The Implied Obligation of Good Faith as a Limit on Contractual Discretion: The New York Approach to Contractual Good Faith Compared to Bhasin

Similar documents
Recent Developments in the Canadian Law of Contract

ARE UNREASONED ARBITRATION AWARDS IRRATIONAL? Robert M. Hall

West Palm Beach Hotel v. Atlanta Underground LLC

GOVERNING LAW AND JURISDICTION CLAUSES Q&A: US (NEW YORK)

Case 6:05-cv CJS-MWP Document 23 Filed 01/18/2006 Page 1 of 12 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF NEW YORK. Defendant.

This is a securities fraud case involving trading in commercial mortgage-backed

Case 3:10-cv RBL Document 40 Filed 04/11/12 Page 1 of 8 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT TACOMA

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA. Before the Court is Twin City Fire Insurance Company s ( Twin City ) Motion for

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT. August Term, 2012

Petron Scientech Inc v. Ronald Zapletal

Inherent Authority of Arbitration Panels to Grant. Attorney s Fees and Costs. Robert M. Hall

BIRCH BROADCASTING, INC. & a. CAPITOL BROADCASTING CORPORATION, INC. & a. Argued: October 14, 2010 Opinion Issued: November 24, 2010

Case 7:14-cv VB Document 25 Filed 03/02/15 Page 1 of 8 : : : :

Case 1:08-cv JSR Document 151 Filed 05/23/16 Page 1 of 14

Case 1:12-cv CM Document 50 Filed 10/26/12 Page 1 of 12

Mohammed Mekuns v. Capella Education Co

IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF WISCONSIN

Case 6:05-cv CJS-MWP Document 77 Filed 06/12/2009 Page 1 of 10

Case 1:07-cv PLF Document 212 Filed 03/31/17 Page 1 of 13 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

1 of 1 DOCUMENT. WEST PALM BEACH HOTEL, LLC v. ATLANTA UNDERGROUND, LLC, Appellant. No UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

FORMATION OF CONTRACT INTENTION TO BE BOUND (ART. 14 CISG) - RELEVANCE OF PRACTICES BETWEEN THE PARTIES (ART. 8(2) & (3) CISG)

Plaintiff, DECISION and ORDER No. 1:14-cv-341(MAT)(JMM) Accadia Site Contracting, Inc. ( Accadia or Plaintiff ),

FILED: NEW YORK COUNTY CLERK 08/26/ :25 PM INDEX NO /2014 NYSCEF DOC. NO. 10 RECEIVED NYSCEF: 08/26/2014

LAW OFFICE OF MARK ROYSNER Mulholland Highway, Suite 382 Calabasas, CA

Case 3:04-cv MLC-TJB Document 71 Filed 07/23/2007 Page 1 of 11 UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY

Are Arbitrators Right Even When They Are Wrong?: Second Circuit Upholds Arbitral Ruling Allowing Implicit Reference to Class Arbitration

NOT FOR PUBLICATION UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Greenberg v DeRosa 2019 NY Slip Op 30046(U) January 2, 2019 Supreme Court, New York County Docket Number: /2018 Judge: O. Peter Sherwood Cases

The Benefits and Pitfalls of Mandatory Mediation Provisions in Commercial Contracts

OF FLORIDA THIRD DISTRICT

Department of Justice Antitrust Division. United States of America v. Charter Communications, Inc., et al.

New York Central Mutual Insura v. Margolis Edelstein

STATE OF MICHIGAN COURT OF APPEALS

CIVIL MINUTES - GENERAL

Bishop v. GNC Franchising LLC

Commencing the Arbitration

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNIA. Plaintiffs,

Case 1:10-cv JHM -ERG Document 11 Filed 12/21/10 Page 1 of 8 PageID #: 387

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION

Aguon v. Continental Micronesia, Inc., 16 ROP 284 (Tr. Div. 2010) SWINGLY AGUON, Plaintiff, CONTINENTAL MICRONESIA, INC., Defendant.

