The "duty" of good faith in contract performance and enforcement

Journal of Legal Education

Volumn 46, Issue 4, 1996, Pages 537-545

  Speidel, Richard E ^a  

^a NORTHWESTERN UNIVERSITY   (United States)

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EID: 21744444507     PISSN: 00222208     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (76)

1. For example, in Edwin W. Patterson et al., Cases and Materials on Contracts, 4th ed. (Brooklyn, 1957), there is only one indexed reference to "good faith" and that is to mistake in bids. Id. at 59-62;
2. See also id. at 368-71 (requirements contracts), 1035 (duty of cooperation). In the first edition of Edward J. Murphy and Richard E. Speidel, Studies in Contract Law (Mtneola, 1970), however, there were 22 indexed references to "good faith." The difference is explained in part by a more elaborate index and the extensive treatment given to Article 2, Sales, of the UCC.
3. See Edward J. Murphy & Richard E. Speidel, Studies in Contract Law, 4th ed., 1396 (Westbury, 1991) (16 indexed references to good faith).
4. See Steven J. Burton, Breach of Contract and the Common Law Duty to Perform in Good Faith, 94 Harv. L. Rev. 369 (1980).
5. U. C. C. § 1-203;
6. See Steven J. Burton, Good Faith Performance of a Contract Within Article 2 of the Uniform Commercial Code, 67 Iowa L. Rev. 1 (1981).
7. Section 205.
8. Article 1.7 of the UNIDROIT Principles of International Commercial Contracts (1994) provides that "[e]ach party must act in accordance with good faith and fair dealing in international trade" and that the "parties may not exclude or limit this duty." Good faith and fair dealing are described as a "fundamental idea underlying the Principles." Cmt. 1. In addition, Article 5.3 provides that "[e]ach party shall cooperate with the other party when such co-operation may reasonably be expected for the performance of that party's obligations," and Article 6.2.3 (1) permits one party to request and requires the other party to engage in renegotiations in the event of "hardship" as defined in Article 6.2.2.
9. See Joseph M. Perillo, UNIDROIT Principles of International Commercial Contracts: The Black Letter Text and a Review, 63 Fordham L. Rev. 281 (1994).
10. See, e.g., E. Allan Farnsworth, Good Faith Performance and Commercial Reasonableness Under the Uniform Commercial Code, 30 U. Chi. L. Rev. 666 (1963);
11. Robert S. Summers, "Good Faith" in General Contract Law and the Sales Provisions of the Uniform Commercial Code, 54 Va. L. Rev. 195 (1968);
12. Burton, supra note 2;
13. Burton, supra note 3;
14. Eric G. Andersen, Good Faith in the Enforcement of Contracts, 73 Iowa L. Rev. 299 (1988);
15. Dennis M. Patterson, Good Faith, Lender Liability, and Discretionary Acceleration: Of Llewellyn, Wittgenstein, and the Uniform Commercial Code, 68 Tex. L. Rev. 169 (1989);
16. Mark Gergen, A Cautionary Tale About Contractual Good Faith in Texas, 72 Tex. L. Rev. 1235 (1994);
17. See also Steven J. Burton & Eric G. Andersen, Contractual Good Faith: Formation, Performance, Breach and Enforcement (Boston, 1995).
18. See, e.g., William D. Warren, Cutting Off Claims of Ownership Under the Uniform Commercial Code, 30 U. Chi. L. Rev. 469 (1963);
19. Grant Gilmore, The Commercial Doctrine of Good Faith Purchase, 63 Yale L. J. 1057 (1954).
20. According to the Permanent Editorial Board of the Uniform Commercial Code, § 1-203 "does not support an independent cause of action for failure to perform or enforce in good faith." Rather, the "doctrine of good faith merely directs a court towards interpreting contracts within the commercial context in which they are created, performed, and enforced, and does not create a separate duty of fairness and reasonableness which can be independendy breached." PEB Commentary No. 10 (Feb. 10, 1994)
21. Reprinted in UCC Rep. Serv. 2d (CBC) Findex vol. [hereinafter PEB Commentary 10].
