Every contract you sign in Minnesota contains a term neither side drafted, neither side negotiated, and neither side can strike: an implied covenant of good faith and fair dealing. The Minnesota Supreme Court put it flatly in In re Hennepin County 1986 Recycling Bond Litigation, 540 N.W.2d 494, 502 (Minn. 1995):
Under Minnesota law, every contract includes an implied covenant of good faith and fair dealing requiring that one party not “unjustifiably hinder” the other party’s performance of the contract.
“Every contract” — with one glaring exception, and it happens to be the contract more Minnesotans sign than any other. For as long as the court has considered the question, it’s refused to read the covenant into employment contracts. The deal that governs your paycheck is the one place the promise nobody wrote doesn’t exist.
There’s no implied-covenant statute to look up. This doctrine lives in the case law, so that’s what this article is built from, almost entirely. Here’s where the covenant came from, what it actually forbids, what it won’t do for you, and how I plead it when a counterparty performs the letter of a contract while strangling its purpose.
It took the supreme court twenty years to commit
The history takes two minutes, and it’s worth them, because opposing counsel still occasionally cite the older cases as if the question were open.
In 1975, it was open. In Wild v. Rarig, 302 Minn. 419, 441, 234 N.W.2d 775, 790 (1975), the court observed that some jurisdictions imply a condition of good faith in all contracts, noted that Minnesota’s Uniform Commercial Code already supplied one for sales contracts by statute, acknowledged that Haase v. Stokely-Van Camp had read good faith into a particular non-sales contract — and then ducked the general question: “Whether this court will read such a condition of good faith into all contracts has not yet been decided.”
By 1984 the court was implying the condition without ceremony. Zobel & Dahl Construction v. Crotty, 356 N.W.2d 42, 45 (Minn. 1984), a construction dispute, stated that “every contract contains an implied condition that each party will not unjustifiably hinder the other from performing.” The facts of Zobel are the doctrine in miniature, and I use them with clients constantly. A homeowner refused to let the builder back onto the property to finish punch-list repairs unless the builder first waived its mechanic’s lien rights. The builder was willing to do the work. The owner made the work impossible, then complained it wasn’t done. The jury found the owner in breach, and the supreme court affirmed. Nobody had written “the owner shall allow the builder onto the land” into the contract. Nobody needed to.
Hennepin County in 1995 turned the Zobel condition into the general covenant quoted above, and it added a piece of mechanics that matters: the covenant claim doesn’t require proof of an express breach first. As the court put it, “a claim for breach of an implied covenant of good faith and fair dealing implicitly assumes that the parties did not expressly articulate the covenant allegedly breached.” 540 N.W.2d at 503. That sentence earns its keep at the motion-to-dismiss stage. The covenant isn’t riding on some other breach. It is the breach.
What the covenant forbids — and the definition of bad faith
Minnesota’s version is narrower than the free-floating “fairness” duty clients imagine. The verb that does the work is hinder: one party may not unjustifiably obstruct the other’s performance. The court of appeals supplied the working definition of the mental state in Sterling Capital Advisors, Inc. v. Herzog, 575 N.W.2d 121, 125 (Minn. App. 1998):
“Bad faith” is defined as a party’s refusal to fulfill some duty or contractual obligation based on an ulterior motive, not an honest mistake regarding one’s rights or duties.
Two consequences fall right out of that, and they dispose of most weak covenant claims before I ever draft one.
An honest mistake isn’t bad faith. In Sterling itself, shareholders who rejected purchase offers after allegedly being misled by skewed financial analyses had — at worst — mistakenly rejected the offers. Mistake, even negligent mistake, doesn’t carry an ulterior motive, and the claim failed. 575 N.W.2d at 125–26.
And exercising a right the contract gives you isn’t bad faith either. Burgmeier v. Farm Credit Bank of St. Paul, 499 N.W.2d 43, 50 (Minn. App. 1993), said it about a foreclosing lender: “A lender does not act in bad faith by asserting or enforcing its legal and contractual rights.” Sterling applied the same rule to any contract party, 575 N.W.2d at 125, and rejected a covenant claim against shareholders who invoked an express right to reject any and all offers. If the contract hands your counterparty an absolute right to walk, terminate, or refuse, then their walking, terminating, or refusing is what you agreed to. The covenant doesn’t renegotiate it. I’ve had to give that news to more than one client holding a contract with a termination-for-convenience clause, and it never goes over well. The time to fight an absolute discretion clause is at the drafting table, not in the complaint. (For what Minnesota law won’t let parties agree to at all, see my article on unenforceable contract terms.)
