Is the Implied Covenant of Good Faith in Contracts Necessary or Outdated?, Study notes of World Religions

Download Is the Implied Covenant of Good Faith in Contracts Necessary or Outdated? and more Study notes World Religions in PDF only on Docsity! CP DUBROFF 5/22/2006 3:54:55 PM 559 THE IMPLIED COVENANT OF GOOD FAITH IN CONTRACT INTERPRETATION AND GAP-FILLING: REVILING A REVERED RELIC HAROLD DUBROFF† INTRODUCTION The implied covenant of good faith contract performance has become a fundamental concept of modern contract jurisprudence. Originally applied in late Nineteenth Century common law contracts cases,1 the covenant gained increased acceptance when it was incorporated into the Uniform Commercial Code (“U.C.C.”)2 and later adopted by the American Law Institute as part of the Restatement (Second) of Contracts (“Restatement † Professor of Law, Albany Law School. The author gratefully acknowledges the assistance of Andrew Poplinger and Nicholas Steinbock-Pratt, students at Albany Law School, and Robert Emery, Associate Director and Research Librarian at the Schaffer Law Library, in the preparation of this Article. 1 See infra notes 14–20 and accompanying text. 2 The U.C.C. was promulgated by the National Conference of Commissioners on Uniform State Laws and the American Law Institute in 1951. U.C.C. xv (2005). The original version of the U.C.C. had three general sections relating to good faith. U.C.C. app. xviii §§ 1-201(19) (defining good faith: “ ‘Good faith’ means honesty in fact in the conduct or transaction concerned.”); 1-203 (stating an obligation of good faith: “Every contract or duty within this Act imposes an obligation of good faith in its performance and enforcement.”); 2-103(1)(b) (defining good faith for purposes of Article 2: “ ‘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). Article 1 of the U.C.C. was revised in 2001. The revision changed the definition of good faith (except for purposes of Article 5) to “honesty in fact and the observance of reasonable commercial standards of fair dealing.” U.C.C. § 1-201 (2004). The 2001 revision also modified the statement of the obligation of good faith—“Every contract or duty within [the Uniform Commercial Code] imposes an obligation of good faith in its performance and enforcement.” Id. § 1-304. Article 2 of the U.C.C. was amended in 2003 to remove the special definition of good faith for purposes of Article 2, except that for jurisdictions adopting the amended Article 2 that had not adopted the revised Article 1, amended Article 2 contains the same definition of good faith that is incorporated into revised Article 1. Id. app. xx § 2-103(j). CP_DUBROFF 5/22/2006 3:54:55 PM 560 ST. JOHN’S LAW REVIEW [Vol. 80 Second”).3 Since the middle of the Twentieth Century it has attracted the attention of scholars4 and has become an 3 RESTATEMENT (SECOND) OF CONTRACTS § 205 (1979). 4 See STEVEN J. BURTON & ERIC G. ANDERSEN, CONTRACTUAL GOOD FAITH: FORMATION, PERFORMANCE, BREACH, ENFORCEMENT 23 (1995); E. ALLAN FARNSWORTH, FARNSWORTH ON CONTRACTS § 7.17 (3d ed. 2004); Eric G. Andersen, Good Faith in the Enforcement of Contracts, 73 IOWA L. REV. 299 (1988); Hazel Glenn Beh, Student Versus University: The University’s Implied Obligations of Good Faith and Fair Dealing, 59 MD. L. REV. 183 (2000); Steven J. Burton, Breach of Contract and the Common Law Duty to Perform in Good Faith, 94 HARV. L. REV. 369 (1980) [hereinafter Burton, Breach of Contract]; Steven J. Burton, Good Faith in Articles 1 and 2 of the U.C.C.: The Practice View, 35 WM. & MARY L. REV. 1533 (1994) [hereinafter Burton, Good Faith in Articles 1 and 2]; Steven J. Burton, Good Faith Performance of a Contract Within Article 2 of the Uniform Commercial Code, 67 IOWA L. REV. 1 (1981) [hereinafter Burton, Good Faith Performance]; Steven J. Burton, More on Good Faith Performance of a Contract: A Reply to Professor Summers, 69 IOWA L. REV. 497 (1984) [hereinafter Burton, More on Good Faith Performance]; Frederick W. Claybrook, Jr., Good Faith in the Termination and Formation of Federal Contracts, 56 MD. L. REV. 555 (1997); Thomas A. Diamond & Howard Foss, Proposed Standards for Evaluating When the Covenant of Good Faith and Fair Dealing Has Been Violated: A Framework for Resolving the Mystery, 47 HASTINGS L.J. 585 (1996); Claire Moore Dickerson, From Behind the Looking Glass: Good Faith, Fiduciary Duty & Permitted Harm, 22 FLA. ST. U. L. REV. 955 (1995); Robert Dugan, Good Faith and the Enforceability of Standardized Terms, 22 WM. & MARY L. REV. 1 (1980); Robert Dugan, Standardized Forms: Unconscionability and Good Faith, 14 NEW ENG. L. REV. 711 (1979); Russell A. Eisenberg, Good Faith Under the Uniform Commercial Code–A New Look at an Old Problem, 54 MARQ. L. REV. 1 (1971); E. Allan Farnsworth, Good Faith Performance and Commercial Reasonableness Under the Uniform Commercial Code, 30 U. CHI. L. REV. 666, 671 (1963) [hereinafter Farnsworth, Good Faith Performance]; Daniel Fischel, The Economics of Lender Liability, 99 YALE L.J. 131 (1989); Barbara A. Fure, Contracts as Literature: A Hermeneutic Approach to the Implied Duty of Good Faith and Fair Dealing in Commercial Loan Agreements, 31 DUQ. L. REV. 729 (1993); Mark P. Gergen, A Cautionary Tale About Good Faith in Texas, 72 TEX. L. REV. 1235 (1994); Clayton P. Gillette, Limitations on the Obligation of Good Faith, 1981 DUKE L.J. 619 (1981); Victor P. Goldberg, Discretion in Long-Term Open Quantity Contracts: Reining in Good Faith, 35 U.C. DAVIS L. REV. 319 (2002); Eric M. Holmes, A Contextual Study of Commercial Good Faith: Good-Faith Disclosure in Contract Formation, 39 U. PITT. L. REV. 381 (1978); Eric M. Holmes, Is There Life After Gilmore’s Death of Contract?–Inductions from a Study of Commercial Good Faith in First-Party Insurance Contracts, 65 CORNELL L. REV. 330 (1980); Emily M.S. Houh, Critical Race Realism: Re-claiming the Antidiscrimination Principle Through the Doctrine of Good Faith in Contract Law, 66 U. PITT. L. REV. 455 (2005); Christina L. Kunz, Frontispiece on Good Faith: A Functional Approach Within the UCC, 16 WM. MITCHELL L. REV. 1105 (1990); William H. Lawrence & Robert D. Wilson, Good Faith in Calling Demand Notes and in Refusing to Extend Additional Financing, 63 IND. L.J. 825 (1988); Monique C. Lillard, Fifty Jurisdictions in Search of a Standard: The Covenant of Good Faith and Fair Dealing in the Employment Context, 57 MO. L. REV. 1233 (1992); Saul Litvinoff, Good Faith, 71 TUL. L. REV. 1645 (1997); Timothy J. Muris, Opportunistic Behavior and the Law of Contracts, 65 MINN. L. REV. 521 (1981); A. Brooke Overby, Bondage, Domination, and the Art of the Deal: An CP_DUBROFF 5/22/2006 3:54:55 PM 2006] IMPLIED COVENANT OF GOOD FAITH 563 attempts to define good faith for purposes of the implied covenant. These difficulties would be eliminated if cases that are really about contract interpretation were approached that way without regard to the issue of good faith. It must be emphasized at the outset that the concern in this Article is with the universal implication of a covenant of good faith performance and enforcement as a basis for resolving questions of contract interpretation and gap-filling. Cases involving good faith can arise in a variety of other contexts, however.7 For example, in some instances a “bad faith” breach of contract may give rise to tort liability8 or may deprive a breaching party of the benefits of the substantial performance doctrine;9 in other situations, a preliminary agreement or agreement to agree may bind the parties to attempt in good faith to reach a final agreement.10 In all these cases, the question of good faith cannot be avoided by resort to contract interpretation. In another category of cases, good faith is mandated by law, either because the contract expressly or impliedly confers discretion on a party in performance or enforcement,11 or as a means to police opportunistic conduct.12 In some of these instances, such as the obligation to exercise good faith in requirement and output contracts, the same criticisms that are suggested with respect to the general implied covenant of good faith apply with equal force; that is, the good faith requirement is simply a surrogate for the real question at issue, which is the interpretation of the contract. In other situations, such as those 7 See Burton, Good Faith in Articles 1 and 2, supra note 4, at 1537–38; Burton, Good Faith Performance, supra note 4, at 18–21. 8 The tort of bad faith breach is generally restricted to cases of insurance companies that wrongfully deny claims of the insured or unreasonably fail to settle claims against the insured that result in liability of the insured in excess of policy limits. See, e.g., Silberg v. Cal. Life Ins. Co., 521 P.2d 1103 (Cal. 1974). 9 See Jacob & Youngs, Inc. v. Kent, 230 N.Y. 239, 244, 129 N.E. 889, 891 (1921) (“The willful transgressor must accept the penalty of his transgression.”). 10 See E. Allan Farnsworth, Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations, 87 COLUM. L. REV. 217, 264–69 (1987); Charles L. Knapp, Enforcing the Contract to Bargain, 44 N.Y.U. L. REV. 673, 677–79 (1969). 11 See, e.g., U.C.C. §§ 2-305 (discussing open price to be set by seller or buyer), 2- 306 (discussing requirement and output contracts), 2-311 (discussing terms of performance to be set by one of parties); 2-712(1) (2005) (discussing buyer entitled to cover damages in making good faith substitute purchase). 