Breach of the Implied Covenant of Good Faith and Fair Dealing in California

Last updated: November 2026

The implied covenant of good faith and fair dealing is a term California law reads into every contract. It prohibits either party from doing anything that unfairly interferes with the other party's right to receive the benefits of the agreement. The covenant cannot add obligations the contract does not contain, and it cannot forbid conduct the contract expressly allows. Kolmogorov Law, P.C. litigates implied covenant claims, on both sides, for businesses in Orange County, Los Angeles, and across California.

Call (909) 235-6116 or contact us online if a counterparty has honored the letter of your contract while gutting its purpose, or if you have been accused of doing so.

What the implied covenant of good faith and fair dealing is

Every contract carries an unwritten promise: neither party will do anything to deprive the other of the benefits of the bargain. For contracts governed by the Commercial Code the promise is statutory. Every contract or duty within that code imposes an obligation of good faith in its performance and enforcement. (Com. Code, § 1304.) For other contracts the rule is common law, and it is the same in substance.

The covenant is about performance and enforcement. It governs how parties carry out the deal they made, not whether the deal was fair when made. A hard bargain is not a breach of the covenant. Exercising a contractual right in a way that defeats the other side's reasonable expectations may be.

CACI No. 325 is the jury instruction. In outline, the plaintiff must prove the parties had a contract, the plaintiff performed or was excused, and all conditions for the defendant's performance occurred. The plaintiff must then show the defendant unfairly interfered with its right to receive the benefits of the contract, and that it was harmed.

What the covenant cannot do

The limits matter as much as the rule, because business owners often reach for the covenant when the express terms do not help them.

The covenant cannot prohibit what the contract expressly permits. The California Supreme Court put it plainly: as to acts and conduct authorized by the express provisions of the contract, no covenant of good faith and fair dealing can be implied which forbids those acts. (Carma Developers (California), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 374.) In that case a landlord terminated a lease to capture a higher rent, exactly as the lease allowed, and the court held the covenant could not make that a breach. (Id. at p. 376.)

Nor can the covenant create new substantive terms. It protects the benefits of the agreement the parties actually made. A party who wishes it had negotiated exclusivity, a minimum purchase, or a longer notice period cannot obtain those terms through the covenant.

And in most commercial settings the covenant is a contract theory with contract remedies. Outside the insurance context, where a separate tort has developed, a breach of the covenant does not usually support tort damages or punitive damages. Punitive damages are not available for breach of an obligation arising from contract. (Civ. Code, § 3294, subd. (a).) Our page on insurance bad faith covers the exception.

Where the covenant does real work

The covenant matters most where the contract gives one party discretion. If a term says a party "may" approve or "will determine" something, the covenant usually requires that the discretion be exercised in good faith and for the purposes the contract contemplates. Whether "sole discretion" language removes that constraint entirely is a frequent fight, and courts read the whole contract to answer it.

Two patterns come up often in business cases.

A sales agent earns commissions on deals that close. The company, three weeks before a large deal closes, reassigns the account to a salaried employee and pays no commission. The contract says nothing about reassignment. The covenant is the agent's theory.

A franchisor has discretion to approve the sale of a franchise to a new owner. It withholds approval of every buyer the franchisee proposes, then exercises its own option to buy the unit at a formula price. The question is whether the approval right was used for its intended purpose. Timing and motive, not the words of the agreement, are what the covenant examines.

Pleading and proving the claim

A covenant claim is usually pleaded alongside a straightforward breach of contract claim, and the two should be kept distinct. If the defendant's conduct violated an express term, the claim is breach of contract and the covenant count adds nothing. If the conduct violated no express term but frustrated the purpose of the deal, the covenant is the claim. A complaint that simply restates the breach of contract allegations under a second heading invites a demurrer.

The elements of the underlying contract claim still apply, and they are set out on our page on the elements of breach of contract. The plaintiff must show its own performance, the conditions for the defendant's performance, and damages measured the ordinary way: the amount that compensates for the detriment caused. (Civ. Code, § 3300.) Our page on breach of contract damages goes further.

Proof focuses on purpose: emails showing why a decision was made, its timing against the other side's expected benefit, and gaps between the stated reason and the real one.

Defending a covenant claim

On the defense side, the first question is whether the contract expressly authorized the conduct. If it did, the claim usually fails under Carma. The second is whether the plaintiff is trying to add a term it never negotiated. The third is whether the plaintiff itself was in material breach, which may excuse the defendant's performance; our page on material versus minor breach covers that defense.

Where the relationship involves partners, LLC members, or corporate officers, a fiduciary duty claim may be pleaded instead of or alongside the covenant, with different remedies. Our page on breach of fiduciary duty covers that ground.

Where these cases are heard

Implied covenant claims are heard in the Superior Court: the Central Justice Center in Santa Ana for Orange County, the Stanley Mosk Courthouse for Los Angeles. Cases with out-of-state parties may be in the Central District of California.

What to bring to the first meeting

Bring the contract, especially any clause granting discretion or approval rights, and the correspondence around the decision you are challenging or defending. Add a timeline showing when the decision was made relative to the benefit at stake, and any internal communications about the reasons for it.

Frequently asked questions

What is the implied covenant of good faith and fair dealing?

It is a promise the law implies in every California contract that neither party will do anything to unfairly interfere with the other party's right to receive the benefits of the agreement. It governs how the contract is performed and enforced. It does not add new terms and does not prohibit conduct the contract expressly allows.

Can I sue for breach of the implied covenant if the other party followed the contract?

Sometimes. The covenant applies where a party uses discretion or technical rights in a way that defeats the purpose of the agreement. It does not apply where the contract expressly authorized the conduct. (Carma Developers (California), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 374.) The closer the conduct is to an express permission, the weaker the claim.

What damages are available for breach of the covenant of good faith?

In ordinary commercial contracts, the same contract damages available for any breach: compensation for the loss caused. Punitive damages are not available for breach of a contractual obligation. (Civ. Code, § 3294, subd. (a).) Tort remedies exist in the insurance context, where an insurer's bad faith denial of a claim is treated differently.

Is breach of the implied covenant the same as breach of contract?

No. Breach of contract is the violation of an express term. Breach of the implied covenant is conduct that violates no express term but unfairly deprives the other party of the benefits of the deal. The covenant claim should be pleaded only where it adds something the contract claim does not.

Talk to a California breach of contract attorney

If a counterparty is using the terms of your contract against its purpose, call (909) 235-6116 or contact us online. Kolmogorov Law, P.C. is located at 327 Magnet, Irvine, CA 92618, and represents businesses in Orange County, Los Angeles, and throughout California.

This page provides general information about California law and is not legal advice. Outcomes depend on the contract, the facts, and the court.