Case 1:15-cv SPW Document 47 Filed 04/05/16 Page 1 of 17 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MONTANA BILLINGS DIVISION

Case 1:14-cv JMF Document 29 Filed 04/20/15 Page 1 of 9. : : Plaintiff, : : Defendants.

From Article at GetOutOfDebt.org

State of New York Supreme Court, Appellate Division Third Judicial Department

American Capital Acquisitions v. Fortigent LLC

Case 2:17-cv AJS Document 50 Filed 06/13/17 Page 1 of 7 IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA

This action comes before the Court following defendants removal of plaintiff s

Case 7:12-cv VB Document 26 Filed 04/18/13 Page 1 of 11 : : : : : :

Case 6:14-cv CEM-TBS Document 31 Filed 01/16/15 Page 1 of 10 PageID 1331

Ferguson v Octagon Credit Inv., LLC 2013 NY Slip Op 33370(U) May 20, 2013 Sup Ct, New York County Docket Number: /12 Judge: Eileen Bransten

Applying Heimeshoff to Plans Contractual Limitations By J.S. Chris Christie, Jr.

United States District Court District of Massachusetts MEMORANDUM & ORDER

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF WASHINGTON

PRECEDENTIAL UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT. No

MEMORANDUM OF LAW IN SUPPORT OF DEFENDANTS MOTION TO DISMISS THE COMPLAINT PRELIMINARY STATEMENT

SUPREME COURT OF ALABAMA

NOT DESIGNATED FOR PUBLICATION. No. 118,990 IN THE COURT OF APPEALS OF THE STATE OF KANSAS. JENNIFER VANDONSEL-SANTOYO, Appellee,

Case , Document 53-1, 04/10/2018, , Page1 of 19

Marco P. Falco. In 2017, Marco was recognized as a leader in his field in The 2017 Canadian Legal Lexpert Directory. Publications & Presentations

Good Faith and Honesty: Bhasin v Hrynew

UNITED STATES COURT OF APPEALS FOR THE TENTH CIRCUIT ORDER AND JUDGMENT *

2018COA62. No. 16CA0192 People v. Madison Crimes Theft; Criminal Law Sentencing Restitution. Pursuant to an agreement between the defendant and the

US Bank NA v. Maury Rosenberg

Case3:08-cv MEJ Document239 Filed10/21/14 Page1 of 6 UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA I.

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT. August Term, (Argued: March 5, 2015 Decided: July 28, 2015)

UNITED STATES DISTRICT COURT DISTRICT OF HAWAII

UNITED STATES DISTRICT COURT DISTRICT OF CONNECTICUT

Case 3:09-cv RPC Document 23 Filed 02/12/2010 Page 1 of 13 IN THE UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF PENNSYLVANIA

Case 3:06-cv JAP-TJB Document 62 Filed 07/22/2008 Page 1 of 13 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE ORDER I. INTRODUCTION

United States Supreme Court Limits Investor Suits for Misleading Statements of Opinion

State of New York Supreme Court, Appellate Division Third Judicial Department

IN THE UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF TENNESSEE COLUMBIA DIVISION ) ) ) ) ) ) ) ) ) ) ) MEMORANDUM

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION ORDER AND OPINION

IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF LOUISIANA VERSUS NO ORDER AND REASONS ON MOTION

Plaintiff, : : : : John Sgaliordich is an individual investor who alleges that various investment

DOCI: DATE FILED: /%1Ot

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT. No PAUL GREEN SCHOOL OF ROCK MUSIC FRANCHISING, LLC. JIM R. SMITH, Appellant.

Rosado v. Ford Mtr Co

Case 1:16-cv JPO Document 75 Filed 09/16/16 Page 1 of 11 X : : : : : : : : : : : : : : : : : : : X. Plaintiffs,

Gino Sabatini v. Its Amore Corp

United States Supreme Court Considering A California Appellate Court Opinion Invalidating A Class Action Arbitration Waiver

FILED: NEW YORK COUNTY CLERK 07/19/ :58 PM INDEX NO /2016 NYSCEF DOC. NO. 53 RECEIVED NYSCEF: 07/19/2016

.. :P~TEFILED:?l~llf?