22. A Westlaw search in December 1995 of the Allfeds and Allstates databases revealed that 90 cases had cited § 205 since 1980. A leading common law case where § 205 is cited is Centronics Corp. v. Genicom Corp., 562 A.2d 187 (N. H. 1989) (Souter, J.). In California, the duty of good faith and fair dealing is implied in "every contract" without reliance on the Restatement.
23. See Freeman & Mills, Inc. v. Belcher Oil Co., 900 P.2d 669, 672 (Cal. 1995).
24. See Charles Fried, Contract as Promise 74-91 (Cambridge, Mass., 1981).
25. See PEB Commentary 10, supra note 8;
26. See also Edwin W. Patterson, Constructive Conditions in Contracts, 42 Colum. L. Rev. 903, 928-42 (1942) (exploring origins of the duty to cooperate).
27. If the parties intend to conclude a contract without agreement on all of the terms, contract law will supply terms to fill the gap. Usually, but not always, these are terms that reasonable people would probably agree to if they had bargained over them. Most of these gap fillers can be varied by agreement, but good faith is an exception.
28. See Richard E. Speidel, Article 2 and Relational Sales Contracts, 26 Loy. LA. L. Rev. 789, 804-07 (1993).
29. U. C. C. § 2-209 (1).
30. See Hartford Steamboiler Inspection & Ins. Co. v. Industrial Risk Insurers, 1995 WL 645971 (Conn. Super. Ct. Oct. 26, 1995).
31. This limitation is criticized in G. Richard Shell, Opportunism and Trust in the Negotiation of Commercial Contracts: Toward a New Cause of Action, 44 Vand. L. Rev. 221 (1991). The parties, however, may agree to negotiate in good faith.
32. See generally Channel Home Ctrs. v. Grossman, 795 F.2d 291 (3d Cir. 1986) (agreement in letter of intent).
33. See Andersen, supra note 6.
34. U. C. C. § 1-201 (19).
35. In the words of the inimitable Calvin of Calvin and Hobbes, it is not dishonest to candidly pursue one's self-interest (Calvin's object being a larger piece of pie).
36. U. C. C. §2-103 (1) (b).
37. See Final Report, ABA UCC Article l Task Force, § 1-201 (19) (Oct. 1993);
38. See also Donald B. King, Underlying Principles of Good Faith, Unconscionability, Reasonableness, and Trade Usage: Proposed Revisions for Uniform Commercial Code Article 1, 1995 Com. L. Ann. 31, 36-48;
39. Denise R. Boklach, Commercial Transactions: U. C. C. § 1-201 (19)
40. Good Faith-Is Now the Time to Abandon the Pure Heart/Empty Head Test? 42 Okla. L. Rev. 647 (1992) (arguing yes).
41. Good Faith in Articles 1 and 2 of the U. C. C.: The Practice View, 35 Wm. & Mary L. Rev. 1533, 1535-36 (1991). Other articles and books by Burton (and by Eric G. Andersen) are cited supra notes 2, 3, and 6.
42. See Burton, supra note 3, at 24.
43. See also Gergen, supra note 6, at 1263-74. Gergen argues that three categories of conduct cover the good faith waterfront. Bad faith conduct is inconsistent with contract-based expectations, is inconsistent with relevant trade norms, or impairs the parties' joint interests in matters left open by a contract.
44. In Zapatha v. Dairy Mart, Inc., 408 N. E.2d 1370 (Mass. 1980), a leading case, the court upheld termination of a franchise under a clause authorizing termination without cause if 90 days' notice was given. Absent evidence of commercial standards of fair dealing in the trade, it was not dishonest to terminate when the right was clear in the contract even though the termination may have been arbitrary. The court assumed that termination in accordance with the contract was "performance" of the contract.
45. Accord, Corenswet, Inc. v. Amana Refrigeration, Inc., 594 F.2d 129 (5th Cir. 1979).
46. See Duquesne Light Co. v. Westinghouse Elec. Co., 66 F.3d 604, 617 (3d Cir. 1995) (good faith used "as an interpretive tool to determine" parties' justified expectations, not to "enforce an independent duty divorced from the specific clauses of the contract");
47. Accord, U & W Indus. Supply, Inc. v. Martin Marietta Alumina, Inc., 34 F.3d 180 (3d Cir. 1994);
