The breach of the covenant of good faith and fair dealing--what it is and isn't.

Breach of the covenant of good faith and fair dealing is a contract claim.?[I’m not discussing the tort, like insurance bad faith, of course.]?But folks often try using it to get a second bite at the apple on their straight breach claim.?That isn’t how the claim functions.??

In Arizona, it isn’t a claim for a nasty breach of contract; a nasty breach is just a breach. Instead, a party breaches the covenant “if a party uses its discretion for a reason outside the contemplated range—a reason beyond the risks assumed by the party claiming a breach.”?Wells Fargo Bank, N.A. v. Ariz. Laborers, Teamsters & Cement Masons Local No. 395 Pension Trust Fund, 201 Ariz. 474, 492 ? 66, 38 P.3d 12, 30 (2002) (quotations omitted).

Wells Fargo Bank is a good example. The bank, a union fund, and Symington had an agreement. The bank funded Symington’s project. The union fund would take-out that loan when the project reached a certain point. But as that point approached, the bank knew that Symington’s finances were poor. The bank allegedly violated its protocols to allow Symington to pass the take-out date, which would transfer the liability to the union fund. And the bank didn’t disclose this to the union fund. The bank also knew that Symington didn’t share the information with the union fund. “There is evidence the Bank knew of the deprivation and engaged in a systematic strategy designed to withhold material information from the Funds and to keep Symington financially alive until after the take-out deadline,” which damaged the fund. ? 68. That didn’t violate the contract’s terms, but it could violate the implied covenant. That is the type of exercise of discretion that supports the claim.?

Too often, parties rely on the same factual allegations for implied covenant and breach of contract claims.?“You breached the contract by failing to deliver the widgets, so you also breached the covenant of good faith and fair dealing!”?Courts often reject that approach—a party can’t base the implied covenant claim on the same conduct as a separate breach claim.?Shaw v. CitiMortgage, Inc., 201 F. Supp. 3d 1222, 1252 (D. Nev. 2016).?“[I]f a mere failure to perform an express obligation under a contract also established a breach of the implied covenant of good faith and fair dealing, then all breaches of contract necessarily would also constitute breaches of the covenant of good faith and fair dealing.”?Ipro Tech LLC v. Sun West Mortg. Co., 2019 WL 2106417, *3 (D. Ariz. Mar. 21, 2019); see also, e.g., Linde, LLC v. Valley Protein, LLC, 2019 WL 3035551, *13 (E.D. Cal. July 11, 2019); Constr. Sys., Inc. v. Gen. Cas. Co. of Wis., 2011 WL 3625066, *9 (D. Minn. Aug. 17, 2011); RST (2005) Inc. v. Research in Motion Ltd., 597 F. Supp. 2d 362, 367 (S.D.N.Y. 2009); Kuroda v. SPJS Holdings, L.L.C., 971 A.2d 872, 888 (Del. Ch. 2009); Harsch Props., Inc. v. Nicholas, 932 A.2d 1045, 1050 (Vt. 2007).???

A party can’t stack a good faith covenant claim on a contract claim using the same facts, damages, and arguments.?Not performing is breach of contract—not breach of the implied covenant.

We see another wrinkle when contracts give one party “sole discretion,” “absolute discretion,” or similar authority.?Many courts won’t apply the implied covenant then; we won’t let an implied covenant vitiate what the parties negotiated.?“When a contract grants one party sole discretion to make a decision, the implied covenant of good faith and fair dealing does not create rights that are not in the contract.”?Lanza v. Fin. Indus. Regul. Auth., 347 F. Supp. 3d 104, 105 (D. Mass. 2018); see also, e.g., Clark v. America’s Finest Chicken Co., 110 F.3d 295, 298 (5th Cir. 1997) (affirming summary judgment when agreement gave franchisor sole discretion over advertising fund); Taylor Equip., Inc. v. John Deere Co., 98 F.3d 1028, 1032 (8th Cir. 1996) (courts won’t use implied covenant to block party’s contractual right to exercise sole discretion); Moran v. Erk, 901 N.E. 696, 699-700 (N.Y. 2008) (implied covenant doesn’t impose “bad faith” exception on party’s absolute right to terminate agreement for any reason).?*Arizona folks: I’m not aware of Arizona authority on this “sole discretion” topic.*

A breach of the implied covenant claim is a good one when the facts support it.?But it isn’t a tool to get another shot at your straight breach of contract claim.??