By Stanton T. Mathews & Kevin Lancaster
Excerpted from California Causes of Action
- Statute of limitations
- Affirmative defenses
- Related causes of action
- Form complaint
§11-4:00 Breach of Implied Covenant of Good Faith and Fair Dealing
In every contract there is an implied covenant of good faith and fair dealing by each party not to do anything which will deprive the other parties of the benefits of the contract, and a breach of this covenant by failure to deal fairly or in good faith gives rise to an action for damages. Sutherland v. Barclays American/Mortgage Corp., 53 Cal. App. 4th 299, 314, 61 Cal. Rptr. 2d 614 (1997); Harm v. Frasher, 181 Cal. App. 2d 405, 415, 5 Cal. Rptr. 367, 373 (1960); Seaman’s Direct Buying Serv., Inc. v. Standard Oil Co., 36 Cal. 3d 752, 206 Cal. Rptr. 354 (1984), overruled on other grounds, Freeman & Mills, Inc. v. Belcher Oil Co., 11 Cal. 4th 85, 102-03, 44 Cal. Rptr. 420 (1995); see also Witkin, Summary of California Law, Contracts, §743.
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 & Laramie, Ltd. v. Dep’t of Parks and Recreation, 11 Cal. App. 4th 1026, 1031-32, 1033 n.4, 14 Cal. Rptr. 335, 338-39, 340 n.4 (1992); Smith v. City and County of San Francisco, 225 Cal. App. 3d 38, 49, 275 Cal. Rptr. 17, 24 (1990); Peterson Dev. Co. v. Torrey Pines Bank, 233 Cal. App. 3d 103, 116, 284 Cal. Rptr. 367, 375 (1991).
§4:22 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. April Enters., Inc. v. KTTV, 147 Cal. App. 3d 805, 816, 195 Cal. Rptr. 421, 425 (1983); Harm v. Frasher, 181 Cal.App. 2d 405, 417, 5 Cal.Rptr. 367, 374 (1960).
§4:23 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. Witkin, Summary of California Law, Contracts, §744 (8th ed.); see also Sutherland v. Barclays American/Mortgage Corp., 53 Cal.App. 4th 299, 314, 61 Cal. Rptr. 2d 614 (1997); Harm v. Frasher, 181 Cal.App. 2d 405, 415, 5 Cal. Rptr. 367, 373 (1960).
§4:24 Causation and Damage
The breaching party is liable for all damages proximately resulting from the conduct. Quigley v. Pet, Inc., 162 Cal.App. 3d 877, 887-88, 208 Cal. Rptr. 394, 399-400 (1984); see also CACI 2423.
There is no implied covenant of good faith and fair dealing during pre-contractual negotiations. Racine & Laramie, Ltd. v. California Dep’t of Parks and Recreation, 11 Cal. App. 4th 1026, 1031-32, 1033 n.4, 14 Cal.Rptr. 335, 338-39, 340 n.4 (1992).
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. Racine & Laramie, Ltd. v. California Dep’t of Parks and Recreation, 11 Cal. App. 4th 1026, 1031, 14 Cal.Rptr. 335, 338 (1992); Foley v. Interactive Data Corp., 47 Cal. 3d 654, 690, 254 Cal.Rptr. 211 (1988).
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. Smith v. City and County of San Francisco, 225 Cal.App. 3d 38, 49, 275 Cal.Rptr. 17, 24 (1990).
§4:31a Discretionary Powers Expressly Granted in Contract
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, 41 Cal. App. 4th 798, 808, 48 Cal. Rptr. 2d 747, 753 (1995); Carma Developers (Cal.), Inc. v. Marathon Dev. Cal., Inc., 2 Cal. 4th 342, 374, 6 Cal. Rptr. 2d 467, 485 (1992); California Lettuce Growers, Inc. v. Union Sugar Co., 45 Cal. 2d 474, 482, 289 P.2d 785, 790 (1955) (one party’s discretionary power was limited by the covenant of good faith and fair dealing where the contract otherwise would be illusory); Halvorsen v. Aramark Uniform Servs., Inc., 65 Cal. App. 4th 1383, 1390, 77 Cal. Rptr. 2d 383, 386 (1998) (written “at-will” employment contract precluded existence of implied contract requiring good cause for termination), rejected on other grounds, Graw v. Los Angeles County Metro. Transit Auth., F. Supp. 2d , No. CV 97-8641 DDP (CWX), 1999 WL 391575, at *2 (C.D. Cal., June 10, 1999).
