California Breach of Implied Covenant of Good Faith and Fair Dealing Elements and Defenses

Definition
In every contract there is an implied covenant of good faith and fair dealing by each party not to do anything which will deprive the other parties of the benefits of the contract, and a breach of this covenant by failure to deal fairly or in good faith gives rise to an action for damages. (Avidity Partners, LLC v. State of California (2013) 221 Cal.App.4th 1180, 1206.)

Element 1: Contract

An action for breach of the implied covenant of good faith and fair dealing requires an underlying agreement of some sort (contract, letter of intent, preliminary agreement to use best efforts to agree, etc.). (Racine & Laramie, Ltd. v. Dep’t of Parks and Recreation (1992) 11 Cal.App.4th 1026, 1031-32, 1033 n.4.) There is no implied covenant of good faith and fair dealing during pre-contractual negotiations. (Ibid.)

The covenant exists merely to prevent one contracting party from unfairly frustrating the other party’s right to receive the benefits of the agreement actually made. The covenant thus cannot “be endowed with an existence independent of its contractual underpinnings.” It cannot impose substantive duties or limits on the contracting parties beyond those incorporated in the specific terms of their agreement. (Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 349-350.)

When one party to a contract retains the unilateral right to amend the agreement governing the parties’ relationship, its exercise of that right is constrained by the covenant of good faith and fair dealing which precludes amendments that operate retroactively to impair accrued rights. (Cobb v. Ironwood Country Club (2015) 233 Cal.App.4th 960, 963.)

       Discretionary Powers Expressly Granted in Contract

The implied covenant of good faith and fair dealing cannot be read to require defendants to take a particular action that is discretionary under the contract when the contract also expressly grants them the discretion to take a different action. To apply the covenant to require a party to take one of two alternative actions expressly allowed by the contract and forgo the other would contravene the rule that the implied covenant of good faith and fair dealing may not be “read to prohibit a party from doing that which is expressly permitted by an agreement.” (Bevis v. Terrace View Partners, LP (2019) 33 Cal.App.5th 230, 256.)

Element 2: Duty of Good Faith and Fair Dealing

The covenant imposes on each party to the contract the duty to refrain from doing anything which would render performance of the contract impossible by any act of his own, and also the duty to do everything that the contract presupposes that each party will do to accomplish its purpose. (Pasadena Live v. City of Pasadena (2004) 114 Cal.App.4th 1089, 1093.)

The implied covenant of good faith and fair dealing imposes reciprocal duties on both parties to a contract. (Smith v. City and County of San Francisco (1990) 225 Cal.App.3d 38, 49.)

        Scope of Duty

The precise nature and extent of the duty imposed depends on the contractual purposes. (Jonathan Neil & Assoc., Inc. v. Jones (2004) 33 Cal.4th 917, 937; Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 818.)

The essence of the good faith covenant is objectively reasonable conduct. (Badie v. Bank of Am. (1998) 67 Cal.App.4th 779, 796 [bank’s addition of an entirely new term to credit card account holders by sending a notice of change of terms requiring ADR along with their account statements was not “objectively reasonable” even though account agreement gave bank unilateral and non-negotiable right to change every aspect of performance required under it]; Lazar v. Hertz Corp. (1983) 143 Cal.App.3d 128, 141.)

Element 3: Breach of Implied Covenant

Breach of a specific provision of the contract is not necessary to claim for breach of the implied covenant of good faith and fair dealing. (Thrifty Payless, Inc. v. The Americana at brand, LLC (2013) 218 Cal.App.4th 1230, 1244.)

Although the breach of the implied covenant is often pleaded as a separate count, a breach of the implied covenant is necessarily a breach of contract. (Digerati Holdings, LLC v. Young Money Entertainment, LLC (2011) 194 Cal.App.4th 873, 885.)

The issue of whether the implied covenant of good faith and fair dealing has been breached is ordinarily a question of fact unless only one inference can be drawn from the evidence. (Hicks v. E.T. Legg & Associates (2001) 89 Cal.App.4th 496, 509.)

