Civil Model Jury Charge 4.10 J. IMPLIED TERMS — COVENANT OF GOOD FAITH AND FAIR DEALING BILATERAL CONTRACTS
In
addition to the express terms of a contract, the law provides that every
contract contains an implied covenant of good faith and fair dealing. This means that, even though not specifically
stated in the contract, it is implied or understood that each party to the
contract must act in good faith and deal fairly with the other party in
performing or enforcing the terms of the contract.[2]
To
act in good faith and deal fairly, a party must act in a way that is honest and
faithful to the agreed purposes of the contract and consistent with the
reasonable expectations of the parties.[3] A party must
not act in bad faith, dishonestly, or with improper motive to destroy or injure
the right of the other party to receive the benefits or reasonable expectations
of the contract.[4]
There can be no breach of
the implied covenant of good faith and fair dealing unless the parties have a
contract.[5] Additionally, the implied covenant of good
faith and fair dealing may not override an expressly granted right under the
contract. For example, an implied
covenant of good faith and fair dealing may not override an express provision
in the contract giving one party the right to terminate the contract and the
party’s motive in terminating the contract under such circumstances may be
irrelevant.[6] A party must still, however, act in good faith
in the performance of the contract until the termination actually takes place.[7]
Thus, even though the party complies with the express contract term entitling
him to terminate the contract, he may still be in breach of the covenant of
good faith and fair dealing if he fails to act in good faith and deal fairly
until the contract is actually terminated.
There are many forms of conduct that might constitute a
violation of good faith and fair dealing, but each case is fact-sensitive.[8] In order for you to find that there has been
a breach of the implied covenant of good faith and fair dealing in this case,
the plaintiff must prove to you that the defendant, with no legitimate purpose: 1) acted with bad motives or intentions or
engaged in deception or evasion in the performance of contract; and 2) by such
conduct, denied the plaintiff of the bargain initially intended by the parties.[9]
The plaintiff in this case claims
that the defendant breached the implied covenant of good faith and fair dealing
by [give brief statement of plaintiff’s
claim of breach]. To prevail on this
claim, the plaintiff must prove each of the following three elements by a
preponderance of the evidence:
First,
the plaintiff must prove that some type of contract existed between the parties.[10] There can be no breach of the covenant of
good faith and fair dealing unless the parties have a contract.
Second,
the plaintiff must prove that the defendant acted in bad faith with the purpose
of depriving the plaintiff of rights or benefits under the contract.
Third,
the plaintiff must prove that the defendant’s conduct caused the plaintiff to
suffer injury, damage, loss or harm. I
will now discuss each of these elements separately.
Was there a contract between the
parties?
You
must first determine whether some type of contract existed between the
plaintiff and the defendant.[11]
1.
Express or Implied Contract
[Instruct the
jury on the legal principles that apply to the particular contract. See Model Civil Jury Charge 4.10E. ]
If you find that a contract existed
between the parties, you must then determine whether the defendant violated the
implied covenant of good faith and fair dealing.
Did
the defendant act in bad faith with the intent to deprive the plaintiff of rights
or benefits under the contract?
As
to this element, you must decide whether the defendant acted with bad faith to
interfere with the plaintiff’s right to receive the benefits of the contract. Proof of bad motive or intention is essential
to a claim that the defendant has violated the covenant of good faith and fair
dealing.
In
considering what constitutes bad faith, you should consider a number of
factors, including the expectations of the parties and the purposes for which
the contract was made. You should also
consider the level of sophistication between the parties, whether the parties
had equal or unequal bargaining power, and whether the defendant’s action
involved the exercise of discretion.
Keep
in mind, however, that bad faith is not established by simply showing that the
defendant’s motive for his/her actions did not consider the best interests of
the plaintiff. Contract law does not
require parties to behave thoughtfully, charitably or unselfishly toward each
other.[12]
In
order for the plaintiff to prevail on his/her claim, you must specifically find
that bad faith motivated the defendant’s actions. A defendant who acts in good faith on an
honest, but mistaken, belief that his/her actions were justified has not
breached the covenant of good faith and fair dealing.[13]
Whether the defendant’s conduct caused the plaintiff
to suffer injury, damage, loss or harm
The
plaintiff must also prove that because of the defendant’s actions, the
plaintiff was unable to realize the benefits of the contract [describe the specific losses alleged by the
plaintiff].