12 Id. § 2-209 cmt. 2 (providing that agreements modifying a contract need not have consideration but must meet the test of good faith). CP_DUBROFF 5/22/2006 3:54:55 PM 564 ST. JOHN’S LAW REVIEW [Vol. 80 in which the U.C.C. requirement of good faith for contract modifications applies, the good faith concept is not a substitute for contract interpretation, and the analysis suggested in this Article is not germane. This Article is not concerned with judging conduct once it is established that good faith is required under the contract, as properly interpreted, or otherwise under the circumstances;13 instead, its concern is with a more preliminary issue: whether good faith should be required as a general matter without regard to questions of interpretation. I. A BRIEF HISTORY OF THE IMPLIED COVENANT OF GOOD FAITH AND FORMALIST CONTRACT INTERPRETATION Although the notion of a good faith purchaser is traceable to ancient times, the implication of a covenant of good faith in contract performance is a relatively recent development in the law of contracts, arising in the second half of the Nineteenth Century.14 In its earliest uses, the covenant was applied to a variety of situations in which the express contract language, interpreted strictly, appeared to grant unbridled discretion to one of the parties and could reduce or eliminate the other party’s contract benefits. These situations arose when the promisor’s duty was conditioned on its satisfaction with the promisee’s performance;15 when the duty to buy or sell goods was measured by the needs of the purchaser or the output of the seller;16 when the promisor’s duty to pay was dependent on when he chose to sell property;17 when an insurer was granted discretion to dispute or settle claims against the insured;18 when the promisor reserved the right to interpret the contract;19 and when the 13 Id. 14 See BURTON & ANDERSON, supra note 4, at 23–33; Farnsworth, Good Faith Performance, supra note 4, at 670–71; Van Alstine, supra note 4, at 1230. 15 Balt. & Ohio R. Co. v. Brydon, 3 A. 306 (Md. 1886); Doll v. Noble, 116 N.Y. 230, 22 N.E. 406 (1889); Singerly v. Thayer, 2 A. 230 (Pa. 1886). 16 Brawley v. United States, 96 U.S. 168, 171 (1877); Loudenback Fertilizer Co. v. Tenn. Phosphate Co., 121 F. 298 (6th Cir. 1903); Wigand v. Bachmann-Bechtel Brewing Co., 222 N.Y. 272, 118 N.E. 618 (1918); N.Y. Cent. Ironworks Co. v. U.S. Radiator Co., 174 N.Y. 331, 66 N.E. 967 (1903) (dictum); Genet v. President of the Del. & Hudson Canal Co., 136 N.Y. 593, 32 N.E. 1078 (1893); Asahel Wheeler Co. v. Mendleson, 180 A.D. 9, 167 N.Y.S. 435 (3d Dep’t 1917). 17 See Simon v. Etgen, 213 N.Y. 589, 592, 107 N.E. 1066, 1066–67 (1915). 18 See Brassil v. Md. Cas. Co., 210 N.Y. 235, 239–40, 104 N.E. 622, 623–24 (1914). 19 See Indus. & Gen. Trust v. Tod, 180 N.Y. 215, 220, 73 N.E. 7, 7 (1905). CP_DUBROFF 5/22/2006 3:54:55 PM 2006] IMPLIED COVENANT OF GOOD FAITH 565 promisor attempted to manipulate its profits so as to defeat the promisee’s rights based on the existence of such profits.20 In all of these cases the good faith obligation overrode the unqualified discretion that a strict reading of the contract terms seemed to vest in one of the parties. In such cases, the good faith requirement could be used to change the outcome, so that “if the person [who reserved discretion] decide[d], not on the question submitted, but on some question of interest or advantage not made the basis of rights or obligations by the contract, the decision [was] outside of the contract and [was] given no effect by it.”21 By the early Twentieth Century, the New York Court of Appeals had announced “a contractual obligation of universal force . . . the obligation of good faith in carrying out what is written,”22 as well as its view that, for purposes of implying contract terms, one would be incorrect to “suppose that one party was to be placed at the mercy of the other.”23 Then, in 1933, the New York Court of Appeals decided Kirk La Shelle Co. v. Paul Armstrong Co.,24 often cited as the leading early case on the implied covenant of good faith, in which the court declared that: [I]n every contract there is an implied covenant that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract, which means that in every contract there exists an implied covenant of good faith and fair dealing.25 In Kirk La Shelle, the defendant settled a lawsuit by agreeing to pay, to the plaintiff, half of all receipts from the revival of a play. The settlement also gave, to the plaintiff, 20 See Marsh v. Masterson, 101 N.Y. 401, 404–05, 5 N.E. 59, 59–60 (1886). 21 Devoine Co. v. Int’l Co., 136 A. 37, 38 (Md. 1927). 22 Brassil, 210 N.Y. at 241, 104 N.E. at 624. The decision by the insurer to defend, instead of settle within the policy limits, obligated the insurer to appeal once a verdict over four times the policy limit was had against the insured. The insured’s rights “go deeper than the mere surface of the contract written for him by the defendant.” Id. at 242, 104 N.E. at 624. However, the court was careful to note that “[t]he circumstances of this case are peculiar . . . [and w]e do not go beyond them.” Id. at 242, 104 N.E. at 624. 23 Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88, 91, 118 N.E. 214, 214 (1917) (referencing nowhere an application of the implied covenant of good faith, but demonstrating the willingness of a court to recognize the imposition, upon contracting parties, of principles of fairness in dealing). 24 263 N.Y. 79, 188 N.E. 163 (1933). 25 Id. at 87, 188 N.E. at 167. CP_DUBROFF 5/22/2006 3:54:55 PM 568 ST. JOHN’S LAW REVIEW [Vol. 80 At the heart of the formalistic approach to contract interpretation was “the plain meaning” rule, which was based on two presumptions. The first was a presumption that words have a finite number of ordinary or commonly understood meanings, and the second was that parties intend that the words included in their contracts be given those meanings.37 Operating under these presumptions allowed questions of interpretation to be treated as questions of law not requiring factual determination regarding the context in which the contract was formed or the actual intentions of the parties.38 Judge Hand’s often-quoted observation regarding the plain meaning rule was particularly candid: It makes not the least difference whether a promisor actually intends that meaning which the law will impose upon his words. The whole House of Bishops might satisfy us that he had intended something else, and it would make not a particle of difference in his obligation. . . . Hence it follows that no declaration of the promisor as to his meaning when he used the words is of the slightest relevancy, however formally competent it may be as an admission. Indeed, if both parties severally declared that their meaning had been other than the natural meaning, and each declaration was similar, it would be irrelevant . . . [and w]hen the court came to assign the meaning to their words, it would disregard such declarations, because they related only to their state of mind when the contract was made, and that has nothing to do with their obligations.39 The parol evidence rule, which applies when the parties reach a final written agreement on some or all of the terms of the contract, intensified the importance of the plain meaning rule by barring proof of prior, or contemporaneous oral, agreements, whether or not such agreements could be proved to have been 37 See id. at 1232–33 (noting that the plain meaning rule stands for the proposition that an unambiguous writing is conclusive evidence of actual intent). 38 See RESTATEMENT (SECOND) OF CONTRACTS § 212(2) (1979) (classifying interpretation as a question of fact only if there is an issue of credibility with respect to extrinsic evidence, or when more than one reasonable inference can be drawn from extrinsic evidence). Since the parol evidence rule, as applied by the formalists, barred extrinsic evidence except where language was ambiguous on its face, interpretation of language that had a plain meaning would be solely a question of law for the court. See FARNSWORTH, supra note 4, § 7.14 (reiterating the position of Restatement Second). 39 Eustis Mining Co. v. Beer, Sondheimer & Co., 239 F. 976, 984–85 (S.D.N.Y. 1917). CP_DUBROFF 5/22/2006 3:54:55 PM 2006] IMPLIED COVENANT OF GOOD FAITH 569 actually made.40 As applied by the formalists, the parol evidence rule also barred extrinsic evidence intended to interpret the integration itself, unless a court found the writing to be ambiguous on its face.41 Thus, extrinsic evidence was often barred, even when introduced to demonstrate an ambiguity in the language of the contract. Courts would apply the plain meaning rule, and if a court concluded that the language employed had a plain meaning then there was no ambiguity. Although courts acknowledged the potential injustice and harshness of the rule, classic contract law and Restatement First applied it rigorously as a necessary prophylactic against fraud and faulty memories. As one court noted: [A]pplication of the [parol evidence] rule can work to create harsh results. However, the policies behind the rule compel its consistent, uniform application. Commercial stability requires that parties to a contract may rely upon its express terms without worrying that the law will allow the other party to change the terms of the agreement at a later date.42 A party relying upon the plain meaning and parol evidence rules could seek to enforce rights that contract language, literally interpreted, conferred upon it despite the fact that the literal interpretation was not an accurate reflection of the actual intent of the parties at the time of contracting. Implication of a covenant of good faith, however, provided a justification for courts to look beyond the plain language of an agreement to inquire into the context of a particular bargain and determine the actual intentions and expectations of the parties, although they may have been expressed imperfectly. Two early New York Court of Appeals cases provide interesting illustrations of how changes in the common law evolve—in this case to limit the plain meaning rule so as to achieve reasonable results without abandoning the principles of formalistic jurisprudence. In one of the earliest of the good faith cases, New York Central Iron Works Co. v. United States Radiator Co.,43 the defendant was required to fill the “entire radiator needs” of the plaintiff. When iron 40 See RESTATEMENT OF CONTRACTS § 237 (1932). 