What gets through those two filters is the real cause of action: a party with an ulterior motive using its position to choke off the benefit it promised. The owner in Zobel holding site access hostage for a lien waiver. A party frustrating the condition precedent its own obligation depends on — Hennepin County reaffirms that a party “cannot take advantage of the failure of a condition precedent when the party itself has frustrated performance of that condition.” 540 N.W.2d at 502–03.
What the covenant won’t do for you
Three hard limits, each with a pinned citation, because this is where covenant claims go to die.
It stays inside the contract. “In Minnesota, the implied covenant of good faith and fair dealing does not extend to actions beyond the scope of the underlying contract.” Hennepin County, 540 N.W.2d at 503. The covenant polices how the parties perform the deal they made. It doesn’t add duties about deals they didn’t make. If the obligation you want to enforce has no anchor in the contract’s actual subject matter, you need a different theory — fraud or misrepresentation if you were deceived into the deal, promissory estoppel if you relied on a promise outside any contract, unjust enrichment if there’s no contract at all.
It sounds in contract, not tort — so no punitive damages. Wild v. Rarig held that a plaintiff suing for breach of contract “is limited to damages flowing only from such breach” except where the breach “constitutes or is accompanied by an independent tort,” and that a malicious motive for breaching is “immaterial in so far as damages for contract breach are concerned.” 302 Minn. at 440–41. The supreme court in Hunt confirmed the point in one line: “In that same case, we rejected bad faith termination of a contract as an independent tort as the basis for punitive damages.” Hunt v. IBM Mid America Employees Federal Credit Union, 384 N.W.2d 853, 858 (Minn. 1986). A covenant claim recovers contract damages — the value of the hindered performance. If the misconduct reaches outside the contract to a genuine tort — a third party inducing the breach, for example — that’s tortious interference, a different claim against a different defendant.
It won’t override an express term. That follows from the scope limit and from Sterling’s holding on absolute rights. The covenant fills gaps in what the parties said. It doesn’t contradict what they said. Where the contract speaks, the contract wins.
The employment exception
Now the exception that swallows more claims than the rule ever pays. Hunt, 384 N.W.2d at 858:
Moreover, we have not read an implied covenant of good faith and fair dealing into employment contracts.
Hunt was a constructive-discharge case: an assistant general manager, an employee handbook, a forced resignation. The court traced its refusal back five decades — “[s]ince at least 1936,” citing Skagerberg v. Blandin Paper Co., promises of “permanent employment” have not converted at-will employment into discharge-for-cause-only or created “an implied covenant of discharge only in good faith” — and then surveyed the sister states that had rejected a good-faith termination duty on policy grounds, from Hawaii to Washington to Wisconsin, before joining them. Id. at 858–59. Ninety years after Skagerberg and forty after Hunt, the rule stands: an at-will employer in Minnesota can terminate without cause, and the fired employee has no implied-covenant claim about how it was done. The employee’s real theories live elsewhere — handbook-based unilateral contract, the whistleblower statute, the discrimination statutes — and none of them is this covenant.
Watch the exact shape of the exception. The employment relationship gets no implied covenant. But businesses sign plenty of contracts about labor that aren’t employment contracts — independent-contractor agreements, staffing agreements, commission agreements with sales agencies. Whether a given agreement lands on the Hunt side of the line is a characterization fight worth having, because the covenant goes wherever the answer goes.
The “sales contract” asterisk is smaller than advertised
You’ll find Minnesota decisions and briefs reciting that the covenant applies to “every non-sales contract” — that phrasing is from Sterling, 575 N.W.2d at 125, glossing Hennepin County. Read quickly, it suggests that contracts for the sale of goods are a good-faith-free zone. They aren’t, and Wild already spelled out why in 1975: sales contracts carry a statutory good-faith obligation under the Uniform Commercial Code, so there was never a gap for the common-law covenant to fill. The current statute, Minn. Stat. § 336.1-304, is one sentence:
Every contract or duty within the Uniform Commercial Code imposes an obligation of good faith in its performance and enforcement.
So Minnesota law really has three territories, not two. Ordinary contracts: common-law implied covenant, Hennepin County. UCC contracts, including sales of goods: statutory good-faith obligation, § 336.1-304. Employment contracts: neither, Hunt. Outside the employment relationship, no Minnesota contract is free of a good-faith duty. The only thing that changes is which body of law supplies it.
One more thing. The Hennepin County opinion itself states the covenant rule without carving out employment or sales at all. The exceptions come from Hunt and from the UCC’s occupation of the sales field, and the “every non-sales contract” formulation is the court of appeals’ summary, not the supreme court’s holding. When I brief this doctrine I cite each proposition to the case that actually holds it, and I’d tell anyone on the other side of my cases to do the same.
How I plead it and how I prove it
Four questions, in order, before the claim goes in a complaint.
