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San Diego Business Contracts: More on the Implied Covenant of Good Faith and Fair Dealing

In general, when your San Diego business enters into a contract, the obligations that are imposed are the ones written in the contract — the obligations to which the parties have agreed to bind themselves. Normally, if something is not written in the contract, then neither party is bound to that obligation. There are, however, a few exceptions to the rule where, by action of California law, certain obligations are implied. One example is the implied covenant of good faith and fair dealing. This covenant exists in every contract and is simply the promise by both parties that they will not do anything to unfairly interfere with the right of any other party to receive their benefits of the contract.

As an example, assume a contract is agreed to whereby money is paid for machine parts and it is agreed that the buyer must arrive by Saturday to pick up the parts. The contract further states that the failure to pick up the parts will void the contract and the seller can keep the deposit paid — say $1,000.

The seller is not allowed to do anything that would prevent the buyer from arriving to pick up the machine parts. The seller cannot, for example, destroy the buyer’s truck on Saturday morning. To do that would be a violation of the covenant of good faith and fair dealing (and also criminal behavior). If there is a violation/breach of the covenant, the other party to the contract can sue and seek damages in compensation.

To establish a claim for breach of the covenant, the following must be shown:

  • A contract was agreed to;
  • The party suing — the plaintiff — did substantially all of the significant things that the contract required the plaintiff to do;
  • The other party — the defendant — took some action that unfairly interfered with the plaintiff’s right to receive the benefits of the contract; and
  • The plaintiff was harmed or suffered injury because of the defendant’s conduct

Note that there does not need to be any separate or independent breach of the contract by the defendant. That is, a claim for breach of the implied covenant can be filed as a stand-alone claim. On the other hand, a regular breach of the contract is not also a breach of the implied covenant. Something more than a normal or regular breach of the contract is required. That is the holding of a recent case decided by the California Court of Appeals called Miller v. OCWEN Loan Servicing, LLC, Case No. B287848 (Cal. App. 2nd Dist. May 29, 2019) (unpublished). In that case, a home owner and borrower sought to have his mortgage modified. The modification agreement was duly drafted and signed by the parties. However, the home owner fell behind on his payments and the loan went into default. When foreclosure proceedings were about to begin, the homeowner brought a separate lawsuit claiming that OCWEN breached the loan modification agreement by not reducing his monthly payments, by not accepting certain payments offered after he had gone into default, by beginning the foreclosure process and by taking certain other actions. The homeowner also claimed that the exact same actions were violations of the covenant of good faith and fair dealing. The trial court dismissed the claims related to the implied covenant and the Court of Appeals affirmed. There must be something more for there to be a breach of the implied covenant.

In our example above, the “something more” is the destruction of the buyer’s truck which prevents the buyer from picking up the machine parts.

Call San Diego Corporate Law Today

For more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Contact Mr. Leonard by calling (858) 483-9200 or via email. Mr. Leonard focuses his practice on business law, transactional, and corporate matters, and he proudly provides legal services to business owners in San Diego and the surrounding communities. Like us on Facebook.

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