Breach of Implied Covenant of Good Faith and Fair Dealing Law Definition Elements California

Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.  Good faith performance of a contract emphasizes faithfulness to an agreed common purpose and consistency with the reasonably justified expectations of the other party. (Major v. Western Home Ins. Co. (2009) 169 Cal.App.4th 1197.)

The fundamental purpose of the implied covenant of good faith and fair dealing is that neither party will do anything which will injure the right of the other to receive the benefits of the agreement. (Id.)


ELEMENT 1: Valid Contract

An action for breach of the implied covenant of good faith and fair dealing requires an underlying agreement of some sort (contract, letter of intent, preliminary agreement to use best efforts to agree, etc.). (Racine v. Laramie, Ltd. v. Department of Parks & Recreation (1992) 11 Cal.App.4th 1026.)

 

No Implied Covenant of Good Faith and Fair Dealings During Negotiations

There is no implied covenant of good faith and fair dealing during pre-contractual negotiations. (Copeland v. Baskin Robbins U.S.A. (2002) 96 Cal.App.4th 1251.)

 

Implied Covenant Functions to Protect Express Covenants of the Contract

The covenant is implied to protect the express covenants of the contract, not to protect a general public policy interest that is not directly tied to the contract’s purpose. (Wolf v. Walt Disney Pictures & Television (2008) 162 Cal.App.4th 1107.)

Implied Covenant Has No Relation to Any Statutory Duties

The covenant of good faith and fair dealing is, by definition, an implied contract term; it has no relation to any statutory duties which may exist. (Kirkpatrick v. Wells Fargo Bank, N.A. (2017) Cal.App.Unpub. LEXIS 4057 (citing Smith v. City and County of San Francisco (1990) 225 Cal.App.3d 38).)

Conflicts with a Contract’s Express Grant of Discretionary Power

Courts cannot imply the covenant of good faith and fair dealing if it conflicts with a contract’s express grant of discretionary power, unless the literal reading of the provision would render the contract illusory and unenforceable, contrary to the parties’ clear intention. (Third Story Music, Inc. v. Waits (1995) 41 Cal.App.4th 798.)

Example

In PMC v. Porthole Yachts, Ltd., the court refused to invoke the doctrine of good faith and fair dealing to limit discretionary powers expressly granted in a contract. 65 Cal.App.4th 882. There, the Court allowed for the buyer to receive deposit of an aborted boat purchase because the contract gave buyer express discretion to cancel for any reason. “The general rule [regarding the covenant of good faith] is plainly subject to the exception that the parties may, by express provisions of the contract, grant the right to engage in the very acts and conduct which would otherwise have been forbidden by an implied covenant of good faith and fair dealing.” (Id.)

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ELEMENT 2: Duty of Good Faith and Fair Dealing

The covenant imposes on each party to the contract the duty to refrain from doing anything which would render performance of the contract impossible by any act of his own, and also the duty to do everything that the contract presupposes that each party will do to accomplish its purpose. (Lueras v. BAC Home Loans Servicing, LP (2013) 221 Cal.App.4th 49.)

The Implied Covenant Imposes Reciprocal Duties on Both Parties

The implied covenant of good faith and fair dealing imposes reciprocal duties on both parties to a contract. (Kransco v. American Empire Surplus Lines Ins. Co. (2000) 23 Cal.4th 390.)

Contradictory and Ambiguous Contracts

The covenant of good faith and fair dealing may be used to aid in the construction of a contradictory and ambiguous contract. (Mitchell v. Exhibition Foods (1986) 184 Cal.App.3d 1033.)

 

Scope of Duty

The precise nature and extent of the duty imposed depends on the contractual purposes. (The McCaffrey Group, Inc. v. Superior Court (2014) 224 Cal.App.4th 1330.)

What is ‘Good Faith?’

Good faith is defined as honesty in fact in the conduct or transaction concerned. Com. Code § 1201(19).

Contract Between Merchants

If the contract is between merchants, good faith is defined as both honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade. Com. Code § 2103(1)(b).

Objectively Reasonable Conduct

The essence of the good faith covenant is objectively reasonable conduct. (Badie v. Bank of Am. (1998) 67 Cal.App.4th 779.) (bank’s addition of an entirely new term to credit card account holders by sending a notice of change of terms requiring ADR along with their account statements was not “objectively reasonable” even though account agreement gave bank unilateral and non-negotiable right to change every aspect of performance required under it).

Applies to Both Performance & Enforcement of the Contract

The duty of good faith and fair dealing applies to both the performance and the enforcement of the contract. (Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342.)

Bad Faith in Performance of a Contract

Bad faith in the performance of a contract may be overt or may consist of inaction and may exist even if the actor believes his conduct is justified. Fair dealing may require more than honesty. (Jacobs v. Tenneco W. (1986) 186 Cal.App.3d 1413.)

