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Elements: Breach of Implied Covenant
of Good Faith and Fair Dealing Definition, elements, authorities, remedies, statute of limitations, affirmative defenses, related causes of action by Excerpted from
§11-4:00 Breach of Implied Covenant of Good Faith and Fair
Dealing §4:10 DEFINITION In every contract there is an implied covenant of good faith and fair dealing by each party not to do anything which will deprive the other parties of the benefits of the contract, and a breach of this covenant by failure to deal fairly or in good faith gives rise to an action for damages. Sutherland v. Barclays American/Mortgage Corp., 53 Cal. App. 4th 299, 314, 61 Cal. Rptr. 2d 614 (1997); Harm v. Frasher, 181 Cal. App. 2d 405, 415, 5 Cal. Rptr. 367, 373 (1960); Seaman’s Direct Buying Serv., Inc. v. Standard Oil Co., 36 Cal. 3d 752, 206 Cal. Rptr. 354 (1984), overruled on other grounds, Freeman & Mills, Inc. v. Belcher Oil Co., 11 Cal. 4th 85, 102-03, 44 Cal. Rptr. 420 (1995); see also Witkin, Summary of California Law, Contracts, §743. §4:20 ELEMENTS §4:21 Contract An action for breach of the implied covenant of good faith and fair dealing requires an underlying agreement of some sort (contract, letter of intent, preliminary agreement to use best efforts to agree, etc.). Racine & Laramie, Ltd. v. Dep’t of Parks and Recreation, 11 Cal. App. 4th 1026, 1031-32, 1033 n.4, 14 Cal. Rptr. 335, 338-39, 340 n.4 (1992); Smith v. City and County of San Francisco, 225 Cal. App. 3d 38, 49, 275 Cal. Rptr. 17, 24 (1990); Peterson Dev. Co. v. Torrey Pines Bank, 233 Cal. App. 3d 103, 116, 284 Cal. Rptr. 367, 375 (1991). §4:22 Duty of Good Faith and Fair
Dealing The covenant imposes on each party to the contract the
duty to refrain from doing anything which would render performance of
the contract impossible by any act of his own, and also the duty to do
everything that the contract presupposes that each party will do to
accomplish its purpose. April Enters., Inc. v. KTTV, 147 §4:23 Breach of Implied Covenant A party to a contract breaches the implied covenant of
good faith and fair dealing by interfering with or failing to cooperate
with the plaintiff in the performance of the contract. Witkin, Summary
of California Law, Contracts, §744 (8th ed.); see also Sutherland v.
Barclays American/Mortgage Corp., 53 §4:24 Causation and Damage The breaching party is liable for all damages
proximately resulting from the conduct. Quigley v. Pet, Inc., 162 §4:30 AUTHORITIES §4:31 Contract There is no implied covenant of good faith and fair
dealing during pre-contractual negotiations. Racine & Laramie, Ltd.
v. California Dep’t of Parks and Recreation, 11 The covenant is implied to protect the express
covenants of the contract, not to protect a general public policy
interest that is not directly tied to the contract’s purpose. Racine
& Laramie, Ltd. v. The covenant of good faith and fair dealing is, by
definition, an implied contract term; it has no relation to any
statutory duties which may exist. Smith v. City and §4:31a Discretionary Powers Expressly
Granted in Contract Courts cannot imply the covenant of good faith and fair dealing if it conflicts with a contract’s express grant of discretionary power, unless the literal reading of the provision would render the contract illusory and unenforceable, contrary to the parties’ clear intention. Third Story Music, Inc. v. Waits, 41 Cal. App. 4th 798, 808, 48 Cal. Rptr. 2d 747, 753 (1995); Carma Developers (Cal.), Inc. v. Marathon Dev. Cal., Inc., 2 Cal. 4th 342, 374, 6 Cal. Rptr. 2d 467, 485 (1992); California Lettuce Growers, Inc. v. Union Sugar Co., 45 Cal. 2d 474, 482, 289 P.2d 785, 790 (1955) (one party’s discretionary power was limited by the covenant of good faith and fair dealing where the contract otherwise would be illusory); Halvorsen v. Aramark Uniform Servs., Inc., 65 Cal. App. 4th 1383, 1390, 77 Cal. Rptr. 2d 383, 386 (1998) (written “at-will” employment contract precluded existence of implied contract requiring good cause for termination), rejected on other grounds, Graw v. Los Angeles County Metro. Transit Auth., F. Supp. 2d , No. CV 97-8641 DDP (CWX), 1999 WL 391575, at *2 (C.D. Cal., June 10, 1999). In the following cases, the court refused to invoke the doctrine of good faith and fair dealing to limit discretionary powers expressly granted in a contract: PMC v. Porthole Yachts, Ltd., 65 Cal. App. 4th 882, 891 76 Cal. Rptr. 2d 832, 837 (1998); Balfour, Guthrie & Co. v. Gourmet Farms, 108 Cal. App. 3d 181, 166 Cal. Rptr. 422 (1980); Brandt v. Lockheed Missiles & Space Co., 154 Cal. App. 3d 1124, 201 Cal. Rptr. 746 (1984); Gerdlund v. Electronic Dispensers Int’l, 190 Cal. App. 3d 263, 235 Cal. Rptr. 279 (1987). §4:32 Duty of Good Faith and Fair
Dealing The implied covenant of good faith and fair dealing
imposes reciprocal duties on both parties to a contract. Smith v.
