The Covenant Of Good Faith And Fair Dealing Can Turn A Small Case Into A Big One.

Most non-lawyers understand the basics of a breach of contract claim. The two sides make a deal, and if one side does not honor his obligations, the other side can sue for damages.

The problem with a contract claim, from a practical point of view, is that the damages are limited. Basically, you can get what you lost based on the contemplation of the parties at the time the contract was formed. For instance, if you contract to provide a service, you provide it, and the other side does not pay, you can sue for the value of those services. Depending on the contract, you might get interest on that money, and you might get back some or all of your attorney’s fees.

But that’s it. If the contract provides for future exchanges of services for money, which are now lost to you, you might or might not get something for that. You don’t get money for pain and suffering. You don’t get damages for the ripple effect that runs through your business. You can’t get punitive damages, even if the other side’s conduct was particularly egregious. Sometimes, the result of all this is that, from a cost-benefit point of view, it doesn’t make sense to file your lawsuit. The attorney’s fees and costs may even exceed what you stand to win.

However, most non-lawyers do not know about another legal concept that arises in a contract setting. Every contract includes an implied term – in other words, not an express term of the contract – requiring compliance with the covenant of good faith and fair dealing. The covenant says that neither side can do anything, whether expressly prohibited in the contract or not, which destroys the other side’s fundamental reason for entering the contract.

For instance, we are doing a case right now regarding an employment-type contract gone bad. A ran a series of stores offering a service. A wanted to open a new store. So A entered a 2-year contract with B under which, if B made the new store successful, B would get a 49% interest after two years. The store was successful. But after one year, A terminated the contract with B. The termination was arguably permitted by the express terms of the contract, which required no reason for termination. But the effect of the termination was to deprive B of his main reason for entering the contract, namely, getting the vested ownership interest after two years. This amounts, potentially, to a breach of the covenant of good faith and fair dealing, even though permitted by the express terms of the contract.

The real significance of the resulting claim for breach of the covenant is that, increasingly under Arizona law, B can now claim not just contract damages, but what are called tort damages. In other words, he can claim future lost profits, pain and suffering, and even punitive damages. Suddenly, a lawsuit that might not have been worth bringing becomes more than worth it.

This is not something that laymen would know about. But both A and B would have benefitted by going to see an attorney specializing in fraud or business litigation at the very outset. There, they would have learned about the covenant, which may end up determining the outcome of this case.


Most people looking for a lawyer, because a fight is brewing, have never had any prior involvement with a lawyer. You would be surprised how many of these new litigants come in with impressions formed from movies and TV. But the media depiction of lawyers is about as accurate as the media’s depiction of everybody else . . . not very accurate.

So what should you be looking for when you think you might need a lawyer.

Many think they should be looking for the most “aggressive” lawyer they can find. After all, “litigation is war”, right? And you need a ferocious warrior. At some point, litigation does become war, so it is true you need someone who is capable of taking the gloves off when that time comes.

But it is well into litigation before the process becomes war-like, and very few cases get very far into that stage of the process. For the most part, litigation is more about relationships than it is about war, and your lawyer, if he/she is going to be effective, must be capable in that area as well.

So take a look at the relationships in your life. What works and what does not? Do you vibe to people who are extremely knowledgeable, able to talk at length about any subject, and always sounds right? Or do you gravitate to the person who listens to what you have to say and then speaks to what you have to say rather than just his/her own thoughts? If your lawyer cannot hear you, and feel your situation, get away, even if that person is “impressive”.

And when confrontation arises in life, what seems to work? If you want someone to do something for you, does it work better to pin that person in a corner and browbeat them? Or is it more effective to stand by your position but back off enough for the other person to have the freedom to make his/her own choice about what you want? Not many – or any – people respond well to being cornered. It is the same in law: unless your goal is simply to get your rocks off, you’re far more likely to get the result you want by respecting the other person’s point of view as well. Good lawyers know this.

Law is a people business. Both between attorneys and their clients, and between opposing parties. Pick your lawyer like you pick the people you want to keep around you in life.