What Is the Implied Covenant of Good Faith and Fair Dealing?
Every contract governed by Florida law carries an invisible rider: the implied covenant of good faith and fair dealing. You will not find it written in most agreements, but courts read it into virtually every enforceable contract automatically. The covenant requires each party to act honestly and to refrain from conduct that would destroy or injure the other party's right to receive the benefits the contract was designed to provide.
In plain terms: you cannot technically comply with the letter of an agreement while deliberately sabotaging its spirit. A landlord who delays approving routine tenant improvements to force the tenant into default, a franchisor who withholds marketing support the contract implicitly assumed would be provided, a business partner who redirects deal flow away from a joint venture to a side entity - all of these can give rise to a good faith claim even if no single sentence in the contract was technically breached.
For South Florida business owners negotiating corporate transactions or structuring joint ventures, LLCs, and partnerships, this doctrine is not a minor footnote. It is a live wire that runs through every deal.
Enter the 'Officious Bystander'
So how do courts decide which unwritten obligations should be implied into a contract? This is where an old but still surprisingly relevant legal concept steps in: the officious bystander test.
The image comes from a hypothetical. Imagine two parties sitting across a table finalizing the terms of a deal. An officious bystander - think of a well-meaning but uninvited third party - leans over and asks: "What about this situation? Does your contract cover it?" If both parties would instantly and emphatically respond "Of course it does, that goes without saying," then that obligation may be implied into the contract, even if it was never written down.
The test is strict, intentionally so. Courts will not imply a term simply because it would be reasonable, or even because one party sincerely believed it should have been included. The standard is near-universal obviousness: would both parties, at the time of contracting, have treated it as so self-evident that writing it down seemed unnecessary?
The implied covenant of good faith operates alongside this framework. It does not add brand-new obligations that the parties never contemplated. It prevents a party from using contractual discretion - pricing mechanisms, approval rights, scheduling, or similar tools built into the agreement - in ways that would gut the deal's essential purpose.
How Florida Courts Apply the Doctrine
Florida courts have been careful to keep the implied covenant in its proper lane. It fills gaps; it does not rewrite bargains. Several principles govern how Florida judges and arbitrators approach these claims.
The Covenant Cannot Override Express Terms
If the contract explicitly gives a party broad discretion - say, the right to terminate without cause on thirty days' notice - the implied covenant does not nullify that right. A party who exercises a clearly granted contractual right is generally not acting in bad faith simply because the other side is harmed by it. The doctrine targets abuse of discretion, not the exercise of rights that were freely bargained for.
Good Faith Claims Require a Predicate Contract
Florida courts consistently hold that there is no standalone tort of bad faith in a pure commercial context outside of specific statutory frameworks like insurance. The implied covenant claim must be tethered to a breach of a contract right. Without an underlying agreement, there is nothing to imply a covenant into.
The Discretion Must Belong to the Defendant
For the covenant to be breached, the defendant typically must have exercised some form of discretion the contract granted. A party cannot breach the covenant by doing something the contract simply did not address at all - that may be a separate gap-filling issue or a matter of negotiation, but it is not a good faith violation.
These principles matter enormously for businesses involved in corporate transactions or those relying on business law counsel to structure their agreements from the start.
Practical Risks: Where Good Faith Claims Arise Most Often
Understanding the theory is useful. Knowing where these claims actually emerge is more valuable.
Partnership and LLC Operating Agreements
Operating agreements for LLCs and partnership agreements often grant managing members or general partners significant discretion over distributions, capital calls, and business decisions. When a controlling party uses that discretion in ways that squeeze out minority members or divert value to affiliated entities, implied covenant claims follow quickly. Florida courts look hard at whether the majority is exercising its rights for legitimate business reasons or using contractual levers as a weapon against co-owners.
If you are working through the structure of a Florida LLC, the LLC vs S-Corp Comparison resource and the article on drafting partnership agreements that survive disputes offer useful context on how governance choices intersect with fiduciary and good faith obligations.
Real Estate Contracts and Conditional Obligations
Real estate purchase agreements routinely include due diligence periods, financing contingencies, and landlord consent requirements. A buyer who strings out a due diligence period without genuine inquiry, or a seller who conditions an approval on concessions never contemplated in the contract, may be in implied covenant territory. For real estate investors in South Florida, this is especially relevant in transactions involving real estate acquisitions and 1031 exchanges, where timing and cooperation obligations are often critical.
Private Equity and Capital Raise Agreements
Subscription agreements, side letters, and fund operating documents frequently grant managers broad investment discretion. When that discretion is exercised in ways that appear designed to benefit the manager at investors' expense, courts examine good faith standards closely. Investors and managers involved in private capital raises should ensure their agreements clearly allocate discretion and define the standards that govern its exercise.
Letters of Intent and Pre-Closing Obligations
Letters of intent occupy a gray zone. A non-binding LOI does not automatically create an implied covenant to negotiate in good faith - but the parties' conduct and the specific language of the LOI can sometimes create limited obligations. For a closer look at how LOIs can create unexpected exposure, see the article on letter of intent best practices for buying a business in Florida and why you need an attorney to negotiate your letter of intent.