Case 1:16-cv DLC Document 31 Filed 09/07/16 Page 1 of 13

17-cv-6293 (MAT) DECISION AND ORDER. Plaintiff JDS Group Ltd. ( JDS or plaintiff ) commenced the

International Union of Bricklayers & Allied Craftworkers v Bank of New York Mellon 2014 NY Slip Op 30177(U) January 17, 2014 Supreme Court, New York

Case 1:16-cv RNS Document 57 Entered on FLSD Docket 02/15/2017 Page 1 of 12 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF FLORIDA

Case 2:17-cv SJF-AKT Document 9 Filed 05/31/17 Page 1 of 7 PageID #: 64

UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS ) ) ) ) ) ) ) ) ) ) ) MEMORANDUM AND ORDER ON MOTION FOR JUDGMENT ON THE PLEADINGS

Amer Leistritz Extruder Corp v. Polymer Concentrates Inc

IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

Case 2:15-cv CDJ Document 31 Filed 03/16/16 Page 1 of 8 IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA

Case 2:16-cv JAD-VCF Document 29 Filed 06/28/17 Page 1 of 8 UNITED STATES DISTRICT COURT DISTRICT OF NEVADA *** ORDER

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF WISCONSIN

Case 1:14-cv ER Document 24 Filed 11/27/18 Page 1 of 8

SUPREME COURT OF THE STATE OF UTAH

Jeffrey Podesta v. John Hanzel

Case 3:14-cv AET-DEA Document 9 Filed 10/17/14 Page 1 of 7 PageID: 117 UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY

Transcription:

The Implied Obligation of Good Faith as a Limit on Contractual Discretion: The New York Approach to Contractual Good Faith Compared to Bhasin (Prepared for IADC presentation in Quebec City, July 2017) Charles J. Scibetta 1 Introduction Before 2014, the law in Canada was that there was no general duty to perform contracts in good faith (except in narrow cases, for example in contracts of insurance). 2 In 2014, however, the Supreme Court of Canada s decision in Bhasin v. Hrynew changed Canadian contract law by identifying good faith as an organizing principle of contract law that manifests itself through the existing doctrines about the types of situations in which the law requires, in certain respects, honest, candid, forthright or reasonable contract performance. 3 The Court identified these existing situations as including: Contracts expressly requiring cooperation of the parties to achieve their objects; Contracts involving the exercise of contractual discretion; Situations where a contractual power is used to evade a contractual duty; Contracts in the employment context in the narrow sense that the manner of termination must be done in good faith; Contracts in the insurance context; and Contracts in the tendering/procurement context.[ 4 ] In addition, the Court held that the general organizing principle of good faith also applies to the parties communications with each other concerning their contract performance. Specifically, the Court recognized a duty of honest performance, under which parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. Per the Court, the duty of honest performance is not an implied term, but rather a general doctrine of contract law that imposes as a contractual duty a minimum standard of honest contractual performance. 5 This doctrine applies to all contracts, and parties are not free to exclude it from their contracts, though they can modify it to some extent depending on the circumstances. 6 1 Charles Scibetta is a founding partner of Chaffetz Lindsey LLP, a litigation and arbitration boutique located in New York City. 2 Ryan P. Krushelnitzky and Sandra L. Corbett, Honest Performance and Absolutely Everything Else: Recent Developments in the Canadian Law of Contract, For the Defense (DRI International), March 2015. 3 (quoting Bhasin). 4 5 Krushelnitzky and Corbett, supra (quoting Bhasin). 6 1