In the following cases, the court refused to invoke the doctrine of good faith and fair dealing to limit discretionary powers expressly granted in a contract: PMC v. Porthole Yachts, Ltd., 65 Cal. App. 4th 882, 891 76 Cal. Rptr. 2d 832, 837 (1998); Balfour, Guthrie & Co. v. Gourmet Farms, 108 Cal. App. 3d 181, 166 Cal. Rptr. 422 (1980); Brandt v. Lockheed Missiles & Space Co., 154 Cal. App. 3d 1124, 201 Cal. Rptr. 746 (1984); Gerdlund v. Electronic Dispensers Int’l, 190 Cal. App. 3d 263, 235 Cal. Rptr. 279 (1987).
§4:32 Duty of Good Faith and Fair Dealing
The implied covenant of good faith and fair dealing imposes reciprocal duties on both parties to a contract. Smith v. City and Countyof San Francisco, 225 Cal. App. 3d 38, 49, 275 Cal. Rptr. 17, 23 (1990).
The covenant of good faith and fair dealing may be used to aid in the construction of a contradictory and ambiguous contract. April Enters., Inc. v. KTTV, 147 Cal. App. 3d 805, 816, 195 Cal. Rptr. 421, 425 (1983) (covenant of good faith and fair dealing limited a contractual provision allowing the erasure of tapes where another provision gave one party the right to sell the tapes after broadcast).
§4:32a Scope of Duty
The precise nature and extent of the duty imposed depends on the contractual purposes. Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d 809, 818, 169 Cal. Rptr. 691, 695 (1979); Careau & Co. v. Security Pacific Business Credit, Inc., 222 Cal. App. 3d 1371, 1393, 272 Cal.Rptr. 387, 398 (1990).
Good faith is defined as honesty in fact in the conduct or transaction concerned. Cal. Com. Code §1201(19). 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. Cal. Com. Code §2103(1)(b).
The essence of the good faith covenant is objectively reasonable conduct. Badie v. Bank of Am., 67 Cal. App. 4th 779, 796, 79 Cal. Rptr. 2d 273, 284 (1998) (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); Lazar v. Hertz Corp., 143 Cal. App. 3d 128, 141, 191 Cal. Rptr. 849, 857 (1983).
The duty of good faith and fair dealing applies to both the performance and the enforcement of the contract. Restatement (Second) of Contracts §205 (1981). 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. Restatement (Second) of Contracts §205, cmt. (d) (1981). The obligation of good faith in enforcement extends to the assertion, settlement and litigation of contract claims and defenses. Restatement (Second) of Contracts §205, cmt. (e) (1981).
§4:33 Breach of Implied Covenant
Breach of specific provision of contract is not a necessary prerequisite to breach of covenant of good faith and fair dealing. Marsu, B.V. v. Walt Disney Co., __ F.3d __, Nos. 97-56547, 98-56151,1999 WL 543733 (9th Cir. July 28, 1999) (Disney’s fulfillment of contract’s express merchandising obligations to enter into certain kinds of licensing agreements and payment of minimum guarantees under the contract did not preclude finding of breach of covenant of good faith and fair dealing); Carma Developers, Inc. v. Marathon Dev. of Cal., Inc., 2 Cal. 4th 342, 373, 6 Cal. Rptr. 2d 467, 486 (1992).
§4:33a 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, 236 Cal. App. 2d 378, 383, 46 Cal. Rptr. 396, 399 (1965) (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).
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. Cohen v. Ratinoff, 147 Cal. App. 3d 321, 330, 195 Cal. Rptr. 84, 89 (1983); see also McWilliams v. Holton, 248 Cal. App. 2d 447, 451, 56 Cal. Rptr. 574, 577 (1967) (lessor breached covenant owed to new tenant by allowing existing tenant to remain in possession of leased premises).
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., 2 Cal. 4th 342, 374, 6 Cal. Rptr. 2d 467, 485 (1992).
§4:33c 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. Universal Sales Corp. v. California Press Mfg. Co., 20 Cal.2d 751, 771, 128 P.2d 665, 677 (1942) (joint venturer breached covenant by withholding information in order to benefit personally).
§4:33d 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, 213 Cal.App. 2d 527, 530, 29 Cal.Rptr. 269, 271 (1963).
