Every contract carries an implied covenant of good faith and fair dealing -- a background term, not separately bargained for, that neither party will exercise its discretion under the contract in a way that deprives the other of the benefit it reasonably expected. The covenant does not add new obligations the parties never agreed to; it polices how the express terms and any discretion they grant are exercised.

Because the covenant fills gaps between what the contract's literal words allow and what its purpose requires, it becomes a common vehicle for disputes over conduct that is technically permitted by the contract's text but defeats what the deal was actually for -- a franchisor exercising an approval right to squeeze out a franchisee, a party manufacturing a pretextual breach to avoid an unfavorable deal. The fight is rarely about whether a party followed the letter of the contract; it is about whether it honored its spirit.

The covenant is interpretive, not additive: it does not override the contract's express terms or create obligations inconsistent with them, and it cannot be used to rewrite a bad bargain into a better one. Where the contract expressly grants a party broad or sole discretion over a term, the covenant still requires that discretion be exercised honestly and not for an improper purpose -- to recapture value the other party was reasonably entitled to expect -- even though it cannot override the discretion itself.

Courts commonly describe bad-faith conduct as including evasion of the spirit of the deal, willful rendering of imperfect performance, abuse of a power to specify contract terms, and interference with or failure to cooperate in the other party's performance. What counts as bad faith is highly fact-dependent and turns on the reasonable expectations the specific contract created.

In most jurisdictions and in most contexts, breach of the implied covenant sounds in contract, not tort, meaning the remedy is ordinarily limited to contract damages rather than tort damages such as punitive or emotional-distress awards. A significant, well-known exception in many states is the insurance context, where insurer bad faith in handling a policyholder's claim is often treated as an independent tort carrying broader damages, reflecting the special reliance relationship between insurer and insured.

Because the tort-versus-contract characterization drives what damages are available, it is frequently the most consequential issue in the case -- often more contested than whether bad faith occurred at all.

Plaintiffs build the claim around a specific contractual discretion or gap the defendant exploited, tying the challenged conduct to a reasonable expectation the contract's purpose created and showing the conduct was not a good-faith business judgment but a deliberate attempt to recapture value or avoid an obligation. Because the claim depends on the contract's structure, plaintiffs typically identify the precise discretionary term at issue rather than alleging bad faith at large.

Defendants attack by showing the challenged conduct was expressly authorized and consistent with the contract's purpose, that any harm flowed from an ordinary business risk the plaintiff accepted, or that the claim is really an attempt to add a term the parties never agreed to -- which the covenant cannot supply. Defendants also frequently move to dismiss a duplicative good-faith claim that adds nothing beyond an ordinary breach-of-contract theory on the same facts.

In Juricratic terms, an implied-covenant claim decomposes into a discretion-scope node (how much latitude did the contract actually grant) and a purpose node (how far did the challenged conduct depart from the reasonable expectations the deal created), with a separate tort-versus-contract gate that changes the modeled damages ceiling depending on jurisdiction and context.

Because the claim often rides alongside an express breach-of-contract theory on the same facts, the model can run both in parallel and show where the good-faith theory adds exposure beyond the express-term claim -- and where it collapses into it as duplicative. These are simulation dials, not a claimed prediction of how a specific court characterizes the conduct.