Contractual good faith: variations on the theme of expectations.

• Author: Pryor, C. Scott
• Position: Florida

Judges and lawyers are familiar with the principle that "a party's good faith cooperation is an implied condition precedent to performance of a contract."(1) The duty of good faith has had a sporadic history in Florida's common law tradition.(2) Since 1965 it has also been a statutorily implied term under the Uniform Commercial Code (Code).(3) Good faith (or the lack of it) has been more frequently an issue in lender liability actions than any other category of claims.(4) Nonetheless, astute counsel must consider this duty as either an affirmative defense or the basis of a claim in every contract action.

The concept of good faith is difficult to define apart from a set of facts to which it can be applied. Similar to Justice Potter Stewart's remark concerning pornography that "I know it when I see it," most attorneys and judges have an intuitive grasp of the parameters of good faith (or at least those situations that evidence bad faith). Although the Code defines good faith purely in subjective terms as "honesty in fact,"(5) several decisions under the common law have adopted a broader definition.(6) Recently, however, some opinions by various district courts of appeal have by implication narrowed the outer limits of the duty of good faith in both Code and common law contract cases.

The Early Days

An early discussion of obligations implied in a contract can be found in Sharp v. Williams, 192 So. 476 (Flat 1939), in which the Florida Supreme Court affirmed a decision that breach of an implied contractual duty constituted actionable "bad faith." In Sharp a landlord sublet part of the leased premises to a subtenant with a provision that the sublease would be extended if the original lease were renewed. Rather than extending the original lease, however, the tenant/sublessor obtained a new lease and thereby eliminated the sublessee's right to extension. While the tenant's actions did not violate any provision of the sublease, the court noted, "A contract includes not only the things written, but also terms and matters which, though not actually expressed, are implied by law, and these are as binding as the terms which are actually written or spoken."(7)

These implied terms include, among others, the promise to do nothing that would prevent the other party from creating or obtaining any benefit which could arise under the contract. Thus, the subtenant's expectation of an extension was a sufficient basis on which to base a claim for bad faith breach of contract.

The Uniform Commercial Code

Little came of the court's discussion of bad faith breaches of contract over the next 30 years. With the adoption of the Uniform Commercial Code in 1965, however, the duty of good faith became explicit. F.S. [Section] 671.203 recites that "[e]very contract or duty within this code imposes an obligation of good faith in its performance or enforcement." The Code narrowly defines its obligation: "'Good faith' means honesty in fact in the conduct or transaction concerned."(8) Did the drafters intend that good faith under the Code prohibits only intentionally wrongful actions and otherwise permits enforcement "to the letter of the contract"? While their original intent is unclear, it would appear that at least today a narrow understanding of good faith under the Code is in order. In light of a series of cases from various jurisdictions holding parties liable in damages for breach of the Code's duty of good faith(9) the Permanent Editorial Board issued an Official Commentary in 1994 to the effect that

This section [UCC 1-203] does not support an independent cause of action for failure to perform or enforce in good faith. Rather, this section means that a failure to perform or enforce, in good faith, a specific duty or obligation under the contract, constitutes a breach of that contract or makes unavailable, under the particular circumstances, a remedial right or power. This distinction makes it clear that the doctrine of good faith merely directs a court toward interpreting contracts within the commercial context in which they are created, performed and enforced, and does not create a separate duty of fairness and reasonableness which can be independently breached.(10)

Good faith under the Code is thus more of an interpretive tool than an independent remedial source.

Common Law Good Faith

The narrow, subjective interpretation of good faith has not carried the day universally. In a non-Code case the Third District Court of Appeal expanded on the remedy afforded by the Sharp decision and held that a blanket lease provision prohibiting assignment by the tenant could not be enforced in an arbitrary or capricious manner. Fernandez v. Vazquez, 397 So. 2d 1171 (Flat 3d DCA 1981). The owners of a bakery leased it for five years with a provision that the lessee could not assign the lease or sublet the premises without the written consent of the landlord. The tenants decided to get out of the bakery business and obtained a buyer who agreed to take an assignment of the lease. The landlord refused to consent but a month later offered to lease the premises to the prospective buyer for an additional $250 per month. The buyer rejected the offer and the sale of the business fell apart. The...