        Construction Contracts

In every building contract that contains no express provision to the contrary, there is an implied covenant that the contractor will be permitted to proceed with the construction of the building in accordance with the other terms of the contract without interference by the owner. (Kenworthy v. State (1965) 236 Cal.App.2d 378, 383 [state made contractor’s performance impossible by first causing a delay and then refusing to extend time for performance when state knew contractor needed to obtain financing before commencing construction, and lender required state’s extension before approving financing].)

        Leases

When a lease allows assignment or subletting only with the lessor’s prior consent, the lessor may refuse consent only where he has a good faith reasonable objection to the assignment or sublease, even if no provision prohibits the unreasonable or arbitrary withholding of consent. (Cohen v. Ratinoff (1983) 147 Cal.App.3d 321, 330; see also McWilliams v. Holton (1967) 248 Cal.App.2d 447, 451 [lessor breached covenant owed to new tenant by allowing existing tenant to remain in possession of leased premises].)

A lease provision giving the lessor the absolute right to terminate the lease if the lessee requests an assignment or subletting did not violate the covenant of good faith and fair dealing. (Carma Developers, Inc. v. Marathon Dev. Cal., Inc. (1992) 2 Cal.4th 342, 374.)

        Joint Ventures

In a joint venture, the parties owe one another the duty of fair, open, and honest disclosure. They cannot secure or accept secret gains by connivance, deceit, or suppression of facts. (Universal Sales Corp. v. California Press Mfg. Co. (1942) 20 Cal.2d 751, 771 [joint venturer breached covenant by withholding information in order to benefit personally].)

         Sale of Business/Covenant Not to Compete

The seller of a company violated the covenant of good faith and fair dealing and the covenant not to compete under the sale contract with his buyer by loaning money to his son to establish a competing business two blocks from the site of the company. (Harrison v. Cook (1963) 213 Cal.App.2d 527, 530.)

Element 4: Causation and Damages

Implicit in the element of damage is that the defendant’s breach caused the plaintiff’s damage. (Troyk v. Farmers Group, Inc. (2009) 171 Cal.App.4th 1305, 1352.)

Any breach, total or partial, which causes a measurable injury, gives the injured party a right to compensatory damages. (Brawley v. J.C. Interiors, Inc. (2008) 161 Cal.App.4th 1126.)

An essential element of breach of contract claims is that a defendant’s alleged misconduct was the cause in fact of the plaintiff’s damage. The causation analysis involves two elements. One is cause in fact. An act is a cause in fact if it is a necessary antecedent of an event. The second element is proximate cause. Proximate cause is ordinarily concerned, not with the fact of causation, but with the various considerations of policy that limit an actor’s responsibility for the consequences of his conduct. (Tribeca Companies, LLC v. First American Title Ins. Co. (2015) 239 Cal.App.4th 1088, 1102-1103

Remedies

Compensatory Damages

The measure of damages for breach of contract is the amount which will compensate plaintiff for all detriment proximately caused by the breach or which, in the ordinary course of things, would be likely to result from the breach. (Cal. Civ. Code, § 3300.)

Restoration

Damages for breach of contract ordinarily include all amounts necessary to place plaintiff in same position as if breach had not occurred. (Applied Equip. Corp. v. Litton Saudi Arabia, Ltd. (1994) 7 Cal.4th 503, 515.)

Lost Profits

Future profits can be recovered to extent they can be estimated with reasonable certainty. (Sanchez-Corea v. Bank of America (1985) 38 Cal.3d 892, 907-08; Fisher v. Hampton (1975) 44 Cal.App.3d 741, 747. Lost profits are recoverable to extent they are natural and direct consequence of breach. (Brandon & Tibbs v. George Kevorkian Accountancy Corp. (1990) 226 Cal.App.3d 442, 457, 277; Postal Instant Press v. Sealy (1996) 43 Cal.App.4th 1704, 1709 [franchisee’s failure to make timely royalty payments to franchisor was not a “natural and direct” consequence of the breach because franchisor chose to terminate contract, thus losing entitlement of future royalty payments].)

