Implied Duty of Good Faith

Question 1

Implied Duty of Good Faith Rule

Answer 1

Rule: All contracts have an implied duty of good faith and fair dealing in performance.

• Good faith emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party.
• Good faith issues that we deal with arise in the context of a dispute not addressed in the contract…good faith decides whether the action violates the purpose of the agreement.
• Parties may not disclaim the duty of good faith by contract, but they can determine the standards by which the performance will be measured.
• Example: Maggie is supposed to build Bates’ custom home. Bates does not give her the plans. It is implied that Bates will give her the plans within reasonable time to build the house.

Question 2

Rule: Contract with “percentage of gross sales” rent clause contains __________.

Answer 2

Rule: Contract with “percentage of gross sales” rent clause contains an implied promise to use reasonable efforts to make profit…failure to do so is a bad faith breach of the contract.

• Goldberg:* So directing customers away from your store A to your other store B, for the purpose of bringing the gross receipts of store A down far enough to terminate contract is not good faith.
• Stop and Shop:* Contract with substantial minimum rent (at or above FMV) does not contain implied duty use reasonable efforts to make profit.

Question 3

Goldberg v. Levy

Answer 3

P entered into a lease to rent property D for 9 years at a price of $13.8K per year, plus 10% of gross receipts of D’s business. If business did not gross excess of $101K, then D could terminate. D conducted business in a manner such that gross receipts were kept below the level stipulated. (Diverted business to another store location).

HOLD: Violation of the covenant of good faith and fair dealing, not absolved from liability. A covenant of good faith and fair dealing is present in every contract, requiring that the party utilize best efforts in order to meet terms.

Question 4

Stop and Shop, Inc. v. Ganem

Answer 4

Parties entered into agreement where P was to rent premises for 13 years and 6 months; rent payment was $22K per year, plus 1 ¼% of gross sales exceeding $1.2 mil. P leased additional premises from D and other parties; % rate would be due only if sales at both locations exceeded $3 mil. K said nothing about how the premises were to be used. P closed the market after 10 years, but continued minimum rent payments. Two additional stores were opened within leased premises. D tried to compel P to continue to operate and pay % of gross sales.

HOLD: No implied covenant to continue operations for a specific purpose, or for any purpose at all, into a commercial lease agreement providing for a portion of the rent to be determined based on the gross sales of the business. Implied condition was not agreed upon by the parties, nor would a reasonable person say that the parties assumed such an implied covenant. D was to demonstrate fair rental value.

Question 5

Considerations in good faith:

Answer 5

1. Motive –> Reasonable commercial justification vs. Party trying to take advantage of gap in agreement
2. Substantial vs. Nominal Rent –> Was base rent just nominal or was there a disparity between fixed rent and rental value?

Question 6

Mutual Life Insurance Co. of New York v. Tailored Woman

(fur dept)

Answer 6

P and D entered into 10 year lease agreement providing for rental of the premises for sale of women’s apparel; fixed minimum payment, plus 4% of gross receipts in excess of $1.2 mil. D maintained a fur dept. Leased additional space in the unpopular 5th floor; second lease did not have gross sales clause, so D moved most profitable department to the 5th floor and built an elevator. Second lease specified that it would have no effect on obligations owed under the 1st agreement.

HOLD: In the absence of fraud or deception, tenant to a commercial lease may conduct business in accordance with general lease provisions in any manner it deems appropriate, consistent with its rights under the K. To the extent that sales were referred from the original premises, for which D paid its employees commissions, P is entitled to a percentage; however, this should not extend to all profits. P should have contracted this.

Not bad faith to use a contract to your advantage as long as you aren’t trying to truly undercut the contract.

Question 7

§205 Duty of good faith and fair dealing

Answer 7

Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.

Question 8

Good faith issues that we deal with arise in the context of

Answer 8

Good faith issues that we deal with arise in the context of a dispute not addressed in the contract

• good faith decides whether the action violates the purpose of the agreement.