Sometimes it is necessary to state the obvious: An employment agreement is a contract that is subject to basic contract principles, interpretation and construction.
Good Faith and Fair Dealing Required
We will often see in employment agreement express covenants not to compete and not to solicit. What is not express in contracts, but implied in the law in many states, is the Covenant of Good Faith and Fair Dealing. For example, Illinois law reads a duty of good faith and fair dealing into all contracts. The duty is implied in every contract. Employment agreements are no exception.
What does “good faith” and “fair dealing mean?” The idea is that whatever contractual discretion a party has, the party must exercise such discretion reasonably and not capriciously or arbitrarily. Good faith is not taking an opportunistic advantage that was not contemplated by the parties when they entered into their agreement.
Not Playing Nicely
An act of bad faith could be where an employer with some discretion under a for-cause termination provision terminates an employee arbitrarily or capriciously for allegedly disreputable behavior. Or it could be where an employer terminates an employee to avoid a payment deadline for stock vesting or bonus payment. An employee example could be where an employee makes his employment contingent on his spouse finding a similar job in the new locale as the employee but the employee and his spouse purposely fail to obtain a new job because the employee has a change of heart and does not want to move.
In short, it is a matter of fair, honest and sincere course of dealing where the parties have some discretion.
Bullet Proof Your Agreement by Expressing Yourself
Courts cannot use this implied covenant to override an express term of an agreement. Nor does this implied covenant ordinarily create a separate cause of action. The courts use the covenant as an aid to interpretation and construction. A well drafted, comprehensive agreement should not fall victim to this covenant.
Without express disavowal in the employment agreement, the implied covenant exists. Accordingly, one party, who believes the other party is engaging in sharp practices by exploiting gaps in their employment agreement, may try to invoke the covenant.