Delaware vs. Florida: A Key Distinction for Sophisticated Transactions
Many Florida businesses - particularly those backed by private equity or structured as multi-member LLCs - are organized in Delaware even if they operate entirely in South Florida. Delaware courts have developed a distinct body of case law on the implied covenant, one that is arguably more restrained than Florida's approach.
Delaware's courts will imply a covenant term only when it is clear that the parties would have agreed to that term if they had thought about it at the time of contracting. The officious bystander test is applied with considerable rigor. Notably, Delaware courts have held that sophisticated parties who negotiated detailed agreements are presumed to have addressed matters they cared about, and courts are reluctant to supply terms that experienced counsel could have included but did not.
For entities that are Delaware-formed but Florida-operating, the governing law clause in the operating agreement or shareholder agreement often determines which body of doctrine applies. The article on Delaware governance decisions: holding parties to their bargain explores how Delaware courts enforce negotiated terms, a theme that intersects directly with implied covenant analysis.
How to Protect Your Business: Drafting for Good Faith
The best time to address implied covenant risk is before you sign, not after a dispute erupts. A few practical steps:
Define discretion explicitly. If one party has the right to make decisions - approve budgets, set prices, grant consents - spell out the standard that governs how that discretion must be exercised. "Reasonable" is better than nothing. "Sole discretion" is broad but can invite challenge if abused.
Address cooperation obligations. Many good faith claims arise not from what a party did, but from what it refused to do. If cooperation is necessary for the contract to function, state it. Identify the specific acts each party must take and the timelines for doing so.
Include a governing law clause. The choice of Florida law, Delaware law, or another state's law will determine which body of implied covenant doctrine governs your dispute. Make that choice deliberately, with counsel who understands the difference.
Use recitals to capture intent. Courts interpreting ambiguous contract language often look to the recitals section for guidance on the parties' purposes. Recitals that accurately describe the deal's business rationale provide useful context if a good faith claim arises later.
Peter Lindley's background as both a Florida business attorney and a former Big 4 CPA gives him a practical advantage in drafting agreements that address these risks at the business level, not just the legal level. The financial mechanics of a deal often drive the discretionary rights that later become implied covenant battlegrounds.
For businesses in the early stages of choosing a structure or governance framework, the entity choice, formation, and governance practice area and the Florida Business Formation Guide are good starting points.
Disclaimer
This article is general legal information provided for educational purposes only. It is not legal advice and does not create an attorney-client relationship. Contract law and the implied covenant of good faith vary by jurisdiction, contract type, and the specific facts of each situation. Consult a qualified Florida business attorney before relying on any information here in connection with an actual legal matter.
Ready to Review Your Contracts?
Implied obligations can be just as binding as the ones you negotiated and signed. If you are entering a significant business agreement, dealing with a partner who may be acting in bad faith, or simply want to make sure your contracts say what you intend them to say, the right time to get counsel is now. Contact Peter P. Lindley, P.A. to schedule a consultation and get integrated legal and financial guidance from an attorney who has spent more than 30 years at the intersection of business law, tax planning, and transactional practice.
Frequently Asked Questions
What is the implied covenant of good faith and fair dealing in Florida?
Florida law implies a covenant of good faith and fair dealing into every contract. It requires each party to act honestly and to avoid conduct that would deprive the other party of the benefits the contract was intended to provide. It does not create new obligations beyond the contract, but it prevents a party from using contractual discretion in bad faith to undermine the deal's essential purpose.
What is the 'officious bystander' test in contract law?
The officious bystander test is a standard courts use to decide whether an unwritten term should be implied into a contract. The idea is that if an uninvited third party asked both contracting parties whether the contract covered a particular situation, and both responded immediately that it obviously did, then that term may be implied. The test requires near-universal obviousness, not mere reasonableness.
Can you sue for breach of the implied covenant of good faith without a written contract?
In Florida, the implied covenant of good faith is tethered to an existing contract. You generally cannot bring a standalone claim for bad faith in a purely commercial dispute without an underlying agreement. The claim must be linked to a specific contractual right that was abused or frustrated.
Does the implied covenant of good faith override clear contract terms in Florida?
No. Florida courts consistently hold that the implied covenant cannot override or rewrite express contract terms. If the contract clearly gives a party a specific right, exercising that right is not automatically a breach of good faith, even if the other party is harmed. The covenant targets abuse of discretion, not the exercise of clearly bargained-for rights.
How does Delaware law on implied covenant differ from Florida law?
Delaware courts apply the implied covenant with particular restraint when sophisticated parties have negotiated detailed agreements. Delaware presumes that experienced parties addressed the matters they cared about, and courts are reluctant to imply terms that counsel could have included but chose not to. Florida courts take a somewhat more flexible approach, making the choice of governing law an important drafting decision.
How can I reduce implied covenant risk in my business contracts?
Define any discretionary rights clearly and state the standard governing their exercise. Include cooperation obligations and timelines. Use accurate recitals to document the deal's business purpose. Select a governing law deliberately. Working with an attorney who understands both the legal doctrine and the business mechanics of your deal is the most effective way to reduce this risk before a dispute arises.