§4:34 Causation and Damage
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. California Lettuce Growers, Inc. v. Union Sugar Co., 45 Cal. 2d 474, 486, 289 P.2d 785, 793 (1955) (landowner’s claim of damages due to grower’s failure to apply manure to land pursuant to agreement was sufficiently definite to withstand demurrer and summary judgment motion).
Compensatory Damages (Quigley v. Pet, Inc., 162 Cal. App. 3d 877, 887-88, 208 Cal. Rptr. 394, 399 (1984) (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); see §11-1:40 (Breach of Contract In General) for discussion of contract damages).
Tort Damages Not Available Except In Insurance Contract (Freeman & Mills, Inc. v. Belcher Oil Co., 11 Cal. 4th 85, 102, 44 Cal. Rptr. 2d 420, 430-31 (1995) (abolished tort of bad faith denial of contract created in Seaman’s Direct Buying Service, Inc. v. Standard Oil Co., 36 Cal. 3d 752, 206 Cal. Rptr. 354 (1984), 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’”)(quoting Applied Equip. Corp v. Litton Saudi Arabia Ltd., 7 Cal. 4th 503, 515, 28 Cal. Rptr. 2d 475 (1994)); see also Cates Constr., Inc. v. Talbot Partners, 21 Cal. 4th 28, 86 Cal. Rptr. 2d 855, 865 (1999) (tort damages not available for surety’s breach under construction performance bond); Foley v. Interactive Data Corp., 47 Cal. 3d 654, 700, 254 Cal. Rptr. 211 (1988) (tort damages are not available for breach of implied covenant of good faith and fair dealing in employment contract); see also Sutherland v. Barclays American/ Mortgage Corp., 53 Cal. App. 4th 299, 314, 61 Cal. Rptr. 2d 614 (1997) (tort damages were not available for lender’s breach of covenant of good faith and fair dealing under home loan agreement)).
The limitations period is four years for claims based on a written instrument. Cal. Civ. Proc. Code §337(1). For claims based on an oral agreement, the limitations period is two years. Cal. Civ. Proc. Code §339(1).
Express Covenant Inconsistent With Implied Covenant (Carma Developers, Inc. v. Marathon Dev. Cal., Inc., 2 Cal. 4th 342, 374, 6 Cal. Rptr. 2d 467, 485 (1992); April Enters., Inc. v. KTTV, 147 Cal. App. 3d 805, 816, 195 Cal. Rptr. 421, 425 (1983)).
Defendant Not A Party To Underlying Contract (Seretti v. Superior Nat’l Ins. Co., 71 Cal. 4th 920, 929, 84 Cal. Rptr. 2d 315, 321 (1999); Austero v. National Casualty Co., 62 Cal. App. 3d 511, 515, 133 Cal. Rptr. 107, 110 (1976)).
Statute of Frauds (Cal. Civ. Code §1624).
Statute of Limitations (Cal. Civ. Proc. Code §§337(1), 339(1)).
See generally §11-1:60 (Breach of Contract In General) and Appendix A for additional affirmative defenses.
Breach of Contract In General (§11-1:00).
Insurer’s Breach of Implied Covenant of Good Faith and Fair Dealing (§13-2:00).
Employer’s Breach of Implied Covenant of Good Faith and Fair Dealing (§14-13:00).
Wrongful Discharge in Violation of Public Policy(§14-10:00).
Principal’s Breach of Duty of Good Faith and Fair Dealing (real estate brokers) (§10-6:00).
Stanton T. Mathews’ trial practice through the last 20 years has been focused on the representation of injured victims of personal, corporate and governmental negligence and wrongdoing. He was trial counsel on the first successful case for fraud against a general aviation manufacturer in U.S. history. He prevailed in a case against the LAPD for the unlawful use of a nightstick just months before the same department successfully defended itself for its officers’ use of their nightsticks in the Rodney King case. Mr. Mathews brought in one of the first verdicts in OrangeCounty involving a third-party attack (attempted rape/murder) on the premises of a nationwide realty firm.
Kevin Lancaster practices in the areas of catastrophic industrial injury, premises liability, professional negligence, products liability and medical malpractice. Mr. Lancaster served as counsel in the reported cases of Ramirez v. Nelson, 44 C. 4th 908 (2008); Medina v. Hillshore Partners, 40 Cal. App. 4th 477 (1995); Nichols v. Keller, 15 Cal. App. 4th 1672 (1993); and Rosso, Johnson, et al. v. Superior Court of San Francisco, 191 Cal. App. 3d 1514 (1987).
They are the authors of, from which this article is excerpted.