48. Indian Harbor Citrus, Inc. v. Poppell, 658 So. 2d 605 (Fla. Dist. Ct. App. 1995).
49. For example, either the termination clause or its effect may be unconscionable. Or the distributor may have relied upon assurances by the manufacturer that the agreement will not be terminated. See Highway Equip. Co. v. Caterpillar, Inc., 707 F. Supp. 954 (S. D. Ohio 1989), where the court held that the duty of good faith did not impose a "good cause" limitation on a termination clause clearly permitting termination without cause, but concluded that a hearing on whether the clause was unconscionable should be held.
50. U. C. C. § 2-306 (1).
51. See Orange & Rockland Utils., Inc. v. Amerada Hess Corp., 397 N. Y. S.2d 814 (App. Div. 1977) (bad faith for buyer to "arbitrarily and unilaterally change certain conditions prevailing at the time of the contract" to take advantage of changing market conditions at the seller's expense).
52. See Oglebay Norton Co. v. Armco, Inc., 556 N. E.2d 515 (Ohio 1990) (parties agree to "mutually agree" on price if external pricing mechanism fails);
53. Marquette Co. v Norcem, Inc., 494 N. Y. S.2d 511 (App. Div. 1985) (parties agree to negotiate over price).
54. This was the result in Centronics Corp. v. Genicom Corp., 562 A.2d 187 (N. H. 1989), where the court held that one party's refusal to cooperate during arbitration by releasing escrow funds not involved in the dispute was not bad faith. The release was not required by the contract, and the refusal did not constitute bad faith under any applicable standard.
55. See Andersen, supra note 6.
56. Classic examples of bad faith enforcement are P1otnick v. Pennsylvania Smelting & Ref. Co., 194 F.2d 859 (3d Cir. 1952) (seller cancels installment contract in a rising market for buyer's immaterial breach);
57. Neumiller Farms, Inc. v. Cornett, 368 So. 2d 272 (Ala. 1979) (buyer rejects seller's minor nonconforming tender in a falling market).
58. See cases cited supra note 30.
59. See Orange & Rockland Utils., Inc. v. Amerada Hess Corp., 397 N. Y. S.2d 814 (App. Div. 1977).
60. See Roth Steel Prods, v. Sharon Steel Corp., 705 F.2d 134 (6th Cir. 1983) (bad faith modification not enforced).
61. See generally D. R. Richmond, An Overview of Insurance Bad Faith Law and Litigation, 25 Seton Hall L. Rev. 74 (1994);
62. Symposium on the Law of Bad Faith in Contract and Insurance, 72 Tex. L. Rev. 1203 (1994).
63. In Freeman & Mills, Inc. v. Belcher Oil Co., 900 P.2d 669 (Cal. 1995), the court held that a bad faith denial of the existence of a noninsurance contract was notactionable in tort unless the denial violated an independent duty arising from principles of tort law.
64. A blended contract-tort theory is proposed in Eileen A. Scallen, Promises Broken v. Promises Betrayed: Metaphor, Analogy, and the New Fiduciary Principle, 1993 U. Ill. L. Rev. 897.
65. See also Jay M. Feinman, Economic Negligence: Liability of Professionals and Businesses to Third Parties for Economic Loss (Boston, 1995). For a recent assessment of Grant Gilmore's argument that contract is dead
66. See Richard E. Speidel, Afterword: The Shifting Domain of Contract, 90 Nw. U. L. Rev. 255 (1995).
67. Steven Burton and I disagree on the importance of relational contracts and the role of good faith in their performance and enforcement. Compare Speidel, supra note 12, at 795-98
68. With Burton, supra note 20, at 1558-60.
69. A case where all these characteristics are present is Oglebay Norton Co. v. Armco, Inc., 556 N. E.2d 515 (Ohio 1990).
70. Speidel, supra note 36, at 264-65.
71. Speidel, supra note 12.
72. Article 6.2.3 cmt. 5.
73. Gergen, supra note 6, at 1264.
74. Two cases that are generally consistent with this thesis are Market Street Associates v. Frey, 941 F.2d 588 (7th Cir. 1991)
75. Ashland Management Inc. v. Janien, 624 N. E.2d 1007 (N. Y. 1993).
76. Burton, supra note 20, at 1535-36.