City and The covenant of good faith and fair dealing may be used to aid in the construction of a contradictory and ambiguous contract. April Enters., Inc. v. KTTV, 147 Cal. App. 3d 805, 816, 195 Cal. Rptr. 421, 425 (1983) (covenant of good faith and fair dealing limited a contractual provision allowing the erasure of tapes where another provision gave one party the right to sell the tapes after broadcast). §4:32a Scope of Duty The precise nature and extent of the duty imposed
depends on the contractual purposes. Egan v. Mutual of Omaha Ins. Co.,
24 Good faith is defined as honesty in fact in the conduct or transaction concerned. Cal. Com. Code §1201(19). If the contract is between merchants, good faith is defined as both honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade. Cal. Com. Code §2103(1)(b). The essence of the good faith covenant is objectively reasonable conduct. Badie v. Bank of Am., 67 Cal. App. 4th 779, 796, 79 Cal. Rptr. 2d 273, 284 (1998) (bank’s addition of an entirely new term to credit card account holders by sending a notice of change of terms requiring ADR along with their account statements was not “objectively reasonable” even though account agreement gave bank unilateral and non-negotiable right to change every aspect of performance required under it); Lazar v. Hertz Corp., 143 Cal. App. 3d 128, 141, 191 Cal. Rptr. 849, 857 (1983). The duty of good faith and fair dealing applies to both the performance and the enforcement of the contract. Restatement (Second) of Contracts §205 (1981). Bad faith in the performance of a contract may be overt or may consist of inaction, and may exist even if the actor believes his conduct is justified. Fair dealing may require more than honesty. Restatement (Second) of Contracts §205, cmt. (d) (1981). The obligation of good faith in enforcement extends to the assertion, settlement and litigation of contract claims and defenses. Restatement (Second) of Contracts §205, cmt. (e) (1981). §4:33 Breach of Implied Covenant Breach of specific provision of contract is not a necessary prerequisite to breach of covenant of good faith and fair dealing. Marsu, B.V. v. Walt Disney Co., __ F.3d __, Nos. 97-56547, 98-56151,1999 WL 543733 (9th Cir. July 28, 1999) (Disney’s fulfillment of contract’s express merchandising obligations to enter into certain kinds of licensing agreements and payment of minimum guarantees under the contract did not preclude finding of breach of covenant of good faith and fair dealing); Carma Developers, Inc. v. Marathon Dev. of Cal., Inc., 2 Cal. 4th 342, 373, 6 Cal. Rptr. 2d 467, 486 (1992). §4:33a Construction Contracts In every building contract that contains no express provision to the contrary, there is an implied covenant that the contractor will be permitted to proceed with the construction of the building in accordance with the other terms of the contract without interference by the owner. Kenworthy v. State, 236 Cal. App. 2d 378, 383, 46 Cal. Rptr. 396, 399 (1965) (state made contractor’s performance impossible by first causing a delay and then refusing to extend time for performance when state knew contractor needed to obtain financing before commencing construction, and lender required state’s extension before approving financing). §4:33b Leases When a lease allows assignment or subletting only with the lessor’s prior consent, the lessor may refuse consent only where he has a good faith reasonable objection to the assignment or sublease, even if no provision prohibits the unreasonable or arbitrary withholding of consent. Cohen v. Ratinoff, 147 Cal. App. 3d 321, 330, 195 Cal. Rptr. 84, 89 (1983); see also McWilliams v. Holton, 248 Cal. App. 2d 447, 451, 56 Cal. Rptr. 574, 577 (1967) (lessor breached covenant owed to new tenant by allowing existing tenant to remain in possession of leased premises). A lease provision giving the lessor the absolute
right to terminate the lease if the lessee requests an assignment or
subletting did not violate the covenant of good faith and fair dealing.
Carma Developers, Inc. v. Marathon §4:33c Joint Ventures In a joint venture, the parties owe one another the duty
of fair, open, and honest disclosure. They cannot secure or accept
secret gains by connivance, deceit, or suppression of facts.
Universal Sales Corp. v. California Press Mfg. Co., 20 §4:33d The seller of a company violated the covenant of good
faith and fair dealing and the covenant not to compete under the sale
contract with his buyer by loaning money to his son to establish a
competing business two blocks from the site of the company. Harrison
v. Cook, 213 §4:34 Causation and Damage When it clearly appears that a party has suffered contract damages, the court or jury should apply a liberal rule in determining the damage award, and uncertainty of the exact amount of the damages is no reason to deny all recovery. California Lettuce Growers, Inc. v. Union Sugar Co., 45 Cal. 2d 474, 486, 289 P.2d 785, 793 (1955) (landowner’s claim of damages due to grower’s failure to apply manure to land pursuant to agreement was sufficiently definite to withstand demurrer and summary judgment motion). §4:40 REMEDIES
§4:50 STATUTE OF LIMITATIONS The limitations period is four years for claims based on a written instrument. Cal. Civ. Proc. Code §337(1). For claims based on an oral agreement, the limitations period is two years. Cal. Civ. Proc. Code §339(1). §4:60 AFFIRMATIVE DEFENSES
§4:70 RELATED CAUSES OF ACTION
Kevin Lancaster practices in the
areas of catastrophic industrial injury, premises liability,
professional negligence, products liability and medical malpractice.
Mr. Lancaster served as counsel in the reported cases of Ramirez v.
Nelson, 44 C. 4th 908 (2008); Medina v. Hillshore Partners,
40 Cal. App. 4th 477 (1995); Nichols v. Keller, 15 Cal. App. 4th
1672 (1993); and Rosso, Johnson, et al. v. Superior Court of San
Francisco, 191 Cal. App. 3d 1514 (1987). They are the authors of
California
Causes of Action, from which this article is excerpted. |
