Implied Terms and the Covenant of Good Faith and Fair Dealing Flashcards
List 8 Doctrines of Good Faith
- Exercise of Discretion
- Spirit v Letter of Contract (Volksgeist Principle)
- Duty to Make Reasonable Efforts
- Doctrine of Prevention
- Honesty in Fact (generally)
- Honest in Fact (involving subjective satisfaction clauses
- Adherence to Commercially Reasonable Standards
- Good Faith CANNOT override Express Contractual provisions
Intro for Test
Every K imposes upon each party a duty of GFFD in its performance and its enforcement and mandates that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the K
Does the covenant of goof faith support an independent cause of action?
No, contrary to popular isconception, the covenant of GFFD does not support an independent causeof action for failure to perform or enforce in good faith. Rather, means that a failure to perform or enforce, in good faith, a specific duty or obligation under the K constitutes a BOC.
Purpose of Covenant of GFFD
prevents parties from exploiting loopholes to deprive the other party of its bargained-for benefit.
Cardozo on GFFD
“The law has outgrown its primitive stage of formalism when the precise word was the sovereign talisman, and every slip was fatal”
GFFD definition
The concept of GFFD does not have, and indeed cannot have a single definition of its own. Good faith, or lack thereof, must be judged in the context from which the claim arose.
H/E, UCC defines as: honesty in fact and the observance of reasonable commercial standards of fair dealing.
Is parole evidence allowed?
Yes, must be allowed in determining whether a breach of covenant of GFFD has occurred b/c not trying to supplement K, only trying to understand the parties intent
Exercise of Discretion
Where a K confers on one party a discretionary power affecting the rights of the other, a duty is imposed to exercise that discretion in good faith and in accordance with fair dealing. A party breaches the covenant if it exerciased its discretion in a manner calculated to undermine the other party’s basic expectations for entering the K
Spirit v Letter of the K (Volksgeist Principle)
Bad faith when calculated effort made to conform one’s conuct to the precise “letter” of the K but undermised the “spirit” of the K either by enabling that party to realize gains that in making K he had implicitly agreed to surrender; or by unfairly denying to the other party the fruits of the K that she reasonably expected to receive.
Duty to Make Reasonable Efforts
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 reasonale efforts
Doctrine of Prevention
Where an obligor’s contractual duty is premised upon the occurrence of an express condition precedent that is not within the oligor’s direct control, good faith implies a promise that the obligor will not take action that actively prevents the condition from occurring
Honesty in Fact (generally)
a duty suggesting that at a minimum lying and other kinds of deception shoudl be regarded as bad faith conduct and proscribed (forbidden by lawl)
Honesty in Fact (involving subjective satisfaction clauses)
When it is a condition of an obligor’s duty that he be subjectively satisfied with obligee’s performance, the subjective standard of honest satisfaction is applicanle. Covenant of GFFD subjects the party on whose satisfaction the other’s rights are conditioned to a subjective test of honest dissatisfaction
Adherence to Commercially Reasonable Standards
requires parties transacting in a particular trade to observe reasonable commercial standards of fair dealing in that trade. Protects the reasonable expectations of parties in light of the background, practices and customs in which the agreement arose
Defense to GFFD
Good Faith Cannot Override Express Contractual Provisions - Courts will not imply any term that conflicts with or contradicts the express terms of the K
2 types of satisfaction clausobjectiees
Utilitarian - governed by objective RPP standard; and
Aesthetic - judged by good faith subjective standard
Which standard applies to satisfaction clause?
The ultimate touchstone of decision cerning which standard applies must be the intent of the parties. Thus, look to actual language of the contract.
Utilitarian Satisfaction Clause
For Ks that call for satisfaction concerning matters of commercial value or uality, operative fitness or mechanical utility
interpreted under RPP standard
Why? commercial value or quality, operative fitness or mechanical utility are features which others are qualified to judge
Aesthetic Satisfaction Clause
for Ks that involve judgment concerning matters of fancy, taste, or judgment.
analyzed under good faith standard
Why: aesthetic works appeal to subjective values which juries are ill fit to judge.
Buyer wants work that will satisfy “her”, not a jury, even a jury of connoisseurs
Only rememdyis to show person is being dishonest in making decision
Illusory Promise
promise in form but not substance carefully worded in such a way that actually doesn’t require the party to do anything
If one of the promises leaves a party free to perform or to withddraw from the agreement at his own unrestricted pleasure, the promise is deemed illusory and it provides no consideration.
But a clause conditioning a party’s contractual obligations on another’s satisfaction does not render the contract illusory.
The application of the implied covenant of GFFD addressed 3 distinct types of situations;
- when K does not provide a term necessary to fulfill the parties’ expectations
- when bad faith served as a pretext for the exercise of a contractual right to terminate; and
- When the K expressly provides a party with discretion regarding its performance
(Seidenberg v Summit Bank)
