The Implied Covenant of Good Faith and Fair Dealing in New York: A Guide for NYC Business Owners
- Reza Yassi
- 5 days ago
- 8 min read
You sign a ten-year exclusive distribution agreement to sell a manufacturer's products throughout the five boroughs. The contract gives the manufacturer sole discretion to approve your marketing plans. For five years, everything runs smoothly. Then the manufacturer's new owner decides it wants to sell direct in New York City, starts rejecting every marketing plan you submit, and uses your inactivity as grounds to terminate. The express terms of the contract look like they let the manufacturer do exactly what it did. You're not powerless. The implied covenant of good faith and fair dealing in New York is one of the most underused tools in commercial litigation — and one of the most misunderstood.
At Yassi Law PC, we handle $1M–$10M commercial disputes across Manhattan, Brooklyn, Queens, the Bronx, Staten Island, Nassau County, and Suffolk County. The implied covenant comes up constantly in distribution agreements, joint ventures, condo sponsor disputes, requirements contracts, and any deal where one party has discretion over performance. Here's what every NYC business owner should understand before threatening — or defending against — an implied covenant claim.
What is the implied covenant of good faith and fair dealing in New York?
The implied covenant of good faith and fair dealing in New York is a doctrine that reads an unwritten promise into every contract: neither party will do anything to destroy the other side's right to receive the benefits of the bargain. It exists in every commercial agreement governed by New York law, whether the parties wrote it down or not. You can't contract out of it.
Under New York law, when a contract grants one party discretionary authority, that discretion must be exercised in good faith — meaning the decision must be reasonable and non-arbitrary.
That principle now governs essentially every commercial contract in New York. In the New York Commercial Division, complex business cases routinely involve good-faith disputes alongside breach claims because the covenant fills the gaps that no contract drafter can fully anticipate. Think of it this way: the express terms are the skeleton; the implied covenant is the connective tissue that keeps a party from gaming the contract.
When does the implied covenant create an independent claim versus a duplicative one?
The implied covenant supports an independent claim only when the conduct you're complaining about is not already covered by a straight breach-of-contract claim. This is the doctrine's biggest trap. New York courts routinely dismiss implied covenant claims as duplicative when plaintiffs simply re-plead their breach claim under a different label.
It is well established that the implied covenant of good faith and fair dealing can support a claim where one party's deliberate inaction — even absent an express contractual deadline — deprives the other party of a benefit they had bargained for. This principle applies, for example, where a condo sponsor sells an initial wave of units but then withholds remaining inventory, thereby preventing the building's transition to unit-owner control that early purchasers had reasonably expected.
Compare that with the typical losing case. You sue your supplier for failing to deliver under section 4.2 of the contract, then add a count alleging the supplier breached the implied covenant by failing to deliver. The second count goes nowhere. The Appellate Division, First Department, has repeatedly held that an implied covenant claim covering the same conduct and seeking the same damages as a breach claim must be dismissed. Most NYC business owners miss that you cannot use the implied covenant as a backup theory for the same set of facts — it must reach conduct the express terms don't already address.
If you're considering an implied covenant theory, the threshold question is always: what conduct am I challenging, and is that conduct already captured by an express promise in the contract? If the answer is yes, plead breach and move on. If the answer is no — but you've still been deprived of a contractual benefit — the implied covenant may be your strongest theory. This analysis is similar in spirit to how courts approach pleading fraud alongside breach of contract: the second theory has to do real work that the first one can't.
How does the implied covenant apply to discretionary decisions in your contract?
The implied covenant has the most bite when one party holds discretion over how the contract gets performed. New York courts apply the covenant to prevent that discretion from being exercised arbitrarily, irrationally, or in bad faith. This is where substantial distribution disputes get decided.
Common NYC scenarios where discretion-based good faith claims arise:
A franchisor with sole approval over new locations rejects every site you propose to push you out
A licensor sets royalty audit standards so onerous they swallow your margin
A lender with discretion over loan modifications denies relief to force a default
A buyer in a requirements contract suddenly buys nothing while continuing to sell the underlying product
Under New York law, even where a party has contractual discretion, the implied covenant requires that discretion to be exercised consistent with the parties' reasonable expectations. Discretion is not a license to torpedo the deal.
For NYC business owners, the practical takeaway is this: if your contract gives the other side discretion — over approvals, audits, terminations, allocations, or sourcing — that discretion comes with a built-in reasonableness check. When you draft, you should think hard about whether you want broad discretion (which invites good faith litigation) or specific objective criteria (which can be enforced cleanly). When you litigate, you should look for any contractual lever the other side pulled and ask whether the pull was rational.
What are the limits of the implied covenant in New York?
The implied covenant has hard limits, and most failed claims fail because they push past them. The doctrine cannot rewrite a contract you regret. It cannot impose obligations the parties never agreed to. And it cannot override clear express terms.
It is well established under New York law that the implied covenant of good faith and fair dealing cannot create independent obligations that contradict or add to the express terms of a contract. Where an at-will employment agreement permits either side to terminate for any reason, the implied covenant will not transform that into a for-cause requirement.
