Most implied covenant claims I see in business cases should not have been filed. A few should have been filed sooner. The difference is rarely the rule, which fits in two sentences. It is the facts, and the last two years of California appellate decisions draw the line between a winning claim and a dismissed one about as clearly as it has ever been drawn.

For the rule itself and the CACI 325 elements, see our page on breach of the implied covenant of good faith and fair dealing. This article is about what has happened in the courts since 2024. A city lost a covenant case over a shipping terminal. A tenant and a lawyer saw their covenant claims die on the pleadings. A festival promoter learned that hard bargaining is not bad faith. If you are deciding whether to sue on the covenant, or how to defend against it, these are the cases the other side's lawyer will be reading.

In short:

• The covenant wins where one side controls a decision and uses that control to defeat the deal. In Oakland Bulk and Oversized Terminal v. City of Oakland (2025), a city that stonewalled a developer lost, and the developer's lease was reinstated.
• It loses where the contract expressly permits the conduct. In Coyote Aviation v. City of Redlands (2025) and Y.P. v. Wells Fargo (2026), the covenant claims were thrown out at the pleading stage on that ground.
• A hard but good faith position on a disputed clause is not bad faith. In VFLA Eventco v. William Morris Endeavor (2024), $6 million in festival deposits stayed with the artists.
• The remedy is a contract remedy. Outside insurance there are no tort or punitive damages, and in Oakland Bulk the remedy that mattered was reinstatement of the lease, not money.
• A covenant count that repeats the breach of contract count adds nothing and invites a demurrer.

The rule, in two sentences

Every contract imposes on each party "a duty of good faith and fair dealing in its performance and its enforcement," and a party can breach that duty without breaching any express term. (Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 371, 373.) But the covenant protects only the benefits of the agreement the parties actually made, so it cannot add duties the contract does not contain or forbid what the contract expressly allows. (Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 349-350; Carma, supra, 2 Cal.4th at p. 374.)

Pleading the claim takes more than a bad outcome. The conduct must be "prompted not by an honest mistake, bad judgment or negligence but rather by a conscious and deliberate act" that frustrates the agreed common purposes. (Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1395.) Every case below turns on one of those limits.

2025: what a winning covenant case looks like

Oakland Bulk and Oversized Terminal, LLC v. City of Oakland (2025) 112 Cal.App.5th 519 is the most important covenant decision for business owners in years, and it is worth reading closely.

The City signed a 66-year ground lease with a developer to build a bulk cargo terminal on the former Oakland Army Base. When word spread that coal might move through the terminal, the City turned against the project. The trial court found that it stopped responding to the developer's communications, rejected what it did answer without any substantive basis, and built a written record to support terminating the lease for a missed construction milestone. The court also found the City was using the delay to pressure the developer into a coal-free project it had no obligation to build.

The City's defense was that nothing it did violated an express term of the lease. The Court of Appeal rejected it. Conduct that does not rise to an express breach but denies a party the benefits of the contract violates the implied covenant. The covenant looks to "the contract's purposes and the parties' legitimate expectations," not only to its words. (Id. at p. 558.) The judgment for the developer was affirmed, and the Supreme Court declined to review the case in September 2025.

The remedy is the part most business owners miss. The trial court gave the developer a choice: equitable relief, or $317,683 in damages if it gave up its rights to the project. The developer chose the equitable remedy. The judgment declared the City's terminations invalid and extended the construction deadline by two and a half years. (Id. at p. 541.) When the contract is worth more than any damages number a court will award, the covenant can be a path back to the deal itself.

The other lesson is about evidence. The Oakland Bulk judgment was built from unanswered letters, delayed responses, and the gap between the City's stated reasons and the real one. A client who thinks the other side is slow-walking a contract should start keeping that record now, not after the termination notice arrives.

2025 and 2026: two claims that ended at the pleading stage

The most common reason a covenant claim fails is that the defendant did exactly what the contract said it could do. Two recent published decisions show how quickly that ends a covenant claim.

In Coyote Aviation Corp. v. City of Redlands (2025) 111 Cal.App.5th 955, 978, an airport tenant argued that the city had led it to believe its lease ran until September 2020. The signed amended lease said April 4, 2020, and required written notice 45 days before expiration to exercise an option to extend. The tenant never sent the notice. The Court of Appeal held that the covenant cannot contradict an express term, and that nothing the city did prevented the tenant from reading its own lease and sending the notice. The demurrer was sustained without leave to amend.

