly replaced.

In assessing whether Pat has a claim for a breach of an implied covenant of good faith and fair dealing, three things must be satisfied. First, Pat (the offeree) must prove that a contract existed between the parties. Second, Pat must prove that the recruiter (offeror) acted in bad faith with the purpose of depriving Pat of the contract’s rights and benefits. Third, Pat must prove that the recruiter’s conduct caused Pat to suffer a loss.

Starting with the first element, there must be a contract between the parties. Here, there was one because there was an offer, acceptance, and consideration between Pat and the recruiter. There was an offer for a position at X that was given by the recruiter. Pat accepted the offer. Then, there was consideration because something of value was exchanged in the contract. Via email and in response to the recruiter’s offer, Pat agreed to carry out the responsibilities of the job in exchange for compensation and health benefits.

Meanwhile, the second element is established because the recruiter acted in bad faith when interfering with Pat’s right to receive the benefits of the employment contract. For instance, the expectations of Pat as the offeree, was that she accepted an extended offer to work at X. Pat expected that after graduation, she would be employed by X. Now, Pat is left jobless because she did not apply for anything else after accepting the offer which meant she lost out in applying to other potential job openings. Also, there was unequal bargaining power because the party that acted in bad faith was the recruiter, who had the upper hand by interviewing and extending job offers. They acted in bad faith and abused their power by taking Pat’s job and offering it to someone else just because they were friends with their father.

Lastly, the third element is satisfied because X’s recruiter’s actions caused Pat to suffer a loss. Pat was not able to start the job and gain the contract’s benefits of compensation and health benefits. Now Pat is left scrambling to find a post-graduation job.

If you are a homeowner hiring a contractor, a buyer of a consumer product, someone getting their first job after college, or any other party to a contract, know about the “invisible  term.” Call us if you need help.

Viviana Torres is a rising third-year law student at Seton Hall University School of Law, where she works as an interpreter for the Center for Social Justice. Viviana is also treasurer of LALSA at Seton Hall Law.

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