The doctrine also will not bail you out when the contract is silent on price. Under UCC § 2-305, a sale-of-goods contract with an open price term must be performed in good faith — but for non-goods commercial contracts in New York, courts won't use the covenant to manufacture pricing terms the parties never agreed on. You can't ask a judge to write the deal you wish you'd negotiated.
A few other guardrails worth knowing. The covenant doesn't apply to purely discretionary decisions where the contract makes clear the discretion is unfettered — for example, a "sole and absolute discretion" clause is harder (though not impossible) to attack. Experienced commercial litigators watch for whether a discretionary clause includes the words "sole," "absolute," or "in its discretion" without qualifiers — those modifiers narrow but do not eliminate the implied covenant. The conduct must still be neither arbitrary nor irrational. The covenant also cannot be used to recover punitive damages on its own, and it does not survive after a contract has been fully performed.
One more critical limit: the parol evidence rule still applies. If you're trying to introduce side conversations to prove bad faith, you face the same evidentiary hurdles that any contract claim faces. We covered those rules in detail in our post on the parol evidence rule in New York.
How should you plead and defend an implied covenant claim in a NYC commercial case?
If you're bringing an implied covenant claim, plead it as a separate count, identify a specific benefit of the bargain you were deprived of, and tie the conduct to discretion the contract granted the other side. Don't repeat the same factual allegations from your breach count and slap a new label on them.
Under CPLR § 3013, your pleading must be sufficiently particular to give the court and the defendant notice of the transactions and occurrences you intend to prove. That means concrete allegations: which decision was made, who made it, when, what discretion the contract gave them, what benefit you lost, and what damages flowed from the loss. Vague allegations that the defendant "acted in bad faith" will not survive a motion to dismiss under CPLR § 3211(a)(7).
If you're defending, your first move is the motion to dismiss. Argue duplication — that the same conduct underlies the breach count and the implied covenant count. Argue that the express terms permit the conduct (which courts treat as fatal to good faith claims). And argue that no specific benefit of the bargain was lost because the plaintiff cannot identify what the contract was supposed to deliver beyond what it actually delivered.
Damages on an implied covenant claim track standard contract damages: you can recover expectation damages — what you would have received had the covenant been observed — subject to the foreseeability and reasonable certainty rules that apply to any breach claim. We walk through those rules in our post on lost profits damages in New York breach of contract cases. Consequential damages waivers in the contract will generally apply to good-faith claims too, which is why drafters often layer them in. Specific performance is theoretically available where damages are inadequate — see our discussion of specific performance in New York commercial contracts — but it's rare in pure good-faith disputes.
One strategic note on venue. Most $1M+ commercial cases involving the implied covenant land in the Commercial Division of New York Supreme Court. The judges there see these claims constantly and have a low tolerance for duplicative pleading. If your implied covenant count looks like a re-skinned breach count, expect it to come out fast. If it's distinct, well-pleaded, and tied to a specific exercise of discretion, you have a real shot. Fee-shifting is generally not available unless your contract provides for it; we cover that ground in our guide to recovering attorney's fees in New York breach of contract cases.
Finally, watch the statute of limitations. Implied covenant claims sound in contract and are subject to the six-year limitations period under CPLR § 213(2). The clock starts when the breach of the covenant occurs, not when you discover it — so don't sit on these claims hoping the discovery rule will save you.
Frequently Asked Questions
Can I sue for breach of the implied covenant if my contract has a strong integration clause?
Yes. An integration clause says the written contract is the complete agreement and bars extrinsic evidence of prior or contemporaneous side deals — but it doesn't eliminate the implied covenant, which is read into every New York contract by operation of law. The covenant lives inside the contract, not outside it, so integration doesn't reach it.
Does the implied covenant apply to at-will commercial relationships?
Yes, but with limits. New York courts apply the covenant to at-will distribution, dealership, and similar commercial arrangements, but the covenant won't override an express right to terminate at will. What it can reach is the manner of termination — for example, terminating right before a commission is earned to avoid paying it, or using sham reasons to mask a discriminatory motive that violates a separate contractual obligation.
How long do I have to bring an implied covenant claim in New York?
Six years from the date of the breach, under CPLR § 213(2). The covenant is treated as part of the contract for limitations purposes, so the contract statute of limitations governs, not the shorter tort periods. Don't assume you have longer because the conduct sounds tortious.
Will a "sole and absolute discretion" clause defeat my good faith claim?
Not automatically. Even where a contract grants sole discretion, New York courts require the exercise of that discretion to be non-arbitrary and not designed to deprive the other party of the fruits of the bargain. The clause raises the bar, but it doesn't eliminate the implied covenant entirely.
The Bottom Line
The implied covenant of good faith and fair dealing in New York is a powerful but narrow tool. It rewards plaintiffs who identify a specific benefit of the bargain lost through the bad-faith exercise of discretion, and it crushes plaintiffs who try to use it as a duplicative backstop for a routine breach claim. Drafting carefully, pleading precisely, and choosing the right battleground are what separate the cases that settle on favorable terms from the ones that get dismissed at the threshold.
If you or your business is facing a commercial contract dispute involving good faith, discretion, or a breach of express terms, the team at Yassi Law PC is ready to help. Call us today at 646-992-2138 for a consultation.
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