In Y.P. v. Wells Fargo Co. (2026) 119 Cal.App.5th 1069, a lawyer deposited a $99,700 cashier's check from a purported client, was told by a bank employee that it had cleared, and wired $89,730 to the client. The check was fake, and the bank charged back the full deposit. His covenant claim argued that the bank should have protected him. The account agreement said deposits were provisional until final settlement and could be charged back, and it warned business customers not to deposit checks from people they did not know. The covenant could not require the bank to do what the agreement said it did not have to do. That claim was dismissed. A separate negligent misrepresentation claim, based on the employee's statement that the check had cleared, was allowed to go forward.

The practical point: if your theory is that the other side should have done something the contract does not require, or should not have done something the contract permits, you do not have a covenant claim. You may have a different claim, as the lawyer in Y.P. did. Find it before you file.

2024: a hard position on a disputed clause is not bad faith

In VFLA Eventco, LLC v. William Morris Endeavor Entertainment, LLC (2024) 100 Cal.App.5th 287, 312-313, a promoter paid $6 million in deposits to book three artists for a June 2020 festival in Los Angeles, then cancelled under COVID restrictions. The force majeure clause let the artists keep the deposits if they were otherwise ready, willing, and able to perform. The promoter sued for the money and pleaded the covenant, pointing to an agent's description of the festival as a "money grab" and other comments it called bad faith.

The Court of Appeal held that both sides had taken a hardline but good faith position on the clause, which each was entitled to do, and that the pandemic, not the artists, had defeated the promoter's expectations. Insisting on your reading of a contract is not a breach of the covenant, even when the reading turns out to be worth $6 million to you.

The older cases that still decide the close calls

Sham discretion. In Locke v. Warner Bros., Inc. (1997) 57 Cal.App.4th 354, 364-365, a studio had discretion to accept or reject a director's projects. Evidence showed executives had decided never to work with her, whatever she submitted. Discretion to reject on subjective grounds does not include the right to refuse categorically and go through the motions. The dissatisfaction has to be honest. The same reasoning reaches approval rights, satisfaction clauses, and consent provisions.

Unfettered discretion. Where a contract gives a party a choice "at its election" and has other consideration to support it, courts will not imply a duty to exercise the choice in good faith. (Third Story Music, Inc. v. Waits (1995) 41 Cal.App.4th 798, 808.) The label owed no duty to market the recordings because it had guaranteed minimum payments either way. Courts imply good faith into a discretion clause only when a literal reading would make the whole contract illusory.

Negotiations. There is no duty to negotiate in good faith in California unless the parties agreed to one. Years of talks impose no obligation not to walk away. (Racine & Laramie, Ltd. v. Department of Parks & Recreation (1992) 11 Cal.App.4th 1026, 1034-1035.) A letter of intent with an express good faith clause changes that. A term sheet usually does not.

Express rights exercised as written. In Carma, a landlord used an express recapture clause to terminate a lease and keep the increased rent for itself after the tenant proposed a sublease. Conduct expressly permitted by the lease and "clearly within the parties' reasonable expectations" can never violate the covenant. (Carma, supra, 2 Cal.4th at p. 376.) The tenant lost.

What a covenant win is worth

Because the covenant is a contract term, the remedy is a contract remedy. The Supreme Court refused to extend tort damages to covenant claims in employment in Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 684, 700, and in construction performance bonds in Cates Construction, Inc. v. Talbot Partners (1999) 21 Cal.4th 28, 43, 60. Insurance is the only exception the Court recognizes. Our guide to insurance bad faith claims covers it.

For a business plaintiff, that means expectation damages, foreseeable consequential damages, prejudgment interest, and fees if the contract has a fee clause. Our article on breach of contract damages explains how those are measured. Where damages are inadequate, Oakland Bulk shows that declaratory relief and specific performance are available too.

If the conduct was truly fraudulent, the route to tort damages runs through a fraud claim, not the covenant. The Supreme Court held in 2024 that fraudulent concealment during a contract can survive the economic loss rule when its elements can be proved independently of the contract and the harm was beyond what the parties contemplated. (Rattagan v. Uber Technologies, Inc. (2024) 17 Cal.5th 1.) Our page on the economic loss rule covers that line.