Rescission and Restitution

Rescission and restitution are alternative remedies in action for damages where there has been repudiation or material breach of a contract, transfer of unique goods is involved, other remedies are inadequate, subject of contract still exists and interests of innocent purchasers for value and defendant’s creditors will not be unjustly affected. (Wong v. Stoler (2015) 237 Cal.App.4th 1375.)

Equitable Relief

Specific Performance

Specific performance is granted only when money damages are inadequate. (Palo Alto-Menlo Park Yellow Cab Co. v. Santa Clara County Transit Dist. (1976) 65 Cal.App.3d     121, 132-33.)

Injunction (Very Limited Availability)

Injunctive relief is largely within discretion of trial court, considering inadequacy of     damages to plaintiff, as well as harm to defendant. (Smith v. Mendonsa (1952) 108      Cal.App.2d 540, 543-44.)

Statute of Limitations

Generally, the limitations period is four years for written contracts (Cal. Civ. Proc. Code, §337, subd. (a)), and two years for oral agreements. (Cal. Civ. Proc. Code, §339, subd. (1)). A contract cause of action does not accrue until the contract has been breached. (Spear v. Cal. State Automobile Assn. (1992) 2 Cal.4th 1035, 1042.) The discovery rule may be applied to breaches of contract which can be, and are, committed in secret and, moreover, where the harm flowing from those breaches will not be reasonably discoverable by plaintiffs until a future time. (Gryczman v. 4550 Pico Partners, Ltd. (2003) 107 Cal.App.4th 1, 4-5.)

Affirmative Defenses

Express Covenant Inconsistent with Implied Covenant

When a contract is unambiguous, no obligation can be implied which would result in the obliteration of a right expressly given under a written contract. (Thrifty Payless, Inc. v. Mariners Mile Gateway, LLC (2010) 185 Cal.App.4th 1050, 1062.)

Defendant Not A Party To Underlying Contract

An implied covenant of good faith and fair dealing arises out of an underlying contractual relationship. In the absence of such a relationship, no recover for bad faith may be had. (Gulf Ins. Co. v. TIG Ins. Co. (2001) 86 Cal.App.4th 422, 430; Seretti v. Superior Nat’l Ins. Co. (1999) 71 Cal.4th 920, 929; Austero v. National Casualty Co. (1976) 62 Cal.App.3d 511, 515.)

Unconscionability

Unconscionability is a contract defense. The unconscionability doctrine ensures that contracts, particularly contracts of adhesion, do not impose terms that are overly harsh, unduly oppressive, so one-sided as to shock the conscience, or unfairly one-sided. (Sanchez v. Valencia Holding Co., LLC (2015) 61 Cal.4th 899; Cal. Civ. Code, §1670.5.)

Unclean Hands

The doctrine of unclean hands is a defense available in both legal and equitable actions. (Jade Fashion Co., Inc. v. Harkham Industries, Inc. (2014) 229 Cal.App.4th 635, 653.)

Unilateral Mistake of Fact

To prevail on a unilateral mistake claim, the defendant must prove that the plaintiff knew that the defendant was mistaken and that plaintiff used that mistake to take advantage of the defendant: “Defendants contend that a material mistake of fact – namely, the defendants’ belief that they would not be obligated to install a new roof upon the residence – prevented contract formation. A unilateral mistake of fact may be the basis of relief. However, such a unilateral mistake may not invalidate a contract without a showing that the other party to the contract was aware of the mistaken belief and unfairly utilized that mistaken belief in a manner enabling him to take advantage of the other party.” (Meyer v. Benko (1976) 55 Cal.App.3d 937, 944.)