- What contract provision was the defendant’s conduct aimed at? The covenant “does not extend to actions beyond the scope of the underlying contract,” so I tie the alleged hindrance to an identified term or condition of the deal — the performance that got choked off, the condition the defendant frustrated. No anchor, no claim.
- Is the defendant’s conduct the exercise of an express right? If the contract authorizes exactly what the defendant did, Sterling and Burgmeier end the claim. I read the contract against my own theory before the other side does.
- What’s the evidence of ulterior motive? Bad faith is a motive standard — “an ulterior motive, not an honest mistake.” Internal emails, timing, a pattern of pretextual objections, a financial incentive to sabotage the deal: motive evidence is the case. An inference that the defendant was sloppy or wrong won’t carry it.
- What are the contract damages? Because Wild limits recovery to damages flowing from the breach, I put a number on the hindered performance at the outset. A covenant claim with real liability and trivial damages is leverage, not a lawsuit.
And keep one pleading note from Hennepin County loaded: a defendant’s argument that “plaintiff has not identified any express term we breached” isn’t a defense to this claim — the covenant claim “implicitly assumes” the parties never wrote the term down. 540 N.W.2d at 503. That single pinned sentence has survived more than one motion to dismiss in my practice.
Madgett Law, LLC
Madgett Law, LLC represents Minnesota businesses and individuals in contract disputes, including cases where a counterparty performed the words of an agreement while gutting its purpose — blocked performance, frustrated conditions, discretion exercised for reasons that don’t survive discovery. Whether that conduct is an actionable breach of the implied covenant or the lawful exercise of a contract right is a question the case law answers with unusual precision, and it’s worth answering before anybody files anything. Call 612-470-6529 or send us a message.
Sources: In re Hennepin County 1986 Recycling Bond Litigation, 540 N.W.2d 494 (Minn. 1995) at 502 (“Under Minnesota law, every contract includes an implied covenant of good faith and fair dealing requiring that one party not ‘unjustifiably hinder’ the other party’s performance of the contract.”), 502–03 (party cannot take advantage of the failure of a condition precedent the party itself frustrated), and 503 (covenant “does not extend to actions beyond the scope of the underlying contract”; claim does not require a prior express breach and “implicitly assumes that the parties did not expressly articulate the covenant allegedly breached”); Zobel & Dahl Construction v. Crotty, 356 N.W.2d 42 (Minn. 1984) at 45 (“every contract contains an implied condition that each party will not unjustifiably hinder the other from performing”) and 46 (owner’s conditioning of site access on lien-rights waiver; jury verdict of breach affirmed); Wild v. Rarig, 302 Minn. 419, 234 N.W.2d 775 (1975) at 441, 234 N.W.2d at 790 (“Whether this court will read such a condition of good faith into all contracts has not yet been decided.”; UCC statutory good faith in sales contracts; Haase v. Stokely-Van Camp read good faith into a non-sales contract) and 440–41 (contract plaintiff “limited to damages flowing only from such breach” except where the breach “constitutes or is accompanied by an independent tort”; malicious motive “immaterial in so far as damages for contract breach are concerned”); Hunt v. IBM Mid America Employees Federal Credit Union, 384 N.W.2d 853 (Minn. 1986) at 858 (“Moreover, we have not read an implied covenant of good faith and fair dealing into employment contracts.”; “In that same case, we rejected bad faith termination of a contract as an independent tort as the basis for punitive damages.”; since at least 1936, per Skagerberg v. Blandin Paper Co., “permanent employment” does not create an implied covenant of discharge only in good faith) and 858–59 (survey of sister jurisdictions rejecting a good-faith termination duty); Sterling Capital Advisors, Inc. v. Herzog, 575 N.W.2d 121 (Minn. App. 1998) at 125 (“Minnesota law does, however, impose an implied covenant of good faith and fair dealing into every non-sales contract to prevent one party from unjustifiably hindering the other party’s performance of the contract.”; “‘Bad faith’ is defined as a party’s refusal to fulfill some duty or contractual obligation based on an ulterior motive, not an honest mistake regarding one’s rights or duties.”; party asserting contract rights does not act in bad faith) and 125–26 (mistaken rejection of offers, even if induced by skewed analyses, is not bad faith); Burgmeier v. Farm Credit Bank of St. Paul, 499 N.W.2d 43, 50 (Minn. App. 1993) (“A lender does not act in bad faith by asserting or enforcing its legal and contractual rights.”); Minn. Stat. § 336.1-304 (“Every contract or duty within the Uniform Commercial Code imposes an obligation of good faith in its performance and enforcement.”).
This article is general legal information about Minnesota law. It is not legal advice, it does not create an attorney–client relationship, and it does not promise or imply any particular outcome. Statutes, rules, and case law change; verify current authority before relying on any of it.