The limitations period follows the contract: four years for a written contract, two for an oral one. (Code Civ. Proc., §§ 337, 339.)

Where business owners run into this

Commercial leases. Consent to assignment or sublease, approval of alterations, recapture rights, and development milestones are the classic discretion points. Oakland Bulk is a lease case. So are Carma and Coyote Aviation, and they came out the other way. See our guide to commercial lease disputes.

Distribution, licensing, and supply agreements. "Best efforts," output and requirements terms, and exclusivity provisions all depend on one side's discretion over volume or promotion. A distributor that buries your product to favor its own line is the typical covenant defendant.

Earn-outs and deferred price. A buyer that runs the acquired business to miss the earn-out targets is exposed, unless the purchase agreement gives it sole discretion over operations. Drafting decides these cases before they are filed.

Banking and lending. Y.P. is a reminder that account and loan agreements are written to allocate risk to the customer. Covenant claims against banks rarely survive the express terms.

LLCs and partnerships. Capital calls, distributions, and management decisions involve discretion, and the covenant often overlaps with fiduciary duty, which carries broader remedies. Our page on breach of an LLC operating agreement covers that setting.

How I evaluate the claim before pleading it

I ask four questions. Does the contract give the other side discretion, or a condition it controls? If not, the claim has no foundation. Does the contract expressly permit what the other side did? If so, stop, as the plaintiffs in Coyote Aviation and Y.P. should have. Is there evidence of deliberate conduct: emails, delays, shifting explanations, a motive the contract does not support? Oakland Bulk had all of it. And does the covenant count add anything to the breach of contract count? If it repeats the same acts and seeks the same damages, a court will disregard it. (Careau, supra, 222 Cal.App.3d at p. 1395; Guz, supra, 24 Cal.4th at p. 352.)

On defense, the first move is almost always a demurrer built on the express terms. If the contract authorized the conduct, the claim ends there. If the plaintiff was itself in material breach, that may excuse performance altogether.

For drafting, a party that wants discretion should say so expressly, state that it is sole and absolute, and make sure other consideration supports the contract. A party that wants protection should write an objective standard into the clause, such as consent "not to be unreasonably withheld," rather than rely on a term a court may refuse to imply.

Frequently asked questions

What did the court decide in Oakland Bulk and Oversized Terminal v. City of Oakland?

The Court of Appeal held in 2025 that the City breached the implied covenant in a 66-year ground lease. It failed to cooperate with the developer, ignored its communications, and built a record to terminate the lease, even though no single act violated an express term. The judgment declared the terminations invalid and extended the construction deadline. The Supreme Court declined review in September 2025.

Does a "sole discretion" clause defeat an implied covenant claim?

Often, but not always. Courts will not imply a good faith limit on an express grant of unfettered discretion when the contract is otherwise supported by consideration. They will imply one when a literal reading would make the contract illusory, and they still require that a subjective judgment be honestly held.

Is refusing to renegotiate a contract a breach of the implied covenant?

No. California imposes no duty to negotiate a new or amended contract in good faith unless the parties agreed to one, for example in a letter of intent or an existing contract that calls for good faith renegotiation.

Can insisting on my reading of a disputed clause be bad faith?

Not if the position is held in good faith. In VFLA Eventco (2024), the Court of Appeal held that both sides were entitled to take hardline positions on a force majeure clause, and that doing so did not breach the covenant.

Why are implied covenant claims dismissed on demurrer?

Usually because the conduct alleged is expressly permitted by the contract, or because the covenant count merely repeats the breach of contract count. The covenant claims in Coyote Aviation (2025) and Y.P. v. Wells Fargo (2026) both failed on the first ground.

Can I get the contract back instead of damages?

Sometimes. In Oakland Bulk, the trial court offered the developer either damages or equitable relief, and the developer chose reinstatement of the lease with an extended deadline. Specific performance and declaratory relief are available where damages are inadequate.

What is the statute of limitations for breach of the implied covenant?

The same as the underlying contract: four years for a written contract under Code of Civil Procedure section 337, two years for an oral contract under section 339.

This article is provided for general informational purposes and is not legal advice. Case law current as of November 2026.

Need help? Contact Kolmogorov Law, P.C. at (909) 235-6116 or visit kolmogorovlaw.com to schedule a consultation with our business litigation team in Irvine, California.