 

The obligation of good faith in enforcement extends to the assertion, settlement and litigation of contract claims and defenses. (Dairy Farmers of Am. v. Cacique, Inc. (2011) Cal.App.Unpub. LEXIS 5421.)

ELEMENT 3: Breach of Implied Covenant

A party to a contract breaches the implied covenant of good faith and fair dealing by interfering with or failing to cooperate with the plaintiff in the performance of the contract. (L. Johnson, Inc. v. America West Airlines, Inc. (2003) Cal.App.Unpub. LEXIS 11455 (citing Sutherland v. Barclays American/Mortgage Corp. (1997) 53 Cal.App.4th 299).)

Not Necessary to Show Breach of a Provision of the Contract

Breach of specific provision of contract is not a necessary prerequisite to breach of covenant of good faith and fair dealing. (Avidity Partners, LLC v. State of California (2013) 221 Cal.App.4th 1180.)

Construction Contracts

In every building contract that contains no express provision to the contrary, there is an implied covenant that the contractor will be permitted to proceed with the construction of the building in accordance with the other terms of the contract without interference by the owner. (Kenworthy v. State (1965) 236 Cal.App.2d 378.) (state made contractor’s performance impossible by first causing a delay and then refusing to extend time for performance when state knew contractor needed to obtain financing before commencing construction, and lender required state’s extension before approving financing).

Leases

When a lease allows assignment or subletting only with the lessor’s prior consent, the lessor may refuse consent only where he has a good faith reasonable objection to the assignment or sublease, even if no provision prohibits the unreasonable or arbitrary withholding of consent. (Airport Plaza v. Blanchard (1987) 188 Cal.App.3d 1594.)

Express Provisions of the Contract Do Not Violate Good Faith & Fair Dealing

A lease provision giving the lessor the absolute right to terminate the lease if the lessee requests an assignment or subletting did not violate the covenant of good faith and fair dealing. (Carma Developers, Inc. v. Marathon Dev. Cal., Inc. (1992) 2 Cal.4th 342.)

Joint Ventures

In a joint venture, the parties owe one another the duty of fair, open, and honest disclosure. They cannot secure or accept secret gains by connivance, deceit, or suppression of facts. (Galardi v. State Bar (1987) 43 Cal.3d 683.)

Sale of Business/Covenant Not to Compete

The seller of a company violated the covenant of good faith and fair dealing and the covenant not to compete under the sale contract with his buyer by loaning money to his son to establish a competing business two blocks from the site of the company. (Harrison v. Cook (1963) 213 Cal.App.2d 527.)


ELEMENT 4: Causation and Damage

The breaching party is liable for all damages proximately resulting from the conduct. (PPG Industries, Inc. v. Transamerica Ins. Co. (1999) 20 Cal.4th 310.)

Uncertainty of Exact Amount of Damages Does Not Bar Recovery

When it clearly appears that a party has suffered contract damages, the court or jury should apply a liberal rule in determining the damage award, and uncertainty of the exact amount of the damages is no reason to deny all recovery. (Stevenson v. Dougherty (2013) Cal.App.Unpub. LEXIS 1656 (citing California Lettuce Growers, Inc. v. Union Sugar Co. (1955) 45 Cal.2d 474).)

REMEDIES

Compensatory Damages

Damages for breach of implied covenant of good faith and fair dealing are limited to damages which might reasonably be foreseen by the parties and exclude punitive damages, pain and suffering and/or medical damages. (Quigley v. Pet (1984) 162 Cal.App.3d 877.)

Tort Damages Not Available Except in Insurance Contract

Abolished tort of bad faith denial of contract created in favor of general rule “precluding tort recovery for noninsurance contract breach, at least in the absence of violation of an independent duty arising from principles of tort law. (Freeman & Mills, Inc. v. Belcher Oil Co. (1995) 11 Cal.4th 85.)

STATUTE OF LIMITATIONS

The limitations period is four years for claims based on a written instrument. Civ. Proc. Code § 337(1).

For claims based on an oral agreement, the limitations period is two years. Civ. Proc. Code § 339(1).

AFFIRMATIVE DEFENSES

  Express Covenant Inconsistent with Implied Covenant

Courts cannot imply the covenant of good faith and fair dealing if it conflicts with a contract’s express    grant of discretionary power, unless the literal reading of the provision would render the contract illusory and unenforceable, contrary to the parties’ clear intention. (Third Story Music, Inc. v. Waits (1995) 41 Cal.App.4th 798.)

Defendant Not A Party to Underlying Contract

The implied covenant of good faith only prevents contracting parties from “unfairly frustrating the other party’s right to receive the benefits of the agreement actually made.” Thus, if the defendant is not a party to the underlying contract, he or she will not be governed by the implied covenant of good faith. (Serpa v. California Surety Investigations, Inc. (2013) 215 Cal.App.4th 695.)

Statute of Frauds

Contracts that are for an agreement that by its terms is not to be performed within a year from the making thereof need to be in writing or else they are invalid. Civ. Code § 1624.