News & Noteworthy

Authored - NJ Contract Law Update - Whitman v. Herbert - Covenant of Good Faith
Two Morals to the Story
APRIL 23, 2012 | Windels Marx - Commercial Litigation

One of the main concerns of a party with a strong contractual position is that the position may be undermined either by equitable principles or amorphous concepts such as the covenant of good faith and fair dealing. The foregoing risk has been limited somewhat by Dunkin' Donuts of Am., Inc. v. Middletown Donut Corp., 100 N.J. 166 (1985). The latter risk receives uneven treatment from New Jersey's courts.

One key to defending a claimed breach of the covenant of good faith (CGF) is whether the conduct advanced as bad faith is nonetheless consistent with express terms of the contract. If it is, the conduct, even if deemed inequitable in the abstract, should not be actionable. The courts do not always express this concept; but I believe that they ordinarily consider it, especially if one of the parties has pointed to the relevant contract provisions.

In Whitman v. Herbert, 2012 WL 787380 (N.J.App.Div. March 13, 2012), the Court was faced with an imperfectly-memorialized settlement contract. The main imperfection was that although there was a commitment to sell parcels of realty to produce the necessary cash to fund the settlement, there was no time limit set on the sale; and a belatedly-proposed "reasonable best efforts [to sell]" clause never found its way into the official settlement memorialization.

For various reasons---including environmental concerns and the depressed real estate market, and allegedly also because of lack of diligence by the potential sellers [the settling obligors]---the properties remained unsold for years. The interesting contractual question was whether, despite the absence of any specific sale time-frame, and the inability to enforce the absent "reasonable best efforts" clause, there was still a time limit (within conscience and reason) within which the potential sellers should have performed.

The legal question was whether the potential seller had engaged in bad-faith "foot-dragging" (in violation of the CGF) to prevent the settling parties "from receiving their reasonably expected fruits under the contract". The trial court dismissed that Count. But the Appellate Division reinstated it; holding that "[t]he record is replete with evidence suggesting foot-dragging, apathy, and outright obstructionism by the settling obligors in their efforts to dispose of the properties in order to fund the settlement." The Court explained further that the covenant of good faith, which is implied in every contract (including an agreement to settle a dispute), "imports standards of decency, fairness or reasonableness"; "requires a party to refrain from destroying or injuring the right of the other party to receive its contractual benefits"; and "prohibits a party from "act[ing] in bad faith [to]...den[y]...the benefit of the bargain originally intended by the parties". Even when a party has "discretionary authority" as expressly authorized by an agreement, if that party exercises that discretion "arbitrarily, unreasonably, or capriciously with the objective of preventing the other party from receiving its reasonably expected fruits of the contract, the party taking the [discretionary] action may [be liable for] breach[ing] the covenant", if that party acted out of an improper motive.

The Court was of course swayed by the fact that the "properties have remained unsold for almost eight years post-settlement"; adding that in light of the evidence (of course including the fact that the contract remained unfulfilled for so long), the allegation of an improper state of mind would ordinarily be a triable issue, as it was in that case.

Morals of the Story

The morals of the story are, first, to have explicit conduct standards (and discretion definitions) built into any contract, including a settlement agreement; and second, that behavior which is willful or ineffective enough may spur a court to delve into the covenant of good faith, or similar supplements to the express contract terms. Appropriately drafted contract waivers can inhibit the latter eventuality, assuming the intent of both parties is in fact to preclude a claim in such instances.

A Final Note

Mediated settlement agreements are usually accelerated as compared to traditional contract negotiations, and rarely allow reflection or careful draftsmanship. As a result, disputes arising thereunder are often litigated, sometimes with the added handicap of mediation confidentiality (as to which still-other solutions exist).

Contact & Legal Disclaimer

Clark Alpert is the author of Guide to New Jersey Contract Law, published by the New Jersey Institute for Continuing Legal Education, originally published in 2007 and updated in November 2011. His updates on New Jersey contract law are based in recent issues and practical methods for addressing similar situations in your practice or business. They are not intended to serve as legal advice. Clark welcomes your questions and comments.

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