41 See id. § 231; E. Allan Farnsworth, “Meaning” in the Law of Contracts, 76 YALE L.J. 939, 959 (1967); Eric A. Posner, The Parol Evidence Rule, the Plain Meaning Rule, and the Principles of Contractual Interpretation, 146 U. PA. L. REV. 533, 535 (1998). 42 Baker v. Bailey, 782 P.2d 1286, 1288 (Mont. 1989). 43 174 N.Y. 331, 66 N.E. 967 (1903). CP_DUBROFF 5/22/2006 3:54:55 PM 570 ST. JOHN’S LAW REVIEW [Vol. 80 prices rose beyond the defendant’s expectations, it refused to fill the plaintiff’s “needs” above those in prior years. Interpreting the contract language under the plain meaning rule, the court concluded that the plaintiff’s “needs” consisted of all radiators that it could sell at a profit. Nevertheless, it stated in dictum that, had the defendant properly raised the issue, it could have defended on the grounds that the plaintiff was not acting in good faith in attempting to exploit market conditions that were beyond the contemplation of the parties when the contract was formed: [W]e do not mean to assert that the plaintiff had the right, under the contract, to order goods to any amount. Both parties in such a contract are bound to carry it out in a reasonable way. The obligation of good faith and fair dealing towards each other is implied in every contract of this character. The plaintiff could not use the contract for the purpose of speculation in a rising market, since that would be a plain abuse of the rights conferred, and something like a fraud upon the seller.44 The court cited no authority for its view that bad faith contract enforcement was “something like a fraud.” In the later case of Kirk La Shelle Co. v. Paul Armstrong Co., the court took a different approach. It did not address the question whether “motion picture rights” had a plain meaning that favored the defendant, but it did not deny such plain meaning. The court was, however, persuaded that when the parties entered into their contract they did not contemplate the development of talking motion pictures. The court was further convinced that to adopt the defendant’s position would enable the defendant to deprive the plaintiff of the benefits of its bargain. How then to reach a just result without questioning the underlying validity of the plain meaning rule? The court found its answer in the same source as it did in its earlier famous decision in Lawrence v. Fox45—the law of trusts: “By entering into the contract and accepting and retaining the consideration therefor, the respondents assumed a fiduciary relationship which had its origin in the contract, and which imposed upon them the duty of utmost good faith.”46 44 Id. at 335, 66 N.E. at 968. 45 20 N.Y. 268, 274 (1859). 46 Kirk La Shelle Co. v. Paul Armstrong Co., 263 N.Y. 79, 85, 188 N.E. 163, 166 (1933). CP_DUBROFF 5/22/2006 3:54:55 PM 2006] IMPLIED COVENANT OF GOOD FAITH 573 yard measured by the “concrete surface included in the bridge deck.”61 The subcontractor brought suit for damages, claiming that the surface area by which the square yardage was to be measured included all of the outer surfaces as opposed to just the area on the upper bridge deck, as the general contractor asserted. Although the court acknowledged that a literal interpretation of the contract language favored the subcontractor,62 it found that, at the time the contract was entered into, both parties intended that the square yardage be measured by the upper surface of the bridge deck only, and enforced the contract accordingly. If it cannot be shown that both parties intended the same meaning of the contract language, then under Restatement Second’s standards of interpretation it is necessary to move on to the second inquiry, which asks whether either party knew or had reason to know of the meaning intended by the other party. If Party A knew or had reason to know of the meaning intended by Party B, and Party B did not know or have reason to know of the meaning intended by Party A, then Party B’s meaning controls the interpretation of the contract.63 Here, although the contract will be interpreted as only one of the parties intended, the other’s intention is ignored merely in the sense that the contract will not be applied as it desired. But ignoring such other party’s desired intention is justified on the basis that its knowledge (or reason to have knowledge) was superior to that of the first party. Revisit the basic facts of Berke Moore for an illustration: had the subcontractor known of the contractor’s intention for the term to include the upper bridge deck only, and had the contractor lacked knowledge, or reason to know, of the subcontractor’s intention, then the contract would be interpreted to require payment based upon the surface area of the upper bridge deck only. Restatement Second and the U.C.C also differ from formalism with respect to the relationship of the parol evidence rule to the resolution of ambiguity. Under the formalistic approach, extrinsic evidence offered to interpret an integrated agreement was inadmissible unless the court, as a matter of law, found that the language of the agreement was ambiguous.64 In determining whether an ambiguity existed, formalist courts 61 Id. at 151. 62 Id. at 153. 63 Id. 64 See supra note 41 and accompanying text. CP_DUBROFF 5/22/2006 3:54:55 PM 574 ST. JOHN’S LAW REVIEW [Vol. 80 applied the plain meaning rule.65 Use of the plain meaning rule could preclude parties’ actual intentions from determining the interpretation of their language. Restatement Second and the U.C.C. take a more liberal approach in resolving ambiguities, often looking to extrinsic evidence of context in determining whether an ambiguity exists.66 Restatement Second explicitly acknowledges the inherent uncertainty of linguistic meaning and the capacity of contextual factors to reduce such uncertainty.67 Chief Justice Traynor adopted this more liberal approach in the famous case (or infamous in the view of some who still cling to the formalistic approach),68 Pacific Gas & Electric Co., Inc. v. G.W. Thomas Drayage & Rigging Co., Inc.,69 in which he explained the proper approach to resolving contract ambiguity: The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible . . . [because] limit[ing] the determination of the meaning of a written instrument to its four corners . . . would either deny the relevance of [party intentions] or presuppose a degree of verbal precision and stability our language has not attained. . . . . . . . . . . [R]ational interpretation requires at least a preliminary consideration of all credible evidence offered to prove the intention of the parties. . . . If the court decides, after considering this evidence, that the language of a contract, in the light of all the circumstances, “is fairly susceptible of either one 65 See infra notes 96−103 and accompanying text (discussing Steuart v. McChesney, 444 A.2d 659 (Pa. 1982)). 66 U.C.C. § 2-202 cmt. 1 (2005); RESTATEMENT (SECOND) OF CONTRACTS § 214(c) cmt. b (1979); see also 3 ARTHUR LINTON CORBIN, CORBIN ON CONTRACTS § 579 (1960). 67 RESTATEMENT (SECOND) OF CONTRACTS § 201 cmts. a, b. 68 For a particularly strident and unfair criticism of Judge Traynor’s approach, see Trident Center. v. Connecticut General Life Insurance Co., 847 F.2d 564, 569 (9th Cir. 1988) (interpreting Pacific Gas to leave all contracts, no matter how clearly written, susceptible to being undermined by parol evidence). In writing his opinion in Trident Center, Judge Kozinski either overlooked or chose to disregard Justice Traynor’s limitation that parol evidence may only be offered to support an interpretation of which the contract language was reasonably susceptible. Judge Kozinski repeated this error in Wilson Arlington Co. v. Prudential Insurance Co. of America, 912 F.2d 366, 370 (9th Cir. 1990). 69 442 P.2d 641 (Cal. 1968). CP_DUBROFF 5/22/2006 3:54:55 PM 2006] IMPLIED COVENANT OF GOOD FAITH 575 of the two interpretations contended for,” extrinsic evidence relevant to prove either of such meanings is admissible.70 Although the formalistic approach to contract law recognized that operative usages could vary the plain meaning of contract language or even add to the agreement provisions in accordance with usages that are “not inconsistent with the agreement,”71 Restatement Second and the U.C.C. go further. They permit other contextual factors not recognized by Restatement First— course of dealing and course of performance—to be given greater weight than usage in determining a contract’s meaning.72 Perhaps even more importantly, the U.C.C. has been interpreted by some courts to allow such contextual factors, “unless . . . carefully negated,”73 to be given effect even if they are “seemingly contradictory” to the express terms of the agreement.74 Nanakuli Paving & Rock Co. v. Shell Oil Co., Inc.75 provides a striking example of the power of contextual factors in modern contract interpretation. Nanakuli was a paving contractor that had a long-term requirements contract with Shell Oil for the supply of asphalt. The contract, a fully integrated writing,76 provided that the price Nanakuli would pay for asphalt would be “Shell’s Posted Price at time of delivery.”77 No dispute existed as to the determination of Posted Price under the contract. Rather, Nanakuli complained that Shell failed to “price protect”: Shell increased its Posted Price after Nanakuli committed itself to fixed-price paving contracts and before Shell delivered the asphalt Nanakuli needed to perform such contracts.78 No mention of price protection was made in the written contract, but at trial, Nanakuli was allowed to introduce 70 Id. at 644−46 (quoting Balfour v. Fresno Canal & Irrigation Co., 41 P. 876, 877 (Cal. 1895)). 