Implied duties are created by judges based on public policy and contractual relationships, a reasonable supplement deemed necessary by interpreting the contract that was made. So if you hire a contractor to build a house, the contractor has an implied duty to build it in a good and workmanlike manner even if the contract is silent on the point. This standard is understood in the trade and promotes confidence in the construction industry.

Often contracts allocate tasks to the parties but fail to spell out how the tasks are to be accomplished. So one party might be responsible for finding office space; another party might be responsible for manufacturing and a third party might be responsible for sales. The implied duty of good faith governs how each party’s discretionary tasks are accomplished: it requires a party with discretion, for example, to exercise that discretion reasonably and in accordance with the reasonable expectations of the parties. So if the party responsible for getting office space rented space from a building it owned at above-market rates, the other party or parties could complain that the party making the rental agreement has violated the obligation of good faith and fair dealing.

Freedom of contract allows people to enter into one-sided contracts. The courts exist to police the bargain made rather than to rewrite parties’ contracts. But some argue that implied obligations ought to be curtailed for the same reason. In our view, this is dangerous. As long as there is a standard to judge conduct, reasonable implied duties commerce. They avoid the necessity to draft long contracts that try to anticipate every contingency and are therefore more efficient for business. They limit the incentives to parties who would rather make money by disadvantaging their contracting partners than by inventing new products or business processes or running a worthwhile business efficiently.

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