Among the above situations identified in Bhasin, the Court listed the exercise of contractual discretion as just one of several discrete situations. By doing so the Court likely was referring to the specific situation where one party has the contractual discretion to bind another through its actions. But in a meaningful sense, all of the identified Bhasin situations deal with issues of discretion because they describe situations where some performance is to be taken, but the contract does not spell out specifically the form which that performance shall take. The performing party has at least some discretion to act as it sees fit, and Bhasin addresses the extent to which the law will proscribe the bounds of that discretion. Similar to Canadian law, New York law recognizes a general obligation of good faith contract performance. The concept in New York, however, is narrower than the principles described in Bhasin. Whereas under Bhasin, the parties are not free to exclude the duty from their contracts, in New York the implied duty of good faith cannot be asserted in contravention of express contract terms. In addition, the duty of honest performance might imply, at least potentially, some subjective component for determining compliance with the implied obligation. In New York, however, the analysis will generally be objective: Regardless of motives or subjective intentions, is the performance objectively within the reasonable expectations of what the parties bargained for? As discussed below, a number of New York decisions support this rule, including three decisions from the Court of Appeals, New York s highest court. The Implied Obligation of Good Faith Under New York Law Under New York law, all contracts imply a covenant of good faith and fair dealing in the course of performance. 7 And, this implied duty includes a pledge 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 contract. 8 As an implied term, the implied duty of good faith and fair dealing in New York must be construed in light of and in line with the contract s express provisions. The implied obligation of good faith cannot create additional obligations inconsistent with other terms of the contractual relationship. 9 The implied duty cannot be construed so broadly as to effectively nullify other express terms of the contract, or to create independent contractual rights. 10 As a result, New York courts will not hesitate to dismiss a claim for breach of the implied duty of good faith that is merely a substitute for a nonviable breach of contract claim. 11 With respect to the exercise of contractual discretion in particular, New York courts recognize that the implied duty of good faith cannot negate a bargained-for clause that allows a party to exercise its discretion. 12 However, contractual discretion is not unlimited. Even the 7 511 W. 232 nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144, 153 (2002). 8 (citation omitted). 9 (citation and internal quotation omitted). 10 Nat l Union Fire Ins. Co. of Pittsburgh, PA v. Xerox Corp., 25 A.D.3d 309, 310 (1st Dep t 2006). 11 Triton Partners LLC v. Prudential Sec. Inc., 301 A.D.2d 411, 411 (1st Dep t 2003). 12 Paxi, LLC v. Shiseido Americas Corp., 636 F. Supp. 2d 275, 286 (S.D.N.Y. 2009). 2

exercise of an apparently unfettered discretionary contract right may violate the implied covenant when it frustrates the basic purpose of the agreement and deprives the counterparty of the benefit of the bargain. 13 Nevertheless, courts are reluctant to interfere with a party s exercise of discretionary contract rights and will do so only in exceptional circumstances. A significant question that has long been the subject of debate in U.S. law is whether courts identify those circumstances under an objective or subjective test. 14 The argument for an objective test turns on the rationale that the objective approach avoids the well-known difficulties in proving subjective motivation... and best accommodates the discretion-exercising party s interest in deference by judge and jury with the other party s interest in no arbitrary and expectable reasons for exercising discretion. 15 Courts following the objective standard hold that when a party has a contractual right to take an action, the court may not inquire into that party s motive for exercising that right. 16 In other words, the implied duty of good faith and fair dealing is not a mechanism to turn a dispute over the exercise of business judgment into a tort. 17 In a series of decisions discussed next, the New York Court of appeals seems to have confirmed that New York generally adopts the objective approach. In a 1995 decision, Dalton v. Educational Testing Service, 18 the Court of Appeals held that when a contract contemplates the exercise of discretion, the party with discretion is bound by the implied obligation of good faith and fair dealing, and that obligation includes a pledge not to act arbitrarily or irrationally in exercising that discretion. 19 When a party exercises its contractually-granted discretion, that party not the courts must be the final arbiter of the propriety of decisions within the grant of discretion: A court will not interfere with [the party s] discretionary determination unless it is performed arbitrarily or irrationally. 20 On that basis, the Court of Appeals in Dalton required a testing service to perform its contractual obligation to consider material submitted to validate a disputed score, but the Court declined to interfere with the service s discretion to make its own evaluation of that material. 21 Thirteen years later, the Court of Appeals confirmed in Moran v. Erk that courts should tread very lightly when reading implied limitations into broad contractual grants of discretion: We do not ordinarily read implied limitations into unambiguously worded contractual 13 Hirsch v. Food Res., Inc., 24 A.D.3d 293, 296 (1st Dep t 2005). 14 See generally Steven J. Burton, Good Faith in Articles 1 and 2 of the U.C.C.: The Practice View, 3 William & Mary Law Review 1533, 1562 (1994). 15 at 1563. 16 Kerns, Inc. v. Wella Corp., 114 F.3d 566, 570 (6th Cir. 1997) (applying New York law); accord, e.g., Fitzpatrick v. Am. Int l Grp., Inc., No. 10 CIV. 142 MHD, 2013 WL 709048, at *26 (S.D.N.Y. Feb. 26, 2013) (same). 17 CCM Rochester, Inc. v. Federated Inv rs, Inc., No. 14-CV-3600 (VEC), 2017 WL 564063, at *6 (S.D.N.Y. Feb. 10, 2017). 18 87 N.Y.2d 384 (1995). 19 at 389. 20 at 392. 21 3