71 RESTATEMENT OF CONTRACTS § 246 (1932). 72 U.C.C. § 1-303(e) (2005); RESTATEMENT (SECOND) OF CONTRACTS § 203(b). 73 U.C.C. § 2-202 cmt. 2. 74 Nanakuli Paving & Rock Co., Inc. v. Shell Oil Co., 664 F.2d 772, 780 (9th Cir. 1981); accord Columbia Nitrogen Corp. v. Royster Co., 451 F.2d 3, 9 (4th Cir. 1971); Michael Schiavone & Sons, Inc. v. Securalloy Co., Inc., 312 F. Supp. 801, 803−04 (D. Conn. 1970). But see S. Concrete Servs., Inc. v. Mableton Contractors, Inc., 407 F. Supp. 581, 583−84 (N.D. Ga. 1975), aff’d, 569 F.2d 1154 (5th Cir. 1978) (unpublished opinion); Div. of Triple T Serv., Inc. v. Mobil Oil Corp., 60 Misc. 2d 720, 731−32, 304 N.Y.S.2d 191, 202−04 (Sup. Ct. Westchester County 1969). 75 664 F.2d 772 (9th Cir. 1981). 76 Id. at 782 n.14. 77 Id. at 780. 78 Id. at 777. CP_DUBROFF 5/22/2006 3:54:55 PM 578 ST. JOHN’S LAW REVIEW [Vol. 80 enforce a promise, it must be sufficiently certain and specific so that what was promised can be ascertained. Otherwise, a court, in intervening, would be imposing its own conception of what the parties should or might have undertaken, rather than confining itself to the implementation of a bargain to which they have mutually committed themselves. Thus, definiteness as to material matters is of the very essence in contract law. Impenetrable vagueness and uncertainty will not do.89 The approach exemplified by Martin is at odds, at least in spirit, with section 204 of Restatement Second,90 which provides broad power to courts to fill gaps with terms that comport “with community standards of fairness and policy,”91 and with section 2-204(3) of the U.C.C., which provides that a contract does not fail for indefiniteness if the parties intended to be bound, and that the court will provide “open” terms “if there is a reasonably certain basis for giving an appropriate remedy.”92 With regard to an open price term, the U.C.C. provides generally that if a contract is concluded with an open price term that is not otherwise fixed, the price will be a reasonable price at the time for delivery.93 Restatement Second and the U.C.C. thus dispense with implication of gap-filling terms based on the presumed intent of the parties in favor of an approach that first looks to whether the parties intended to be bound and then fills gaps based on reasonableness. Moreover, no particular types of gaps are off limits, including gaps resulting from invalidating a contract provision.94 The modern approach to contract interpretation and gap- filling, then, allows for a larger scope of judicial intervention when language is missing or is susceptible to more than one interpretation. A somewhat different question is presented by cases in which the language of the contract appears to be clear and complete, yet common sense strongly suggests that the 89 Id. at 109, 417 N.E.2d at 543, 436 N.Y.S.2d at 249 (citations omitted). 90 “When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court.” RESTATEMENT (SECOND) OF CONTRACTS § 204 (1979). 91 Id. § 204 cmt. d. 92 U.C.C. § 2-204(3) (2005). 93 Id. § 2-305. 94 See A.N. Deringer, Inc. v. Strough, 103 F.3d 243 (2d Cir. 1996) (invalidating an overbroad geographical limitation on competition; court will supply “reasonable” limitation). CP_DUBROFF 5/22/2006 3:54:55 PM 2006] IMPLIED COVENANT OF GOOD FAITH 579 parties did not envision the particular circumstances that actually arose and would have used different language had they done so. Formalism, applying the plain meaning rule and the parol evidence rule, had little difficulty resolving such cases even though the resolution could be absurd.95 Steuart v. McChesney,96 a 1982 decision of the Pennsylvania Supreme Court, provides a fine example of the potential for absurdity. The Steuarts had granted to the McChesneys a right of first refusal on a parcel of land. The right was to be triggered by a bona fide purchaser making an offer to the Steuarts. The price to be paid, however, was not linked to the offer received, but to the property’s “market value” according to its assessed value for real estate taxation purposes at the time of the bona fide offer.97 When the Steuarts received offers, the McChesneys tendered an amount equal to the assessed value, which was approximately one-fourth the amount of the bona fide offers received by the Steuarts. The tax rolls had not been updated for five years, and the Steuarts brought an action seeking either to cancel the McChesneys’ right, or to have the agreement interpreted to make the price of exercising the option equal to either the bona fide offers or fair market value.98 The trial court concluded that the formula based on assessed value was intended as “a mutual protective minimum price for the premises rather than to be the controlling price without regard to a market third party offer” and required the McChesneys to pay a price equal to the highest bona fide offer if they wished to exercise their right of first refusal.99 The Supreme Court, however, relying on the plain meaning rule and its conclusion that “a more clear and unambiguous expression of the Right of First Refusal’s exercise price would be onerous to conceive”100 permitted the McChesneys to buy the property for 95 In certain limited, and clearly marked off categories of cases, such as impossibility and frustration, formalism offered relief from the plain and supposedly absolute terms of the contract. Relief was based on the supposed, unstated intent of the parties. Taylor v. Caldwell, (1863) 122 Eng. Rep. 309 (Q.B.). However, in cases not falling into these categories, the plain meaning rule was applicable unless, of course, a court felt like providing relief based on the good faith doctrine. See supra notes 24–28, 45–46 and accompanying text for a discussion of Kirk La Shelle Co. v. Paul Armstrong Co. 96 444 A.2d 659 (Pa. 1982). 97 Id. at 660. 98 Id. at 661. 99 Id. 100 Id. at 663. CP_DUBROFF 5/22/2006 3:54:55 PM 580 ST. JOHN’S LAW REVIEW [Vol. 80 twenty-five percent of its value. Apparently, the court was unmoved by the seeming internal contradiction in the contract language101—value according to the “assessment rolls” was far less than “market value.” The court’s approach was, however, consistent with formalist dogma that ambiguities in integrated agreements must be patent in order for parol evidence to be introduced.102 Steuart v. McChesney was decided in 1982. Had it been decided 100 (or more) years earlier it would not be so remarkable. It stands as a caution to those inclined to believe that the common law evolves at a uniform pace in all places.103 Courts, influenced by, or influencing, principles of interpretation found in the Restatement Second and the U.C.C., take a different view of cases in which the most obvious interpretation of the contract language conflicts with what the parties actually intended or could be supposed to have intended. Nanakuli could be cited as an example of such a view. “Posted Price at time of delivery” apparently covered the entire universe of pricing questions. Yet without determining that the contract language was either ambiguous or suffered from an obvious omission, the court used the contextual factors of usage and course of performance to, in effect, recognize a gap that could be filled. Of course, the result in Nanakuli was based on specific provisions of the U.C.C. that permit even fully integrated 101 The agreement provided: During the lifetime of said Steuarts, should said Steuarts obtain a Bona Fide Purchaser for Value, the said McChesneys may exercise their right to purchase said premises at a value equivalent to the market value of the premises according to the assessment rolls as maintained by the County of Warren and Commonwealth of Pennsylvania for the levying and assessing of real estate taxes . . . . Id. at 660 (quoting agreement) (emphasis added). 102 See supra notes 40–42 and accompanying text. 103 Another relatively modern case following the approach of Steuart v. McChesney is Lewis v. Carnaggio, 183 S.E.2d 899 (S.C. 1971), in which a landowner had contracted with a builder for the construction of a house. Evidence was introduced that the owner had intended on spending no more than $34,500, and insisted on such language in the contract. Id. at 900. The chosen builder drew up a contract from a form book, and the pertinent language read “ ‘the owners shall not be required . . . to pay to the contractor any amount in excess of the sum of [$34,500] which is the estimated cost of construction, plus the fee provided for herein.’ ” Id. (quoting agreement). The clear grammatical import of the comma, held the court, was to separate the payment cap term from the term requiring the payment of the contractor’s fee. Id. Although this decision was sensible from a grammatical standpoint, a review of the facts surrounding the case indicated that this was not in fact what the parties intended. Id. at 901 (Littlejohn, J., dissenting). CP_DUBROFF 5/22/2006 3:54:55 PM 2006] IMPLIED COVENANT OF GOOD FAITH 583 royalties when the agreement was entered into, the court could fill the gap based on notions of fairness. The results of these divergent approaches might not be the same, but neither of them would require the court to determine whether good faith should require the payment of the royalty. Other good faith cases, which do not involve the question of interpretation of express contract language, may arise because one party appears to have discretion to act in a way that affects the rights of the other. Such discretion may be explicitly reserved by the terms of the contract. A partial listing of such contracts include: requirement/output contracts in which one party determines a requirement or output that the other is bound to supply or buy; contracts that condition a promisor’s duty on being “satisfied” with the performance of the promisee; contracts, such as employment or franchise arrangements, that give one party a right to terminate the contract “at any time”; contracts that give one party the right to determine its time to perform or to set other contract terms, including price; contracts that relieve the promisor of a duty based on the nonoccurrence of a condition; and loan arrangements that give a lender the apparent unrestricted right (such as with a demand loan) to require immediate repayment or to refuse to make future advances. On the other hand, the reservation of discretion may not be explicit in the contract, but instead may arise because the contract does not address situations in which actions of one of the parties can affect the rights of the other. Cases in which the promisee’s compensation is dependent on the efforts or other activities of the promisor but which fail to create a standard for such efforts or activities constitute a prime example of this class of cases. These cases may involve contracts for the sale, lease, or licensing of property in exchange for a share of the revenue generated from such property by the promisor, but the agreement fails to specify a level of effort required of the promisor, nor does it forbid the promisor from diverting its attention to other activities that reduce such revenue.111 In all of these cases, instead of seeking guidance in the implied covenant of good faith, courts could inquire into the particular background facts to determine whether the parties 111 For a comprehensive review of good faith cases described above (as well as others), see BURTON & ANDERSON, supra note 4, chs. 3–4, 7. CP_DUBROFF 5/22/2006 3:54:55 PM 584 ST. JOHN’S LAW REVIEW [Vol. 80 shared a common understanding of how the discretion would be exercised, and if not, whether one of the parties had an expectation that the other party knew or should have known about, as revealed by negotiation, trade usage, course of dealing, course of performance, or other factors. If based on this analysis neither party is chargeable with a gap-filler favorable to the other party, the court could resort to gap-filling based on principles of fairness in the particular situation, or alternatively could conclude that no gap deserving of filling exists. Instead the court could apply the express terms of the contract literally. It may be argued that the approach advocated here is, in substance, no different from the approach taken by courts applying a good faith standard, and all that is at stake is whether to label a case as an “interpretation or gap-filling” case or a “good faith” case. Although such an argument has some validity, two critical differences between these approaches exist. First, as will be seen in the next section of this Article, there are profound differences of opinion with respect to the definition and scope of “good faith.” These differences are evident in the writings of scholars as well as in the U.C.C. and Restatement Second. Although these differences have not played a major role, at least overtly, in deciding cases,112 they nevertheless create an environment for deciding cases that may be unnecessarily vague and rootless. Principles of interpretation and gap-filling, on the other hand, are more precise and give better guidance to courts and contracting parties. Second, and more importantly, whether a court approaches a case as a question of good faith or as a question of interpretation may affect its outcome. This issue, also, will be explored in the next section, but an illustration here may be useful. In Fortune v. National Cash Register, Co.,113 a salesman was employed under a written agreement that provided for part of his compensation to be based on sales to customers in his territory. The right to commissions did not automatically vest when the 112 One of the few cases that have explored the differences between competing conceptualizations of good faith is Centronics Corp. v. Genicom Corp., 562 A.2d 187, 191 (N.H. 1989), in which Justice Souter (then a member of the New Hampshire Supreme Court) discussed the differences between the approach to good faith taken by Professors Burton and Summers. Although he concluded that New Hampshire had adopted Professor Summers’ view on good faith, he also said that the result in the case would be the same under Professor Burton’s view. Id. at 191, 194–96. 113 364 N.E.2d 1251 (Mass. 1977). CP_DUBROFF 5/22/2006 3:54:55 PM 2006] IMPLIED COVENANT OF GOOD FAITH 585 sale was made, but depended on future circumstances, including whether the salesman was employed at the time of delivery. The written agreement specifically reserved to both the employer and the employee the right to terminate the employment without cause upon written notice. A large sale was made to a customer in the employee’s territory, and therefore credited to the employee, but he was reassigned within the company and then fired in a way that substantially reduced his commissions under the agreement. Consistent with the cause of action pleaded by the plaintiff, the trial judge asked the jury to determine whether the employment was terminated in bad faith,114 and in this connection instructed the jury that the employer would have acted in bad faith had it terminated the employment for the purpose of avoiding payment of any part of the commission that would otherwise have been due.115 The jury verdict was in favor of the employee. Reserving the question whether the implied covenant of good faith applied to all employment contracts, the Supreme Judicial Court of Massachusetts upheld the jury instruction and verdict on the ground that good faith is required to terminate an at-will employee who is entitled to compensation for work performed.116 Since Fortune was pleaded and tried solely as a good faith case, the court did not approach the case on the basis of standards of interpretation and gap-filling. Had it done so, the key question would have been the resolution of the conflicting contractual terms which, on the one hand, provided a right to commissions to the employee, but on the other, provided a right to terminate to the employer. The court then would have turned its attention, as the same court did in Spaulding v. Morse, to which of the conflicting provisions should have priority. Its analysis could then have been guided by the standards of interpretation and gap-filling adopted by Restatement Second, determining: 1) whether the employee knew or had reason to know that the employer reserved the right to terminate his employment so as to reduce commissions;117 2) if the employee 114 Id. at 1255. 115 Fortune v. Nat’l Cash Register Co., 349 N.E.2d 350, 352 n.4 (Mass. App. Ct. 1976), rev’d, 364 N.E.2d 1251 (Mass. 1977). 116 Fortune, 364 N.E.2d at 1256. 117 Presumably, this would be a question of fact, and if the employee knew or had reason to know, the employer should win. In Tymshare, Inc. v. Covell, 727 F.2d 1145, 1154 (D.C. Cir. 1984), Justice Scalia supposed that it “would require a degree of folly . . . we are not inclined to posit” that commission salespersons would agree to CP_DUBROFF 5/22/2006 3:54:55 PM 588 ST. JOHN’S LAW REVIEW [Vol. 80 own comments, ‘developed by the courts in the light of unforeseen and new circumstances and practices.’ ”125 Contract law (at least as expressed in the U.C.C. and Restatement Second) has moved away from the rigid formalism of the plain meaning rule and a restrictive parol evidence rule and toward recognition of a more expansive role for the courts in interpreting contracts and filling gaps. In light of this evolution, Professor Farnsworth’s observation that “the chief utility” of good faith performance has been to imply contract terms, leads one to question whether such a rationale remains valid. The case of Market Street Associates v. Frey126 is instructive in answering this question. There, the owner of real estate entered into a sale- leaseback transaction with the General Electric Pension Trust. Paragraph thirty-four of the lease provided that: the lessee could “request” the lessor pension trust to provide financing for leasehold improvements, the lessor would give “reasonable consideration” to such request, the parties would “negotiate in good faith concerning” the request, and that should negotiations fail, the lessee could repurchase the property at its original sales price adjusted by a factor specified in the lease.127 Some twenty years after the original transaction the lessee sought financing from a third party for improvements to the real estate. The third party turned down the request because the lessee could not provide a mortgage on the real estate. The lessee then sought to repurchase the real estate. The pension trust demanded a price of $3 million, which the lessee thought was excessive. The lessee then twice wrote to the pension trust requesting financing for improvements. The lessee’s letters did not mention either paragraph thirty-four or the purchase option that would result to the lessee should financing negotiations fail, but one of the letters referred to “financing pursuant to the lease.”128 The pension trust refused to provide financing, and the lessee exercised the purchase option set forth in paragraph thirty-four, the terms of which yielded an adjusted purchase price of $1 million. When the pension trust declined to sell, the lessee brought suit to enforce the option. The district court granted summary judgment to the pension trust on the ground that the 125 Id. at 676 (quoting U.C.C. § 1-102 cmt. 1 (1958)). 