Implied Terms and Implied Covenant of Good Faith Flashcards
Default Rules
an attempt to reduce transaction costs in negotiating/drafting a contract
UCC Default Rules
a) Warranties (express and implied—discussed below)
b) Missing Terms
(i) Price term: reasonable price at the time established by the contract for the delivery of goods
(ii) Time term: contractual obligation must be performed within a reasonable time
(iii) Place of delivery: seller’s place of business unless otherwise agreed
Common Law (service/employment contracts) Default Rules
a) Missing price term: reasonable value of services rendered
b) Missing duration term: employment-at-will is default rule (employer may fire and employee may quit at any time for any reason)
Immutable (Default Rules)
something the parties cannot change; mandatory
a) i.e. good faith (R2C 205, UCC 1-305)
Tailored (Default Rules)
special term for specific situation
a) i.e. R2C 204 allows courts to supply terms (Haines)
Majoritarian/Off-the-Rack(Default Rules)
parties can bargain around these, permissive—allows the parties to leave gaps if they want to
a) i.e. open price terms
Penalty (Default Rules)
requires parties to disclose information to the other parties, courts won’t supply these
a) i.e. courts won’t supply quantity terms
Haines
Haines v. City of New York
Open duration contract regarding maintenance and operation of sewage facility. judgement for NYC
1) Three possibilities for duration:
a) Perpetual Duration
b) Terminable at will
c) “Reasonable Time” (R2C §230)
2) Courts hate imposing specific terms, they will apply reasonable standard
3) UCC §2-309 Absence of Specific Time Provision
Good Faith and Fair Dealing
both UCC and Restatement impose. It’s immutable and thus in every contract
1) Definition: “Honesty in fact in the conduct or transaction concerned”
a) Merchants: “honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade”—subjective
2) Good faith only applies to performance of contracts. There is no duty to negotiate in good faith (culpa en contrahendo)
3) When terms are left open—good faith obligation operates
a) Price: UCC §2-305: if contract leaves the price to be fixed by one of the parties, then the specified party must fix the price in good faith (Nanakuli discusses this)
b) Satisfaction Term: whether a party’s obligation is completed is left to discretion of one of the parties—requires good faith
(i) Ex: when purchasing a property and it requires a condition that title be inspected and satisfactory to the buyer, the buyer must inspect and evaluate in good faith
(ii) Quantity:
(a) Output contract (buyer agrees to purchase all of seller’s output for a particular good
(b) Requirements contract (seller agrees to supply buyer with all of buyers requirements for a particular good)
(c) Both of these require good faith with regard to the amount purchased/sold
UCC § 2-306
prohibits any unreasonably disproportionate demand or tender if there is prior course of dealing or the parties contemplated the scope of the contract
(situations to use good faith)
a) Standards dealing with contract formation (Racine)—rare in US
Centronics
Genicom won’t give the undisputed portion of purchase price to Centronics. Contract provides for full payment once disputes are resolves. Centronics calls their withholding a breach of good faith
(Centronics) Two tests regarding bad faith
(Centronics) Two tests regarding bad faith
(i) Summers: When a party acts inconsistent with common standards of decency, fairness, and reasonableness. This is an ex-post test that is very broad and prevents opportunistic behavior
(ii) Burton: recapturing opportunities foregone. This is an ex-ante test, looks at the parties at the time of the contract
b) Johnson says the Burton test is better but most courts prefer Summers
c) You cannot breach good faith unless you have some discretionary power in the agreement
(i) But: if a contract term specifically gives someone the right to act arbitrarily, there is no good faith requirement
