The Duty of Good Faith and Fair Dealing

By: Jonathan H. Freiberger

A basic tenet of contract interpretation is that “agreements are construed in accord with the parties’ intent.” Greenfield v. Philles Records, Inc., 98 N.Y.2d 562, 569 (2002) (citations omitted); see also SM Owner, LLC v. Envoy Towers Co., L.P., 245 A.D.3d 973 (2^nd Dept. 2026). It is equally fundamental that the “best evidence of what parties to a written agreement intend is what they say in their writing.” Greenfield, 98 N.Y.2d at 569 (quoting Slatt v. Slatt, 64 N.Y.2d 966, 967 (1985); South Shore Eye Care, LLP v. Lane, 242 A.D.3d 792, 793 (2^nd Dept. 2025). Clear and unambiguous written agreements, therefore, “must be enforced according to the plain meaning of its terms.” South Shore, 242 A.D.3d at 794 (citations and internal quotation marks omitted); see also Greenfield, 98 N.Y.2d at 569.

However, implied in every contract is a covenant of good faith and fair dealing in the course of performance. Singh v. City of New York, 40 N.Y.3d 138, 145 (2023). The covenant ensures that a party to a contract will do nothing to “destroy[] or injur[e] the right of the other party to receive the fruits of the contract.” Mahope Family Ltd. P’ship v. Avgush, 220 A.D.3d 850 (2^nd Dept. 2023) (citations and internal quotation marks omitted). Thus, the duty of good faith and fair dealing requires “that the parties to perform under the contract in a reasonable way.” Cordero v. Transamerica Annuity Service Corp., 39 N.Y.3d 399, 409 (2023) (citation and internal quotation marks omitted). In this regard, where “the contract contemplates the exercise of discretion, this pledge includes a promise not to act arbitrarily or irrationally in exercising that discretion.” Id. (citation and internal quotation marks omitted). Such implied obligations are “in aid and furtherance of other terms of the agreement … [and, therefore, n]o obligation can be implied … which would be inconsistent with other terms of the contractual relationship.” Murphy v. American Home Products Corp., 58 N.Y.2d 293, 304 (1983); see also Cherry Operating LLC v. CPS Fee Co. LLC., 216 A.D.3d 544, 545 (1st Dept. 2023). The covenant may be breached when a party “exercises a contractual right as part of a scheme to deprive the other party of the benefit of the bargain.” Gutt v. North American Partners in Anesthesia, LLP, 237 A.D.3d 1063, 2066 (2nd Dept. 2025) (citation, internal quotation marks and brackets omitted). The Gutt Court also noted that “[t]echnically complying with the terms of a contract while depriving the plaintiff of the benefit of the bargain may constitute a breach of the covenant of good faith and fair dealing.” Id. (citation and internal quotation marks omitted).

For example, 6243 Jericho Realty Corp. v. Autozone, Inc., 71 A.D.3d 983 (2^nd Dept. 2010), involved a lease dispute between a landlord and potential tenant. Under the lease, the tenant had a period of time to obtain certain municipal approvals; absent which the tenant could unilaterally cancel the contract. Having not received the contemplated approvals, the tenant, as permitted under the lease, provided notice of cancellation to the landlord. After trial, the tenant was found to have breached the covenant by failing to make a good faith effort to obtain the approvals. The ruling was affirmed by the Second Department.

Against this backdrop, we discuss Zormati v. Citibank, a case decided on March 25, 2026, by the Appellate Division, Second Department. The plaintiff in Zormati (“Borrower”) borrowed funds from Citibank and secured the repayment obligation with a mortgage on real property. Subsequently, US Bank recorded a mortgage on the same property and, thereafter commenced an action to foreclose its mortgage and named Citibank, but not the Borrower, as a defendant (the “Foreclosure Action”). Citibank defaulted in the Foreclosure Action.

The Borrower commenced the Zormati action and alleged that Citibank breached its loan agreement by failing to the Borrower notice of the Foreclosure Action or otherwise defending the priority of the Citibank mortgage. The motion court granted Citibank’s motion to dismiss the complaint. The Second Department affirmed.

First the Court found that Citibank did not breach the loan agreement because it contained no requirement that Citibank notify the Borrower of the Foreclosure Action or protect the priority of its mortgage.

Second, the Court found that there was no breach of the duty of good faith and fair dealing because:

the defendants demonstrated their prima facie entitlement to judgment as a matter of law dismissing the cause of action to recover damages for breach of the implied covenant of good faith and fair dealing by submitting evidence that established that they did not withhold the benefits of, or seek to prevent the performance of, the loan agreement.

Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.