126 941 F.2d 588, 593 (7th Cir. 1991). 127 Id. at 591. 128 Id. CP_DUBROFF 5/22/2006 3:54:55 PM 2006] IMPLIED COVENANT OF GOOD FAITH 589 lessee did not really want financing, wanted only the opportunity to exercise its purchase option, and breached its obligation of good faith by omitting mention of paragraph thirty-four in its request, thereby failing to alert the lessor to the consequences of refusing to provide financing. The Seventh Circuit reversed the grant of summary judgment and remanded to the district court for a determination of what it viewed as the dispositive question in the case—whether the lessee tried to “trick” the pension trust into triggering the paragraph 34 option.129 In the course of his opinion for the Seventh Circuit, Judge Posner dealt with the relationship of the implied covenant of good faith to contract interpretation, and suggested that implying contract terms so as to effectuate party intent would produce the same result as imposing an implied covenant of good faith. We could of course do without the term “good faith,” and maybe even without the doctrine. We could . . . speak instead of implied conditions necessitated by the unpredictability of the future at the time the contract was made. . . . . But whether we say that a contract shall be deemed to contain such implied conditions as are necessary to make sense of the contract, or that a contract obligates the parties to cooperate in its performance in “good faith” to the extent necessary to carry out the purposes of the contract, comes to much the same thing. They are different ways of formulating the overriding purpose of contract law, which is to give the parties what they would have stipulated for expressly if at the time of making the contract they had had complete knowledge of the future and the costs of negotiating and adding provisions to the contract had been zero.130 Despite Judge Posner’s assertion that implication of contract terms and good faith are interchangeable, the holding in Market Street suggests otherwise. In fact, the case illustrates the way in which the implied covenant of good faith may actually divert inquiry from appropriate contract interpretation and implication. In its remand, the Seventh Circuit directed the district court to determine whether the lessee attempted to trick the pension trust, in which case the lessee would have acted in bad faith and could not enforce the option. On the other hand, if the lessee did 129 Id. at 596. 130 Id. CP_DUBROFF 5/22/2006 3:54:55 PM 590 ST. JOHN’S LAW REVIEW [Vol. 80 not attempt to trick the lessor, but “acted honestly, reasonably, without ulterior motive, in the face of circumstances as they actually and reasonably appeared to it” there would be no bad faith and the option should be enforced.131 Of course, if bad faith is construed as embracing conduct intended to trick, but not embracing innocent nondisclosure, this would be the appropriate question on which to hinge the result. But it can certainly be argued that a different standard of conduct might have resulted from an inquiry into what the parties, in Judge Posner’s own words, “would have stipulated for expressly if at the time of making the contract they had had complete knowledge of the future and the costs of negotiating and adding provisions to the contract had been zero.”132 If, at the time of negotiating the terms of the lease, the pension trust had envisioned a situation in which the request for financing would not prompt the pension trust official reviewing the request to consider paragraph thirty- four, would the pension trust have proposed language that would protect it only if the lessee acted with a purpose to trick the pension trust? Or would it instead have proposed language that would condition the purchase option on a request for financing that directly referenced paragraph thirty-four regardless of the lessee’s motive in requesting the financing? If the pension trust would have proposed the more protective provision,133 would the lessee have agreed to such a proposal? If the answers to the last two questions are yes, then should not the pension trust win the case, regardless of whether the lessee acted in bad faith, as such concept was conceived by Judge Posner? Resolution of these questions would involve considering whether the lease had a gap that should be filled by an implied term and, if so, what that term ought to be. As Judge Posner suggested, the General Electric Pension Trust is not a particularly sympathetic party to relieve of a duty to read. Moreover, in considering whether a gap worthy of filling exists it would seem relevant whether the express contract consists of a single sentence written on the back of matchbook, or 131 Id. at 597. 132 Id. at 596. 133 The pension trust likely would have proposed the more protective provision, not just because it would be more favorable to the pension trust, but because it would be less apt, given the absence of any requirement to inquire into the motives of a party, to provoke litigation. CP_DUBROFF 5/22/2006 3:54:55 PM 2006] IMPLIED COVENANT OF GOOD FAITH 593 with Professor Farnsworth’s view that the significance of good faith lies in its role of implying contract terms.143 Professor Summers views good faith as an independent duty rooted in morality.144 He identifies four broad categories of bad faith. The first is bad faith in contract negotiation and formation,145 which is not recognized by either Restatement Second or the U.C.C. good faith provisions. The other three, bad faith in performance,146 bad faith in raising and resolving contract disputes,147 and bad faith in taking remedial action,148 generally coincide with Restatement Second and the U.C.C. requirements of good faith in performance and enforcement. Professor Summers then further identifies several subcategories of each of his four categories of bad faith. Subcategories of bad faith in performance include evasion of the spirit of the deal, lack of diligence and slacking off, willful rendering of only substantial performance, abuse of the power to specify terms, abuse of the power to determine compliance, and interference with or failure to cooperate in the other party’s performance. Bad faith in raising and resolving contract disputes may consist of conjuring up a dispute, adopting overreaching or “weaseling” contract interpretations, and taking advantage to obtain a contract modification or dispute settlement. Bad faith remedial actions include abuse of the right to adequate assurances, wrongful refusal to accept performance from the other party, willful failure to mitigate damages, and abuse of the power to terminate.149 Professor Summers’ excluder analysis clearly influenced the approach of Restatement Second to the implied covenant of good faith.150 Although the language of Restatement Second section 143 Id. at 233. 144 See id. at 198 (recognizing that where “a party is legally as well as morally obligated to act in good faith, he will be significantly less likely to break faith”); see also id. at 195 (“[T]here is a growing interest in devising legal standards of contractual morality.”). 145 Id. at 220–32. 146 Id. at 232–43. 147 Id. at 243–48. 148 Id. at 248–52. 149 Id. at 232–52. 