In
summary, if you find that the plaintiff has proven by a preponderance of the
evidence: (1) the existence of some type of contract; (2) that the defendant,
although acting consistent with the contract’s terms, acted in bad faith with
the intent to deprive the plaintiff of his/her reasonable expectations under
the contract; and (3) the plaintiff sustained injury or loss as a result of
such action, then you must find for the plaintiff.
If
you find that the plaintiff has failed to prove any of these elements by the
preponderance of the evidence, you must find for the defendant.
[1] See Chapter Two, “Employment Law Charges,”
for model charge regarding the Covenant of Good Faith and Fair Dealing in the
context of an employment contract See Charge 2.15.
[2] See
Sons of Thunder, Inc. v. Borden, Inc., 148 N.J. 396 (1997); Pickett v.
Lloyd’s, 131 N.J. 457, 467
(1993); Onderdonk v. Presbyterian Homes, 85
N.J. 171, 182 (1981); Bak-A-Lum Corp. v. Alcoa Bldg. Prods. Inc.,
69 N.J. 123, 129-130 (1976); Ass’n Group Life, Inc. v. Catholic War
Veterans, 61 N.J. 150, 152
(1972); Palisades Properties, Inc. v.
Brunetti, 44 N.J. 117, 130
(1965).
[3]
The U.C.C. addresses the issue.
“Every contract or duty within this Act imposes an obligation of good faith in
its performance or enforcement.” N.J.S.A.
12A:1-203. Good faith is generally defined as “honesty in fact in the conduct
or transaction concerned.” N.J.S.A.
12A:1-201(19). “Good faith in the case of a merchant means honesty in fact and
the observance of reasonable commercial standards of fair dealing in the trade.”
N.J.S.A. 12A:2-103(b). Although the U.C.C. governed in Sons of Thunder, Inc., supra,
the Court stated that the common law duty also influenced the Court’s analysis.
Sons of Thunder, Inc. v. Borden, Inc.,
supra, at 420-421.
[4] Brunswick Hills Racquet Club, Inc. v. Route
18 Shopping Center Assoc., 182 N.J.
at 230-231 (2005); Wilson v. Amerada Hess
Corp., 168 N.J. 236, 251 (2001)
(citations omitted); Sons of Thunder,
Inc. v. Borden, Inc., supra, at
420. See also Wade v. Kessler Institute, 172 N.J.
327 (2002); Palisades Properties, Inc. v.
Brunetti, supra, at 117.
[5] Wade v. Kessler Institute, supra, at 345
(expressly emphasizing there can be no breach of the implied covenant of good
faith and fair dealing in the absence of a contract).
[6]
See Sons of Thunder, Inc. v. Borden,
Inc., supra, at 417 (“We
agree...that the implied covenant of good faith and fair dealing cannot
override an express termination clause”); Id.
at 423 (“[W]here the contractual right to terminate is express and unambiguous,
the motive of the terminating party is irrelevant. . . .As stated previously,
we agree with that view of the law”); see also Prudential Stewart Realty v. Sonnenfeldt, 285 N.J. Super. 106, 110 (App. Div. 1995), certif. denied, 143 N.J.
(1996) (party does not breach implied duty of good faith and fair dealing, in
exercising contractual right to terminate after six months, regardless of
party's motives); Karl’s Sales &
Service, Inc. v. Gimbel Bros., Inc., 249 N.J. Super. 487, 495 (App. Div. 1991), certif. denied, 127 N.J. at
548 (1991).
[7] Sons of Thunder, Inc. v. Borden, Inc., supra, at 419 (although the duty does
not trump an express termination clause, the court still “must determine
whether ... [party] performed its obligations in good faith.”); Id. at 421-424 (party with express
termination right must still perform contract in good faith and fairly).
[8] Price v. New Jersey Manufacturers Insurance
Company, 182 N.J. 519 (2005) (an
insurance company, as the dominant party, has an even greater obligation than
the insured to act in good faith; it must not put technical encumbrances or
hidden pitfalls in the way of unsophisticated customers that would undermine
their reasonable expectations.); Silvestri
v. Optus Software, Inc., 175 N.J.
