Every contract carries an implied obligation that neither party will do anything to destroy or injure the other’s right to receive the benefits of the agreement. It is invoked constantly and misunderstood as often.
What it does. It constrains the exercise of discretion. Where a contract gives one party a choice — to approve, to set a price, to determine satisfaction, to allocate resources — the covenant requires that the discretion be exercised in a manner consistent with the parties’ reasonable expectations, not arbitrarily or to recapture an opportunity given up in the bargain.
What it does not do. It does not create obligations the contract never contained, override express terms, or import a general duty of fairness. A party exercising an express right — terminating for convenience where the contract permits it — is generally not in breach of the covenant merely because the result is harsh.
Where it succeeds. Earnout cases where the buyer’s conduct reduced the payment. Requirements and output contracts where volumes were manipulated. Exclusive distribution arrangements where the grantor undermined the territory. Discretionary approvals withheld for reasons unrelated to the stated criteria.
Whether it sounds in contract or tort varies by jurisdiction and matters for damages and limitation periods; in most commercial contexts it is a contract claim, and the remedy is contract damages rather than punitive exposure.