The South Carolina Supreme Court has clarified the scope of the covenant of good faith and fair dealing implied in every contract. In Road, LLC v. Beaufort County, Op. No. 28204 (May 15, 2024), the Court held that a party’s obligations under the implied covenant are tied to the rights and duties the parties agreed upon in the contract. The implied covenant does not extend beyond the terms to create new duties not expressly stated or otherwise implied.
South Carolina Courts have long recognized that the law will imply specific terms that are not expressed in a contract. However, these implied terms are applied in only limited circumstances, and typically done when an implied term is necessary to effectuate the intention of the parties. These recognized implied terms are separate and apart from the implied covenant of good faith and faith dealing, first recognized in Commercial Credit v. Nelson Motors, Inc., 247 S.C. 360, 147 S.E.2d 481 (1966). The Commercial Credit Court differentiated between terms implied in a contract and the implied covenant.
Typically, there can be no implied terms when the contracting parties agree that the agreement “contains the full and complete agreement between and among them” and “there are no oral or implied agreements or understandings which are not specifically set forth in this Agreement or in the exhibits thereto.”
Conversely, the implied covenant of good faith and faith dealing applies in every contract. But, how far can the implied covenant stretch? Not beyond governing the manner in which parties to a contract enforce their existing contractual rights and carry out their existing contractual duties. For example, where a contract provides for one party to collect payments on an installment sales contract, the collection must be performed with “reasonable and normal diligence.” See e.g. Commercial Credit, 247 S.C. at 366, 147 S.E.2d at 483. While “reasonable and normal diligence” may not be an expressed term of the contract, it is an implied covenant of the manner in carrying out the duty to collect payments.
However, the Road Court recently declined to extend the implied covenant to facilitate the “purpose” for which the contract was made. In dealing with a land sale dispute, the Road Court noted that identifying the purpose of the contract is really part of the analysis of whether an unexpressed term should nevertheless be implied, i.e. an implied term. Further, the purpose of the contract is to be determined by the court construing its expressed terms, not by permitting witnesses to provide parol evidence of one party’s unilateral personal views. The Road Court held there was no ambiguity in the purpose of the agreement between the parties. Where the purpose of the contract or agreement is explicit, the analysis shifts back to the manner in carrying out any duties articulated by the terms of the contract. However, the actions by one party being disputed were not prohibited by the terms agreement. Therefore, where the agreement needs no clarity in determining the manner in how the obligations are carried out, the covenant of good faith and fair dealing has no place to impose separate duties or obligations of the parties.
The Court’s recent decision provides clarity on contract interpretation and the distinction between implied terms and the implied covenant of good faith and fair dealing. Where parties seek to avoid implied terms being added to a contract, explicit language such as “contains the full and complete agreement between and among the parties” must be used. Further, the implied covenant of good faith and fair dealing—distinct from implied terms—is not a separate obligation or duty imposed in the contract. Rather, the use of the covenant of good faith and fair dealing can only be used to explain the manner in which an obligation or duty—already imposed by the explicit terms of the agreement—shall be carried out.
All parties have an obligation to review and understand the contract terms before signing. The Road decision may create a hurdle for parties who execute contracts without all terms or obligations the contract was intended to have, believing the other party will simply act in good faith and fair dealing.