Bilateral Mistake

Where, as here, the extrinsic evidence is not in conflict, the determination of whether a mutual mistake occurred is a question of law. (Hess v. Ford Motor Co. (2002) 27 Cal.4th 516, 527.) “Ordinary negligence does not bar a claim for mutual mistake because ‘“[t]here is an element of carelessness in nearly every case of mistake . . . .”’ ‘Only gross negligence or ‘preposterous or irrational’ conduct will [bar] mutual mistake.’” (Thrifty Payless, Inc. v. The Americana at Brand, LLC (2013) 218 Cal.App.4th 1230, 1243.)

Duress

“Menace” is considered to be duress: “Under the modern rule, ‘“[d]uress, which includes whatever destroys one’s free agency and constrains [her] to do what is against [her] will, may be exercised by threats, importunity or any species of mental coercion. It is shown where a party ‘intentionally used threats or pressure to induce action or nonaction to the other party’s detriment.’”’ The coercion must induce the assent of the coerced party, who has no reasonable alternative to succumbing.” (In re Marriage of Baltins (1989) 212 Cal.App.3d 66, 84.)

Economic Duress

Different elements may apply if economic duress is alleged to avoid an agreement to settle a debt. (Perez v. Uline, Inc. (2007) 157 Cal.App.4th 953, 959-960.) The doctrine of economic duress can apply when one party has done a wrongful act which is sufficiently coercive to cause a reasonably prudent person, faced with no reasonable alternative, to agree to an unfavorable contract. The party subjected to the coercive act, and having no reasonable alternative, can then plead economic duress to avoid the contract. (CrossTalk Productions, Inc. v. Jacobson (1998) 65 Cal.App.4th 631, 644.)

Undue Influence

Undue influence consists of the use of excessive pressure by a dominant person over a servient person resulting in the apparent will of the servient person being in fact the will of the dominant person. The undue susceptibility to such overpersuasive influence may be the product of physical or emotional exhaustion or anguish which results in one’s inability to act with unencumbered volition. (Keithley v. Civil Service Bd. of the City of Oakland (1970) 11 Cal.App.3d 443, 451.)

Fraud

Fraud may be asserted as an affirmative defense: “One who has been induced to enter into a contract by false and fraudulent representations may rescind the contract; or he may affirm it, keeping what he has received under it, and maintain an action to recover damages he has sustained by reason of the fraud; or he may set up such damages as a complete or partial defense if sued on the contract by the other party.” (Grady v. Easley (1941) 45 Cal.App.2d 632, 642.)

Waiver

The waiver may be either express, based on the words of the waiving party, or implied, based on conduct indicating an intent to relinquish the right. Thus, “California courts will find waiver when a party intentionally relinquishes a right or when that party’s acts are so inconsistent with an intent to enforce the right as to induce a reasonable belief that such right has been relinquished.” (Wind Dancer Production Group v. Walt Disney Pictures (2017) 10 Cal.App.5th 56, 78.)

Statute of Limitations

Generally, the limitations period is four years for written contracts (Cal. Civ. Proc. Code, §337, subd. (a)), and two years for oral agreements. (Cal. Civ. Proc. Code, §339, subd. (1)). A contract cause of action does not accrue until the contract has been breached. (Spear v. Cal. State Automobile Assn. (1992) 2 Cal.4th 1035, 1042.) The discovery rule may be applied to breaches of contract which can be, and are, committed in secret and, moreover, where the harm flowing from those breaches will not be reasonably discoverable by plaintiffs until a future time. (Gryczman v. 4550 Pico Partners, Ltd. (2003) 107 Cal.App.4th 1, 4-5.)

Novation

“A novation is a substitution, by agreement, of a new obligation for an existing one, with intent to extinguish the latter. A novation is subject to the general rules governing contracts and requires an intent to discharge the old contract, a mutual assent, and a consideration.” (Klepper v. Hoover (1971) 21 Cal.App.3d 460, 463.)