Good Faith Performance
Policy
Courts concerned about enforcement error - imposing good faith obligations where there are none (no good faith duty to negotiate) as erroneous enforcements undermine reliability in contracts
UCC § 1-201(b)(20)
Good faith means (1) honesty in fact and (2) the observance of reasonable commercial standards of fair dealing Good faith cannot be disclaimed under the UCC but allows parties to "determine the standards by which the performance of good faith obligations are to be measured"
Good Faith and Percentage Lease Agreements: Goldberg Corp. v. Levy
Holding: Good faith performance in a percentage lease agreement means there is a duty for the lessee to use reasonable efforts to operate the leased land to generate profits. Diverting business to another store in the area for the sole purpose of lowering profits at the percentage lease location violates the covenant of good faith and fair dealing. Note: Implied in fact vs. implied in law obligations of good faith In fact: a reasonable person would imply the good faith term In law: liability is imposed without the parties' consent (good faith is somewhat of a torts concept)
Kirk La Shelle Co. v. Paul Armstrong Co. and Rsmnt. 205
Rule: All contracts include the implied covenant to perform in good faith. Parties have the duty to not act in a way that would destroy or injure the other party's ability to "receive the fruits of the contract" Good faith is commercial reasonableness Bad faith in contrast is types of conduct that violate community standards of commercial decency, fairness and reasonableness
The Original Great American Chocolate Chip Cookie Co.
Rule: Commercial reasonability is NOT the test of good faith. Parties do not have a duty to act altruistically but rather to avoid taking advantage of gaps in a contract to exploit the vulnerabilities that arise when contractual performance is sequential rather than simultaneous. Good faith = act how the other party intended for you to act (this might not be reasonably). Bad faith is where a provision is invokes to achieve a purpose contrary to its intended purpose Note: Satisfaction clauses, Terminable at Will clauses, and insecurity clauses are clauses where parties will usually breach good faith (feign dissatisfaction to drive down the price before accepting the goods)
Good Faith and Percentage Lease Agreements: Mutual Life Insurance v. Tailored Woman
Rule: Unconscionable diversion of business from a percentage lease agreement premises to other premises is barred. (But this was not an unconscionable diversion) An unconscionable diversion would be a diversion clearly made with the intent to subvert the percentage lease agreement Reasoning: if P had desired further restrictions on how D could use premises they could have expressly stated that in the contract Policy: Enforcement of the INTENDED bargain
Good Faith and Percentage Lease Agreements: Stop & Shop v. Blumberg
Rule: What good faith is expected by the parties can be construed through their manifest intentions in the written lease construed in light of the circumstances in which the contract was made (unless the parties explicitly define the good faith duty). An omission to specify an agreement in a written lease is evidence that there was no such understanding and covenants will not be extended by implication unless the implication is clear and undoubted. Reasonableness in this case is using sound business judgment and fair promotion of the business - no purposeful depreciation. Note: If the lessor can prove that there was a substantial difference between fair market rent value and the fixed minimum rent in the contract they can prove that the parties intended for the percentage lease to be a substantial component of the deal and the implied covenant to operate the premises reasonably to generate a profit is stronger.
Did the parties perform in good faith?
Two step process in deciding if a contract has been performed in good faith: Why did the parties include the clause? Is it being invoked in a way consistent with that purpose?