Meaning
Implicit obligations that are not explicitly stated in a contract but are legally inferred by arbitration or customary practice govern the behavior of the contracting parties. These unwritten covenants require both parties to act in good faith and deal fairly with each other, ensuring that neither party acts to destroy the right of the other to receive the fruits of the agreement.
Implied Duty
The primary example of these obligations is the implied covenant of good faith and fair dealing. This obligation means that parties cannot use technical loopholes in the contract to avoid their obvious intent. While unwritten covenants are not spelled out in the document, they are enforced to prevent opportunistic behavior that would undermine the commercial purpose of the contract.
This duty ensures that agreements function as intended even when unforeseen circumstances arise.
Dispute Hazard
Disagreements often arise when one party relies on these unexpressed expectations while the other adheres strictly to the written text. Because these unwritten covenants are subjective, proving their existence and scope in a dispute is difficult and expensive. The lack of written records means that resolution depends on interpreting the past behavior and communications of the parties.
This ambiguity increases the risk of protracted disagreements and high legal costs.
Risk Mitigation
Drafting detailed agreements that explicitly outline every material expectation helps minimize reliance on implied obligations. This practice requires specifying the remedies for potential failures and detailing the communication protocols between parties. By leaving fewer items to implication, organizations reduce the likelihood of costly disputes.
