Good faith is one of those legal concepts people underestimate — until a contract dispute costs them everything. Ask any seasoned business attorney, and they'll tell you: the letter of a contract rarely captures the full story. What parties expect from each other — that invisible layer of honesty, fairness, and reasonableness — is where good faith lives. Courts across the U.S., UK, and beyond increasingly recognize this. The importance of good faith in contract law isn't just academic. It's the difference between a deal that holds and one that unravels in litigation. So let's break this down properly.
Managing Contractual Discretion in Performance and Termination
Every contract gives someone discretion. It may be a supplier deciding on delivery timelines. Maybe it's an employer grading performance. Maybe it's a franchisor approving new locations. Power, in other words, is built into contracts — and that power can be abused. Good faith steps in to manage that abuse. Courts in England and Australia have consistently held that where one party has contractual discretion, it must exercise that discretion honestly and reasonably. The landmark case Renard Constructions v. Minister for Public Works (1992) in Australia was an early signal: implied good faith obligations could constrain how parties perform and terminate contracts. Here's the practical takeaway. If your contract gives you the right to terminate "at will" or "for convenience," good faith doesn't strip that right away. What it does is prevent you from weaponizing that right to ambush the other party or engineer a pretextual exit. Discretion must serve its intended contractual purpose — not your short-term strategic interest.
Protecting the "Fruits of the Contract" from Opportunistic Behavior
Every party enters a contract expecting something in return. A tenant expects quiet enjoyment. An employee expects a fair shot at their bonus. A franchisee expects market access. These are the "fruits" of the contract — and good faith protects them from being quietly eaten away. The U.S. Restatement (Second) of Contracts captures this well. It says every contract imposes a duty of good faith and fair dealing. What does that mean in practice? It means you can't use clever technicalities or deliberate inaction to starve the other party of what they bargained for. Consider the famous Fortune v. National Cash Register case from Massachusetts (1977). A salesman named Ormund Fortune was fired just before a massive commission payment would have vested. The court found National Cash Register had acted in bad faith — the termination was timed deliberately to deprive Fortune of his earned benefit. Good faith stepped in and protected the fruits of his contract.
When Self-Interest Becomes a Breach of Duty
Self-interest is normal. Every business protects its margins, its brand, its bottom line. But there's a line — and crossing it can turn legitimate business judgment into a breach of the implied duty of good faith. How does that line get crossed? Usually, it happens through what courts call "opportunistic behavior." One party, seeing an advantage — maybe a market shift, maybe a loophole — exploits the situation in a way the contract never intended. A good real-world example: in Dalton v. Educational Testing Service (1995), ETS had discretion to cancel exam scores it found suspicious. Dalton's scores were flagged. But ETS failed to properly consider the evidence he submitted in his defense. The court held that discretion must be exercised in good faith — ignoring evidence is not good faith, it's self-serving gatekeeping. The ETS's self-interest became a breach of duty.
Balancing Brand Standards and Fairness
Franchising is where good faith gets particularly interesting. Franchisors have enormous power over franchisees. They set brand standards, approve vendors, and can revoke licenses. Franchisees, by contrast, invest everything into a business model they don't fully control. So what happens when a franchisor enforces brand standards selectively — cracking down on one franchisee while ignoring the same violations elsewhere? Or raises standards mid-contract in ways that make compliance financially impossible? Courts have increasingly scrutinized this. In Australia's Burger King Corporation v. Hungry Jack's Pty Ltd (2001), the court found that the franchisor had breached its duty of good faith by manipulating approval processes to prevent the franchisee from meeting development targets — ultimately to reclaim territory. Brand standards, the court made clear, cannot be weaponized to engineer a franchisee's failure. Good faith doesn't stop franchisors from enforcing legitimate standards. It stops them from using standards as a pretext to drive out a franchisee they want gone.
Fair Dealing in Performance Reviews and Severance
Employment contracts are another hotbed of good-faith disputes. Performance improvement plans (PIPs), severance negotiations, and bonus structures — these are all areas where employers hold significant power. Good faith constrains how that power gets used. Take bonus plans. Many employers include discretionary clauses— such as "bonuses may be awarded at management's sole discretion." Sounds airtight. Courts, however, have found that "sole discretion" doesn't mean arbitrary or irrational discretion. In Clark Enterprises v. Kmart Corp., the courts signaled that even broad employer discretion must be exercised consistently with employees' reasonable expectations. Severance is equally fraught. Employers who offer severance in exchange for a release of claims must do so with full disclosure. Withholding material information during severance negotiations — say, an impending merger that would affect benefits — can constitute bad faith. Employees deserve to know what they're giving up.
Real Estate and Commercial Leasing
Commercial leases are long, complex, and full of discretionary provisions. Landlords can approve or deny subletting. They can exercise rights of first refusal. They can enforce use clauses. Good faith governs all of it. Consider subletting. Many leases say a landlord cannot "unreasonably withhold" consent to a sublet. But what counts as unreasonable? Courts look at whether the landlord's stated reasons are legitimate or whether they're manufactured to recapture a below-market lease in a rising market. In Kendall v. Ernest Pestana Inc. (1985), California's Supreme Court held that a landlord's refusal to consent to a sublease must be commercially reasonable. Refusing simply because the landlord wants a higher rent from a new tenant isn't reasonable — it's opportunistic. Good faith, in this case, protected the tenant's contractual right to sublet.
The High Stakes of Fiduciary-Like Duties
Some contracts come close to creating fiduciary relationships — not quite reaching that level legally, but carrying heightened expectations of loyalty and honesty. Think joint ventures, long-term distribution agreements, or exclusive agency arrangements. In these relationships, good faith obligations intensify. Courts have held that parties in close, trust-based commercial relationships owe each other something more than arm's-length fairness. They owe transparency, honest dealing, and a genuine commitment to the contract's shared purpose. The Alaska Packers' Association v. Domenico (1902) case is an old but instructive one. Workers mid-voyage demanded higher wages, exploiting the company's inability to find replacements. The court refused to enforce the renegotiated deal — duress and bad faith had tainted it. The high stakes of these near-fiduciary contracts mean good faith isn't optional. Breach it, and courts will intervene.
Conclusion
Good faith isn't just a legal nicety. It's the spine of every functioning commercial relationship. Contracts are built on expectations — and good faith is what keeps parties honest when those expectations aren't explicitly written down. Whether you're a franchisor enforcing brand standards, an employer running performance reviews, or a landlord managing lease approvals, the obligation of good faith follows you. Courts are not shy about enforcing it, and the consequences of breaching it — rescission, damages, reputational damage — are real. Here's my challenge to you: pull out a contract you're currently operating under. Look at every clause that gives someone discretion. Ask yourself honestly — is that discretion being used fairly? If the answer gives you pause, it might be time to talk to a contract attorney. The importance of good faith in contract law isn't just about what's written. It's about who you are when no one's watching.