150 See generally Summers, The General Duty of Good Faith, supra note 4, at 810–24 (highlighting the substantial influence that Summers’ 1968 article had on the “recognition and conceptualization of good faith in section 205” of the Restatement Second). In this connection, it is worth noting that of the two Reporters for the Restatement Second, Professor Robert Braucher and Professor E. Allan Farnsworth, it was Professor Braucher who was responsible for section 205. CP_DUBROFF 5/22/2006 3:54:55 PM 594 ST. JOHN’S LAW REVIEW [Vol. 80 205 is not materially different from its counterpart in the U.C.C.,151 reflecting Professor Summers’ view, Restatement Second does not attempt any definition of good faith (or bad faith for that matter). Instead, in comments, Restatement Second refers to types of conduct that Professor Summers identifies as bad faith in performance and enforcement.152 Professor Summers’ formulation is subject to three objections. The first derives from his assertion that “good faith” cannot be defined because it has no substantive content—it functions instead to exclude bad faith. Yet he also tells us that bad faith cannot (and should not) be defined, but should be recognized as it arises in specific instances. Unquestioningly, there is room for imprecision in the law (think “I know it when I see it”). But something seems amiss about a concept that has no meaning on its own, yet serves as the negative of another concept that also cannot be defined. If bad faith can be identified when it is revealed in specific circumstances, why is it that good faith cannot be similarly recognized? A second objection to the excluder analysis is its assumption that good faith must be present when bad faith is not found. This assumption is evident in the examples Professor Summers offers to illustrate “excluders”—“voluntary” as the excluder of “involuntary” and “real” as the excluder of “not real.”153 These excluders are terms that, by definition, completely negate each other (all voluntary acts are not involuntary and vice versa). On the other hand, the term “good faith” is not, at least by definition, a complete negation of “bad faith,” and Professor Summers’ application of the excluder analysis does not recognize the possibility that the faith of an action can be normatively neutral—neither good nor bad. Certainly, a deed that is not a good deed is not necessarily a bad deed. On a beautiful summer morning I may either play golf or volunteer at the local halfway house for homicidal maniacs. Volunteering at the halfway house Id. at 810. Professor Braucher was Reporter until 1971, Professor Farnsworth was Reporter from then on. RESTATEMENT (SECOND) OF CONTRACTS v (1979). 151 Compare U.C.C. § 1-304 (2005) (stating that every contract within the U.C.C. “imposes an obligation of good faith in its performance and enforcement”), with RESTATEMENT (SECOND) OF CONTRACTS § 205 (imposing on each party to a contract “a duty of good faith and fair dealing in its performance and its enforcement”). 152 See RESTATEMENT (SECOND) OF CONTRACTS § 205 cmts. a, d. 153 Summers, “Good Faith” in General Contract Law, supra note 4, at 201–02. CP_DUBROFF 5/22/2006 3:54:55 PM 2006] IMPLIED COVENANT OF GOOD FAITH 595 would be a good deed, but am I doing a bad deed by playing golf instead? I hope not. The distinction suggested is a matter of some semantic consequence (at least) because both the U.C.C. and Restatement Second formulate the duty of good faith as a positive rather than a negative duty. Thus, a performance or enforcement that is not in bad faith could still violate Restatement Second section 205 if it is also not in good faith. Nor is this objection trivial; the failure of the excluder analysis to attend to this problem may have real consequences. For example, Professor Summers could rightly count Market Street Associates v. Frey as a case that adopts his approach.154 Judge Posner identified the dispositive issue in the case as whether the lessee intended to trick the lessor into triggering the purchase option. In that case, his focus was on the negative or bad faith question raised by the lessee’s conduct. Yet one may wonder whether the lessee, acting in good faith, ought to have called attention to paragraph thirty-four even if it was not trying to trick the lessor. Requiring the lessee to cite lease paragraph thirty-four in any financing request would be a plausible gap-filler if a principal purpose of paragraph thirty-four was to provide an incentive to the lessor to make a loan so as not to trigger the right of repurchase. If the lessor overlooked the right of repurchase and refused the request on ordinary underwriting considerations, an important object of such right’s inclusion in the lease would be negated. Professor Summers could, of course, point to his good faith articles (along with other authority) supporting the proposition that bad faith conduct is broader than dishonesty,155 and Judge Posner, though citing Professor Summers’ 1968 article in Market Street, may simply have failed to be guided by it. Nevertheless, it seems a stretch to say that the lessee (assuming it did not suspect the lessor’s misapprehension) acted in bad faith; on the other hand it seems not nearly as great a strain to say that “good faith” should require calling attention to paragraph thirty-four if there is a recognized possibility of the lessor’s misapprehension. 154 See supra notes 126–33 and accompanying text. 155 See, e.g., BURTON & ANDERSON, supra note 4, at 123 (doubting that any court would define “good faith” as “honesty in fact alone”); Summers, “Good Faith” in General Contract Law, supra note 4, at 204–06 (claiming that because forms of bad faith are so broad, it is unlikely for judges to be able to use one definition for the term extensively). CP_DUBROFF 5/22/2006 3:54:55 PM 598 ST. JOHN’S LAW REVIEW [Vol. 80 will” as examples.162 Parties asserting bad faith in these situations have occasionally prevailed, but most often courts seem to apply a plain meaning rule to a right to terminate.163 However, even the staunch textualist Justice Scalia (then Circuit Judge Scalia) observed that a contract term providing a power to terminate “within [a party’s] sole discretion” may not be the equivalent of a term providing a power to terminate “for any reason whatsoever, no matter how arbitrary or unreasonable.”164 Based on this nonequivalency, a legitimate issue of interpretation and gap-filling is raised. The inquiry should focus on the question of whether the parties shared an interpretation that would or would not limit the power to terminate, and if they did not share such an interpretation, whether only one of the parties knew or had reason to know of the other’s interpretation. Arguably, without the distraction of a claimed breach of good faith a court might attend more closely to these questions. Professor Summers’ approach to the role of the duty of good faith is largely determined by his belief that the duty is rooted in morality rather than in individual autonomy, and therefore may be used to support results contrary to the party intentions. Professor Robert A. Hillman, of Cornell Law School, an admirer of Professor Summers’ approach to good faith,165 discusses such a situation based on the facts of Tymshare, Inc. v. Covell.166 In Tymshare, Justice Scalia, then a D.C. Circuit judge, held that there is an implied duty to act in good faith when retroactively changing the sales quota determining the amount of commission earned by a salesman. Covell, a salesman for Tymshare, was paid salary and commission based on sales credited to Covell in excess of a quota set by Tymshare. Tymshare won a contract from the United States Postal Service, allegedly based on Covell’s efforts. Substantial revenues were expected from the contract, and Tymshare set Covell’s sales quota so that he would earn $31,000 in commission if the Postal Service contract produced the 162 Summers, “Good Faith” in General Contract Law, supra note 4, at 251–52. 163 See BURTON & ANDERSEN, supra note 4, at 141–46; Van Alstine, supra note 4, at 1258–65 (reviewing cases arising in varying contexts rejecting good faith claims in favor of literal enforcement of contract terms). 164 Tymshare, Inc. v. Covell, 727 F.2d 1145, 1154 (D.C. Cir. 1984). For a discussion of Tymshare, see infra text accompanying notes 166–77. 165 See ROBERT A. HILLMAN, THE RICHNESS OF CONTRACT LAW 143–46 (1998). 166 727 F.2d 1145 (D.C. Cir. 1984). CP_DUBROFF 5/22/2006 3:54:55 PM 2006] IMPLIED COVENANT OF GOOD FAITH 599 expected revenues.167 When the Postal Service revenues initially proved to be lower than projected, Tymshare reduced Covell’s quota so that he would still receive the $31,000 commission. Postal Service revenues subsequently picked up, eventually exceeding even the original projection. Shortly after adjusting Covell’s quotas back to the original level, Tymshare fired him. The question presented to the court was whether Tymshare had acted in bad faith in increasing the quotas. The court held that although the employment contract permitted retroactive quota increases within the “sole discretion” of the employer, Tymshare was not entitled to “reduce the quota for any reason whatever.”168 Justice Scalia interpreted the sole discretion language of the contract as giving Tymshare only “discretion to determine the existence or nonexistence of the various factors that would reasonably justify alteration of the sales quota,”169 factors primarily based on the performance of Covell. This conclusion was not drawn using a good faith analysis, but was grounded in Justice Scalia’s belief that the parties did not intend Tymshare’s discretion to be absolute. Rather, Tymshare’s discretion depended on whether the reasons for the quota increase were consistent with the factors that would justify it. In effect, Justice Scalia saw a gap and filled it as he believed the parties would have. Justice Scalia did not, apparently, discern any significant difference between adjudicating a case based on an independent duty of good faith or using good faith to imply terms into a contract, since he explicitly approved of both Professor Summers’ excluder analysis as well as Professor Farnsworth’s view that the significance of the good faith doctrine is to imply terms into contracts.170 In comparing implication of terms into contracts based on parties’ expectations with the duty of good faith, Justice Scalia said: [T]he authorities that invoke, with increasing frequency, an all- purpose doctrine of “good faith” are usually if not invariably performing the same function executed (with more elegance and precision) by Judge Cardozo . . . when he found that an agreement which did not recite a particular duty was nonetheless “ ‘instinct with . . . an obligation’ imperfectly 167 Id. at 1149. 168 Id. at 1154. 