provisions designed to protect contracting parties. 22 In Moran, a contract for the sale of a home was expressly contingent upon attorney review. After purchasing the home, the purchasers developed qualms about going through with the sale, and they instructed their attorney to disapprove the contract. The seller argued that the purchaser breached its implied obligation of good faith and fair dealing by instructing its attorney to cancel the contract for impermissible reasons. The seller argued that the cancellation had to be motivated by concerns arising out of the attorney s review, not simply by the purchasers buyers remorse. The trial court and the intermediate appellate court agreed with the seller that the buyer s motives were impermissible, and so they ordered the sale to go through. But the Court of Appeals reversed. The Court of Appeals holding applied specifically to the contractual discretion under attorney approval contingencies in real estate contracts, but its rationale would seem to extend more broadly to exercises of contractual discretion in general. Specifically, the Court detailed the dangers posed by intrusive factual inquiries into subjective good faith, particularly in areas of contract law where [c]larity and predictability are particularly important... 23 It observed that disappointed sellers could bring a breach of contract action any time they were disappointed by the exercise of the contractual discretion to cancel the contract, 24 and that the outcome of those disputes would be entirely dependent on the subjective equitable variations of different Judges and courts instead of the objective, reliable, predictable and relatively definitive rules of plaintext contractual language. 25 The Court of Appeals rejected the chanciness inherent in such a motive-focused contract regime. 26 Finally, in 2013 the Court of Appeals addressed the issue of contractual discretion under the follow the settlements clause of a reinsurance contract. Reinsurance is commonly understood as insurance for insurance companies. An insurer (called the ceding company in the reinsurance relationship) buys reinsurance for losses under its policies. The reinsurance agreement typically grants the ceding company discretion to settle claims for coverage under the reinsured policy. Typically, the reinsurer must follow the cedent s settlements i.e., it must pay its reinsured share of the settlements without second-guessing the cedent s claim decisions. Courts have long recognized that the cedent s discretion was limited by an implied obligation of good faith. And reinsurers often argued that cedents breached this implied obligation when they made claims decisions that were motivated by a desire to maximize their reinsurance coverage. In USF&G v. American Re-insurance Co., the Court of Appeals rejected this subjective approach. 27 The Court held that objective reasonableness should ordinarily determine the validity of the cedent s claim decisions. 28 It confirmed that the cedent s motive should generally be unimportant. 29 * * * 22 11 N.Y.3d 452, 456 (2008), 23 at 458. 24 25 (citation omitted). 26 27 20 N.Y.3d 407 (2013). 28 at 420. 29 at 421. 4

The New York Court of Appeals has not stated a categorical rule that subjective motivations always are irrelevant to the analysis of good faith in the exercise of contractual discretion. Seemingly, the Court was careful in USF&G not to state such a categorical rule, as it held that motive should generally be unimportant. Nevertheless, each time the Court has addressed the question of whether good faith should be determined objectively or subjectively, it has opted for an objective test. In general, therefore, New York requires that contract performance fit within the bounds of the bargain struck as an objective matter. The parties subjective intentions and motives for their performance usually will be irrelevant for determining compliance of the implied obligation of good faith. 5