113 (2003) (a subjective standard that governs satisfaction clauses in
employment contracts obliges the employer to act honestly in accordance with
his duty of good faith and fair dealing, but genuine dissatisfaction of the
employer, honestly held, is sufficient for discharge.); Wilson v. Amerada Hess Corp., supra, at 251 (in action by gasoline
company franchisees against the franchisor and supplier of gasoline products,
the plaintiffs alleged that the defendant had breached the implied covenant of
good faith and fair dealing in the performance of the parties’ contract
provision whereby defendant had the unilateral right and discretion to set the
price for the gasoline. The Court held
that the discretion afforded to Hess
under the contract was not “unbridled discretion.” Rather, Hess’s
performance is tempered by the implied covenant of good faith and fair dealing
and the reasonable expectations of the parties. “[A] party exercising its right
to use discretion in setting price under a contract breaches the duty of good
faith and fair dealing if that party exercises its discretionary authority
arbitrarily, unreasonably, or capriciously, with the objective of preventing
the other party from receiving its reasonably expected fruits under the
contract.”); R.J. Gaydos Insurance
Agency, Inc. v. National Consumer Insurance Company, 168 N.J. 255 (2001) (a common law cause of
action for breach of the implied duty of good faith and fair dealing cannot be
brought when that claim is based solely on allegations that the defendant
violated the Fair Automobile Insurance
Reform Act).
See also, Wood v. New Jersey Manufacturers Insurance Co., 206 N.J. 562 (2011) (Plaintiff, a mail
carrier, filed the underlying personal injury action after she was attacked and
seriously injured by the insureds’ dog.
Plaintiff rejected the insurer’s $300,000 settlement offer, but
repeatedly asserted that she would have accepted a settlement near the $500,000
policy limits. Plaintiff, replying on Rova Farms Resort, Inc. v. Investors
Insurance Co. of America, 65 N.J.
474 (1974), placed the insurer on notice that if she recovered a verdict in
excess of the policy limits, she would look to the insurer for the excess. The trial resulted in a verdict in the
Plaintiff’s favor in excess of the policy limits. The insureds assigned their Rova Farms claim to the Plaintiff and
she then brought a declaratory judgment action.
The Appellate Division did not reach the issue of the right to a jury
trial, leaving it on remand to the discretion of the trial court. The Supreme Court granted certification
limited to the question of whether an insured’s claims of bad faith are to be
decided by a judge or jury. The Supreme
Court found that regardless of the label that the Plaintiff put on the action, Rova Farms bad faith claim was a breach
of contract claim and, thus, it was an action at law triable to a jury).
[9] In Brunswick Hills Racquet Club, Inc. v. Route
18 Shopping Center Assoc., supra,
the plaintiff, a tennis club tenant, failed to properly exercise the express
terms of an option agreement to purchase the occupied premises from its
commercial landlord. Plaintiff sued,
alleging that the landlord’s evasive tactics caused the tenant to lose its
option to buy the tennis club under the lease.
In finding that the landlord had breached the covenant of good faith and
fair dealing, the Supreme Court clarified the proof standards for a breach of
good faith and fair dealing claim:
“Proof of ‘bad motive or intention’ is vital to an action for breach of
the covenant.” Id. at 225. The Court also
stated that the party claiming a breach “must provide evidence sufficient to
support a conclusion that the party alleged to have acted in bad faith has
engaged in some conduct that denied the benefit of the bargain originally
intended by the parties.” Id. at Williston on Contracts, Sec. 63:22.
Finally, the Court sets forth a “general rule” that “‘subterfuges and
evasions’ in the performance of a contract” violate the covenant, even if the
actor believes his conduct to be justified.”
Id. at Restatement (Second) of Contracts, Sec. 205, comment d (1981).
[10]
For example, the contract could involve the employer’s obligation to pay
commissions, fringe benefits, bonuses, or other compensation. It could also be a contract to employ the
individual for a certain period or a contract arising out of an employee
handbook.
[11] If
the parties agree that a contract existed, the jury should be so instructed.
[12] Wilson
v. Amerada Hess Corp., supra, at 251.
[13] Silvestri
v. Optus Software, Inc., supra.
