Good Faith and Fair Dealing Flashcards
“Spirit” v. “Letter” of Contract (Volksgeist Principle):
A party acts in bad faith when he makes a calculated effort to conform his conduct to the precise “letter” of the contract but nonetheless undermines the “spirit” of the contract — either by enabling that party to realize gains that in making the contract he had implicitly agreed to surrender or by unfairly denying to the other party the fruits of the contract that she reasonable expected to receive. This principle can apply in situations where a party seeks to exploit semantic lapses in a contract to undermine one of the other party’s chief purposes for entering the contract. See Seidenberg and Locke.
Duty to “Make Reasonable Efforts”
The duty of good faith gives life to seemingly illusory promises by presuming that the parties intended their agreements to have “business efficacy” and thus implying the promisor assumed a duty “to make reasonable efforts.” Wood and Seidenberg involved generic promises to “seek business opportunities” for their contracting partners. Prior to the advent of the covenant of good faith, courts would have regarded these “promises” as illusory because they did not prescribe any actual duties to the promisor. Thus, in both cases the courts would have regarded the contracts as invalid for want of consideration. Today, courts regard these as “real” promises charging the promisor with an implied duty to make reasonable efforts to facilitate the stated goal. See Wood and Seidenberg.
Doctrine of Prevention:
Where an obligor’s contractual duty is premised upon the occurrence of an express condition precedent that is not within the obligor’s control, good faith implies a promise that the obligor will not take action that actively “prevents” the condition from occurring. See Oppenheimer (pp. 795-96). Example. Buying a house conditioned on getting a loan–but never applying for the loan.
Honesty in Fact (generally):
Good faith is said to entail a duty of “honesty in fact” suggesting that at a minimum lying and other kinds of deception should be regarded as “bad faith” conduct.
Honesty in Fact (involving subjective satisfaction clauses):
When it is a condition of an obligor’s duty that he be subjectively satisfied with respect to the obligee’s performance, the subjective standard of honest satisfaction is applicable. Where the contract involves matters of fancy, taste, or judgment, the promisor is the sole judge of his satisfaction. The covenant of good faith and fair dealing subjects the party on whose “satisfaction” the other’s rights are conditioned to a subjective test of honest dissatisfaction. This means that the obligor owes the obligee a duty to be “honest in fact” if he claimed he was dissatisfied with his work. If he was honestly dissatisfied, no court can question his decision regardless of how unreasonable it might be. But if he was dishonest when he claimed to be dissatisfied, he breached the duty of good faith and will not be relieved of his contractual obligations. See Locke.
Commercially Reasonable Standards:
Courts have concluded that the covenant of good faith requires parties transacting in a particular trade to observe reasonable commercial standards of fair dealing in that trade. The covenant protects the reasonable expectations of parties in light of the background practices and customs in which the agreement arose. See Nanakuli.
Good Faith” Cannot Override Express Contractual Provisions:
The courts have held that the covenant of good faith cannot override an express term in a contract. Courts will not imply any term that conflicts with the express terms of the agreement. See Seidenberg
