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Friday, January 11, 2013

The Implied Duty of Good Faith and Fair Dealing: What Does it Mean for Virginia’s Businesses?

The duty of good faith and fair dealing has its roots in the Uniform Commercial Code (“UCC”), which applies to sales and other commercial transactions, and is now recognized at common law in some form in most jurisdictions. Numerous Virginia state and federal courts have held that the implied duty governs all contracts at common law. However, as the common law continues to evolve, it appears that Virginia courts have described and applied the implied duty in a seemingly contradictory fashion. As a result, what protection the implied duty offers in a contract remains unclear. Nevertheless, the implied duty continues to impact business litigation in Virginia and has altered the outcome of several cases. See Sun Trust Mortg., Inc. v. United Guar. Residential Ins. Co. of North Carolina, 806 F. Supp. 2d 872 (E.D. Va. 2011); Wachovia Bank NA v. Ranson Tyler Chevrolet, LLC, 73 Va. Cir. 143 (Roanoke 2007).

Some Virginia courts have held that breach of the implied duty is an independent cause of action, while others have held that it is merely a factor to be considered as to whether a breach of an express contract term should be further considered a material breach. Historic Green Springs, Inc. v. Brandy Farm, Ltd., 32 Va. Cir. 98 (Louisa County 1993) and Virginia Vermiculite, Ltd. v. W.R. Grace & Co. Connecticut, 156 F.3d 535 (4th Cir. 1998); but see RW Power Partners, L.P. v. Virginia Elec. & Power Co., 899 F. Supp. 1490 (E.D. Va. 1995). Moreover, some courts have held that a party may not exercise contractual discretion in bad faith, even when such discretion is vested solely in that party. Historic Green Springs Inc., 32 Va. Cir. 98; Virginia Vermiculite Ltd., 156 F.3d 535.

Often the express contract either does not address the particular dispute at hand, or applying the contract’s express language seems to give rise to an unfair result, which, the affected party will argue, was not anticipated when the contract was made and that the party seeking to take advantage of the omission or unanticipated application of the contract terms is not acting in good faith. Without such an implied duty, parties may defeat the purpose of a contract without breaching the express terms and suffer no consequences. However, the Virginia Supreme Court has cautioned that the implied duty cannot be the vehicle for rewriting an unambiguous contract in order to create duties that do not otherwise exist. Ward’s Equipment v. New Holland North America, 254 Va. 379 (1997). That is, an implied duty of good faith must yield to the express terms of the contract if the two are inconsistent.  

Virginia courts will likely continue to clarify the role of the implied duty of good faith and fair dealing in contract disputes. In the meantime, businesses should continue to be on their best behavior, and litigants and lawyers can look to the implied duty to help protect the legitimate expectations of the parties to a contract and mitigate the often harsh results of classic contract interpretation.

The author, Sara Dajani is an associate attorney at DC region business law firm, Berenzweig Leonard.  Sara can be reached at