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Contracts
St. Louis University School of Law
Walsh, Nancy M.

DUTY OF GOOD FAITH AND FAIR DEALING
 
UCC Definition of Good faith=
Ø means honesty in fact in the conduct or transaction concerned = ex: for a merchant, honesty in fact and the observance of reasonable commercial standards of fair dealing
Ø faithfulness to an agreed common purpose/consistency = ex: commercial leases w/ % of gross sales rent clauses
 
UCC Sales of Contracts: §1-102(3) Duty of extension or restriction of contractual freedom
Good faith/diligence/reasonableness cannot be disclaimed by agreement, but parties can determine standards
 
UCC Sales of Contracts: §1-103 Definitions and Index of definition
Good Faith in the case of a merchant means honesty in fact and the observance of reasonable standards of fair dealing in the trade.
 
1.    WHY THE NEED FOR IMPLIED GOOD FAITH
Ø There are gaps in every K
Ø Some are intentional
Ø Usually they are unintentional omissions
Ø Parties have expectations that go beyond the words of a K (sometimes they are reasonable)
 
2.    PRIOR ENCOUNTERS WITH GOOD FAITH
Ø Illusory Promises- Exclusive K Wood v. Lucy
Ø Output K
Ø Requirement K
Ø Franchise situations
 
3.    IMPLIED DUTY OF GOOD FAITH PERFORMANCE
 
“Neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive fruits of K”
 
a.    Good faith implies a promise to make reasonable /best efforts to bring profits in existence
 
Restatement (2nd) of Contracts §205 Duty of good faith and fair dealing
Every K imposes upon each party a duty of good faith and fair dealing in its performance and enforcement
 
UCC Sales of Contracts: §1-203 Obligation of Good Faith
Every K or duty w/I this Act imposes an obligation of good faith in its performance or enforcement.
Ø If minimum rent is low= % on gross receipts of party’s business is more = bad faith
Goldberg v. Levy
Breach of leasehold agreement
F= P entered into a lease agreement to rent some property to D for 9 years @ 13,800/yr plus 10% of the gross receipts of D’s business. Lease provided for minimum rent + % rent made on gross receipts of business. BUT, if total gross sales for any year were below $101,000, D was entitled to terminate lease. B/c business failed under, D gave notice, stopped making payment of rent, and left.
H= Ct held that although there was no express provision preventing D from diverting his business somewhere else, D was obligated to use best efforts to generate profitsWood v. Lucy.
Here, D intended to defraud P= bath faith involved when he stopped paying rent and diverted business.
Standards: D cannot just leave the premises, divert business to another competitor store for the sole purpose of bringing gross receipts below the specified figure.
ANALYSIS= Where the % lease provides no minimum guaranteed rental or a purely nominal guarantee, the tenant is under the implied obligation to conduct business in good faith
Ø Ct looked at nature of deal.
Ø Ct acted as a gap filler and implied a promise on behalf of the other party to use its best efforts. A promise may be lacking and yet the whole writing may be instinct w/ an obligation imperfectly expressed.
Ø Both sides share risk since they don’t know how they’re going to do based on location, bargaining power, nature of retail
Ø You don’t need to violate terms of K to show bad faith= evidence of intentional harm is sufficient
 
Stop & Shop, Inc. v. Ganem
Ø If minimum rent is high = % on gross receipts of party’s business is less = good faith
F= Grocery store lease. Minimum rent $22,000/yr + % of gross sales above $1.27M/yr IF SALES EXCEEDED $3M/yr. Tenant had other chain stores nearby. P(tenant) filed a declaratory judgment action to find out if he could close store w/o breaching K. P ceased operating the store but continued to pay the rent + real estate tax. D filed counter-claim asking (1) to reform lease to continue operations of business, (2) P pay % lease of total gross sales from ALL P’s stores, and (3) general relief
I= Whether there is in the lease an implied covenant to continue operations and not open competing stores and then discontinue operations of this store.
H= Ct held lease agreement did not contain an implied covenant requiring P to continue ops and have competitive stores in the area. No bad faith or intent to defraud in P ceasing to operate business and divert business to other stores. P continued to pay rent # from Levy.
ANALYSIS= If the guaranteed rental provides landlord an adequate return on his investments and the % rental feature is in the nature of a bonus, then no obligation upon tenant as to the manner of conducting business not expressed in lease
Ø Ct looked at the amount of minimum of lease payments and found them substantial
Ø Ct will no imply a covenant to require a party to continue operations for a specific purpose or any purpose at all in commercial leases w/ a gross sale % covenants the implication of the extension of the covenant is clear and undoubted.
Ø Q of intent of parties turns largely on rent provisions. Looked back at time of K was formed & what parties reasonably believed at that time
Ø A K must include any promises which a reasonable person in the position of the promisee would be justified in understanding were included.
Ø Burden of landlord to present evidence of what fair market rent if landlord believes that minimum rental payment did not equal fair market value for him to require tenant to continue operating business
Ø Nothing in lease precluded P from operating other markets in the same area.
Ø Tenant was free to disregard the effect of the lessors of its business decis

fungible goods, are of fair average quality w/ the description, and
(c) Are fit for the ordinary purposes for which such goods are used; and
(d) Run, w/I the variations permitted by the agreement, of even kind, quality, and quantity w/I each unit and among all units involved, and
(e) Are adequately contained, packaged, and labeled as the agreement may require, and
(f)   Conform to the promises or affirmations of fact made on the container and label if any, and
(g) Unless excluded or modified other implied warranty may arise from the course of dealing or usage of trade.
Implied warranty of merchantability-analogous to UCC, new home contract contains an implied warranty that house will meet trade standards for reasonably good construction (note:  not perfect construction!). 
 
UCC Sales of Contracts: §2-315 Implied warranty: Fitness for a particular purpose
Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, there is unless excluded or modified under next section an implied warranty that the goods shall be fit for such purpose. (and buyer did rely)
 
Implied warranty of fitness for a particular use.  Relies on similar evidence.  Say that even if warranty was not expressly stated, it was implied by statements, expertise, plans. 
Think about what damages would be for breaches of these-see the arguments in Jacob & Young v. Kent and materials re cost of completion v. diminution in value in pp. 913- 924.
 
UCC Sales of Contracts: §2-714 Buyer’s damages for breach in regard to accepted goods
(2) the measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been warranted, unless special circumstances show proximate damages of a different amount.
(3) In a proper case any incidental and consequential damages under the next section may also be recovered.
Language identical to that in McGee ref value of hand
 
Step-Saver Data Systems, Inc. v. Wyse Tech
Step-Saver had to show:
–          warranty implied in every transaction, AND