Covenant of Good Faith and Fair Dealing

If you sign a contact, you and the other parties signing are automatically subject to the covenant of good faith and fair dealing, an implied principle that holds parties to a standard of fairness and honesty in carrying out the contract.

The covenant does not create or impose new obligations on parties to a contract; it applies to the how of the parties’ behavior, not the what. This is an important distinction that was reinforced in a 2024 South Carolina Supreme Court decision, Road, LLC. v. Beaufort County (find it here), which we’ll look at below.

But first, more about the covenant of good faith and fair dealing, and what it does and doesn’t do.

The Covenant of Good Faith and Fair Dealing

The concept of the covenant of good faith and fair dealing comes from English common law and is now an implied covenant in agreements in American jurisprudence. “Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement,” according to Section 205 of the Restatement (Second) of Contracts, a legal resource on contract law used by legal professionals across the country.

A key aspect of the covenant is that a party must not undermine or interfere with the other party’s ability to fulfill their obligations under the agreement or to benefit from it. A party who intentionally behaves in such a way is in breach of the covenant.

The covenant of good faith and fair dealing does not mean that a contract itself or its terms are fair. That is, just because one party believes the contract isn’t fair, that doesn’t mean the other party has violated the covenant of good faith and fair dealing.

This is the issue in the Road case. Essentially, the plaintiff did not like how a deal turned out, but does that necessarily mean another party breached the covenant of good faith and fair dealing? Let’s see what the court said.

Did Beaufort County Violate the Covenant of Good Faith and Fair Dealing? The Road case

The background to Road, LLC v. Beaufort County (2024) is long and rather convoluted, so we’ll just cover the most pertinent facts here.

In 2006, a developer purchased some undeveloped waterfront property in Beaufort County with the intention of developing it. The 229-acre property is a peninsula connected to the mainland via an access road on a narrow isthmus.

Two lawsuits soon arose from this, one of which was about Beaufort County denying the developer’s request to relocate and improve the access road. Both lawsuits were settled in a 2011 agreement (the Settlement Agreement) which meant the developer could continue developing the property.

Road, LLC (Road) was not a party to the Settlement Agreement. But it stepped in at this point to help out the developer by buying an 0.85-acre parcel of land at the end of the access road from the neighbors for $1.3 million. The developer agreed to buy back that same parcel of land from Road for $5 million once development was complete, giving Road a nice profit.

Here’s where it gets interesting. The developer defaulted on the loan for the peninsula property before developing it, so the lender ultimately took possession of it. Beaufort County then purchased the peninsula property with the express intention of preserving it and not allowing further development.

Road sued.

The Lawsuit: Road Contends Beaufort County Breached the Covenant

Road, LLC and Pinckney Point, LLC (the original 2006 purchaser of the peninsula property) sued Beaufort County, alleging (among other things) that the County breached the implied covenant of good faith and fair dealing. The matter eventually went to the Supreme Court of South Carolina, which issued its decision in May 2024.

Road contended that all parties to the Settlement Agreement expected the peninsula property to be developed eventually, even if not by the original developer. Road also argued that facilitating the development of the peninsula property was, in fact, the purpose of the Settlement Agreement.

By purchasing the land with the express intent of not developing it – and doing so quickly, without allowing another developer the chance to see and purchase it – Beaufort County effectively destroyed Road’s opportunity to sell the 0.85-acre parcel at the expected profit in the future. This, Road contended, constituted a breach of the covenant of good faith and fair dealing.

The question before the supreme court boiled down to this: Did the Settlement Agreement impose an obligation on Beaufort County not to interfere with Road’s opportunity to find another developer for the peninsula property?

The court’s answer: No.

Beaufort County Did Not Breach the Covenant

“The implied covenant of good faith and fair dealing cannot create new contractual duties not already expressed or implied in the contract,” the court said in its decision, which affirmed the result but not the reasoning of the appeals court.

Continuing: “Rather, the implied covenant serves only to govern the manner in which parties to a contract enforce their existing contractual rights and carry out their existing contractual duties—express or implied.”

The Settlement Agreement did not expressly require Beaufort County to give another developer the opportunity to purchase the peninsula land. The court determined there was no such duty from implied contract terms, either, as the Settlement Agreement contained language stating it was the full and complete agreement between parties. Finally, since, in the court’s words, “the covenant may not be relied on to create new contractual duties not expressly stated or fairly implied in the contract itself,” no such duty existed under the covenant of good faith and fair dealing, either.

Additionally, the court says that the purpose of the Settlement Agreement was not to facilitate the development of the peninsula property, as Road contended. It was clearly to settle the two pending lawsuits regarding the land.

Had Road, LLC been a party to the Settlement Agreement, perhaps the court would have interpreted things differently. It might have found that Beaufort County did indeed violate the spirit of the agreement and its intended purpose. We don’t know for sure. But as it is, unfortunately for Road, it took a gamble and lost.

Takeaway: Contract Language Matters

As we’ve covered many times on this blog before, the language in a contract matters. Do not depend on implied contract terms or the unwritten understanding of the purpose of the agreement. If something is important to you, put it in writing.

For help with contracts, business law, and commercial real estate transactions in South Carolina, call Gem at the Gem McDowell Law Group. Gem and his team help start, grow, and sell businesses across the state. Gem has over 20 years of experience solving problems, preventing mistakes, and helping businesses thrive. Call or contact us today to schedule your free consultation.