Good Faith and Reasonable Expectations

Abstract

The recognition that there is an obligation of good faith in every contract has been regarded as one of the most important advances in contract law in the twentieth century. Nevertheless, a half century after the doctrine’s incorporation into the Restatement Second of Contracts and the Uniform Commercial Code, great controversy and confusion remain about it. A scholarly dispute about the nature of the doctrine framed more than thirty years ago has hardly been advanced, much less resolved. More important, although nearly every court announces its support of the doctrine, often using similar language and familiar sources, many judicial opinions are unclear, confusing, or confused.The controversy and confusion stem from a fundamental misunderstanding about the nature of the good faith obligation. That misunderstanding is a belief that good faith is a special doctrine that does not easily fit within the structure of contract law. Indeed, the doctrine is seen as potentially dangerous, threatening to undermine more fundamental doctrines and the transactions that they are designed to uphold. Because of its dangerousness, good faith needs to be substantially restricted in its application. In particular, the doctrine either needs to be closely tied to the terms of the contract, limited to cases in which a party has willfully violated its obligations under the contract, or both.All of this is wrong. There is nothing special about the doctrine of good faith. It is continuous with the rest of contract doctrine. It is distinct from other doctrines, but only distinct in the same way that the rules about formation are distinct from the rules about consideration. Good faith is simply another embodiment of the basic principle of contract law—the protection of reasonable expectations. The application of that principle through the good faith obligation leads to a proper understanding of the content of the doctrine and a rejection of many of the ways that courts improperly cabin it.Following an Introduction, Part II of this article describes the controversy among scholars and the confusion in the courts about the obligation of good faith. Part III defines the protection of reasonable expectations as the fundamental principle of contract law and illustrates how the principle emanates in various doctrines in ways that resemble its role in good faith. Part IV applies the reasonable expectations principle to good faith and explains how it corrects the errors courts make in applying the doctrine.