169 Id. 170 Id. at 1152. CP_DUBROFF 5/22/2006 3:54:55 PM 600 ST. JOHN’S LAW REVIEW [Vol. 80 expressed . . . .” The new formulation may have more appeal to modern taste since it purports to rely directly upon considerations of morality and public policy, rather than achieving those objectives obliquely, by honoring the reasonable expectations created by the autonomous expressions of the contracting parties. But it seems to us that the result is, or should be, the same.171 Justice Scalia’s view of the relationship of good faith to contract interpretation and gap-filling is thus similar to that expressed by Judge Posner in Market Street Associates. In discussing Tymshare, Professor Hillman reaches a conclusion that Justice Scalia probably would not share. Professor Hillman’s analysis proceeds by suggesting some hypothetical variations on the Tymshare facts. First, he supposes that the agreement “had expressly permitted management to change the sales quotas at any time ‘for the sole purpose of reducing or eliminating the employee’s earned commissions’ ”172 rather than providing that quotas could be increased within the sole discretion of the employer. Next, he hypothesizes that Covell agreed to the hypothetical term with full understanding of its implications, and then sued Tymshare based on breach of good faith when it increased his quotas solely for the purpose of reducing or eliminating commissions.173 Finally, Professor Hillman suggests that the contract is not unconscionable, so that Covell’s only chance of prevailing would be on the ground of lack of good faith. Conceding that the change in the quota would be within the reasonable expectations of Covell, Professor Hillman nevertheless concludes that “[m]any courts faced with such harsh facts would probably find bad faith.”174 In Tymshare, Justice Scalia stated that the term in the contract was not the same as one that permitted the employer to change quotas “for any reason whatsoever, no matter how arbitrary or unreasonable.”175 Although Professor Hillman’s 171 Id. at 1152–53 (quoting Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 68, 91, 118 N.E. 214, 214 (1917) (quoting McCall Co. v. Wright, 133 A.D. 62, 68, 117 N.Y.S. 775, 779 (1st Dep’t 1909), aff’d, 198 N.Y. 143, 91 N.E. 516 (1910))). 172 HILLMAN, supra note 165, at 150. 173 Id. at 150–51. 174 Id. at 151. For an argument that there might be valid reasons for Covell to agree to the hypothetical term, see supra note 117. 175 Tymshare, 727 F.2d at 1154. CP_DUBROFF 5/22/2006 3:54:55 PM 2006] IMPLIED COVENANT OF GOOD FAITH 603 C. The Covenant and Recapturing Foregone Opportunities Professor Steven Burton of the University of Iowa is yet another of the distinguished scholars who have been influential writers about good faith.179 Professor Burton agrees with Professor Farnsworth that the implied covenant of good faith performance is used to carry out the intention of the parties or to protect their reasonable expectations by interpreting agreements and implying terms.180 Unlike Professor Summers, he does not believe that the doctrine has been used (except in aberrational cases)181 to effectuate results inconsistent with party intent for purposes of achieving results based on “fairness, policy, or morality;”182 nor does he think it should be so used.183 Professor Burton’s position on good faith is distinguishable from that of Professor Farnsworth mainly by the fact that he believes that the good faith doctrine would be superfluous if it did no more than justify implication of terms so as to effectuate party intent.184 In such a case there would be no meaningful difference between the two statements: “Contracts ought to be performed according to their terms in good faith,” and “Contracts ought to be performed according to their terms.”185 In discussing the U.C.C. good faith requirement, he writes: When employed as a principle underlying standards of interpretation and rules of performance, good faith as pacta sunt servanda would add little to the analysis of a particular problem of contract performance. It would mean what the relevant contract terms, standard of interpretation, and rules of performance provide. To say that good faith underlies standards of interpretation and rules of performance would be to say that the content of a contract is determined with reference to the agreement of the parties, including adherence 179 BURTON & ANDERSEN, supra note 4; Burton, Breach of Contract, supra note 4; Burton, Good Faith in Articles 1 and 2, supra note 4; Burton, Good Faith Performance, supra note 4; Burton, More on Good Faith Performance, supra note 4. 180 Burton, More on Good Faith Performance, supra note 4, at 499. 181 See Burton, Good Faith in Articles 1 and 2, supra note 4, at 1535. 182 Id. at 1534; Burton, Good Faith Performance, supra note 4, at 3. 183 See Burton, Good Faith in Articles 1 and 2, supra note 4, at 1535–36, 1552– 57. 184 Professor Farnsworth had written that “the chief utility of the concept of good faith performance has always been as a rationale in a process which is not intrusted to the trier of the facts—that of implying contract terms.” Farnsworth, Good Faith Performance, supra note 4, at 672. 185 See Burton, Good Faith Performance, supra note 4, at 4–5. CP_DUBROFF 5/22/2006 3:54:55 PM 604 ST. JOHN’S LAW REVIEW [Vol. 80 to courses of dealing and usages of the trade not negated by express terms, and to the applicable rules of law, construed in light of the underlying purposes and policies of the U.C.C. Awareness of the underlying good faith principle would not affect the determination of the relevant facts in a dispute, or their import.186 He finds meaning in the good faith doctrine only insofar as it directs attention to facts relevant to the costs undertaken in contract formation (as opposed to facts relevant to the expected benefits of the contract).187 As Professor Burton sees it, these costs can be affected when a party exercises discretion in contract performance. Such discretion can arise because the contract explicitly grants discretion to one party or because the express contract terms have gaps or ambiguities that, in effect, confer discretion on a party.188 The core of his analysis is that a party in these circumstances who exercises discretion so as to recapture opportunities forgone in the contract is performing in bad faith; on the other hand a party who exercises discretion to capture opportunities preserved (or not forgone) in the contract is acting in good faith.189 Initially, Professor Burton believed that the subjective purpose (i.e., actual motive) of the party exercising discretion would determine whether the disputed action was an attempt to recapture forgone opportunities. Subsequently, he changed his view and now supports judging actions on objective grounds (i.e., whether an action was justified on any reasonably expectable ground).190 The dependent party’s reasonable expectations at the time of contract formation with respect to forgone opportunities of the discretion-exercising party, and the reasons for the discretion-exercising party’s actions at the time for performance, determine whether a recaptured opportunity is characterized as preserved or forgone by the contract and thus whether the good faith requirement was observed or breached.191 Professor Burton believes that refining the concept of good faith 186 Id. (footnote omitted). 187 See id. at 5. 188 Burton, More on Good Faith Performance, supra note 4, at 501. 189 Burton, Good Faith Performance, supra note 4, at 5–6. 190 Burton, Good Faith in Articles 1 and 2, supra note 4, at 1561–62. 191 Burton, Good Faith Performance, supra note 4, at 6. Professor Burton deals with good faith contract enforcement as a separate but related issue to good faith performance. He sees good faith enforcement as invoking remedial rights when necessary to protect a party’s interest in receiving performance from the other party. See generally BURTON & ANDERSEN, supra note 4, at 163–95. CP_DUBROFF 5/22/2006 3:54:55 PM 2006] IMPLIED COVENANT OF GOOD FAITH 605 encourages plaintiffs to sue “only when they stand a reasonable chance of succeeding and of succeeding for good reasons.”192 It is hard to argue with Professor Burton’s view that the good faith doctrine is superfluous if it serves only as a justification for requiring contract performance that is within the justifiable expectations of the parties. But it is also hard to argue that his forgone opportunity analysis is necessary, or even helpful, in analyzing whether a party has exercised discretion in a manner permitted by the contract. Clearly, parties who enter into contracts forgo their opportunities to act in specified and unspecified ways. The very nature of a bilateral contract is to create obligations in exchange for rights. Thus, if I promise to cut my neighbor’s lawn in exchange for her promise to pay me $10, I have forgone the opportunities that might have been available to me by not cutting her lawn. But forgone opportunities will be revealed in the same way reasonably expected benefits will be revealed—by determining the agreement of the parties based on principles of interpretation and gap-filling. Until the agreement is so determined it is not possible to identify opportunities that were forgone by entering the contract. After the agreement is so determined the forgone opportunities will be known but will be of no consequence in determining the rights and obligations of the parties—these have already been determined by the process of interpretation and gap-filling. An examination of Mutual Life Insurance Co. of New York v. Tailored Woman, Inc.,193 one of a series of percentage rent cases that Professor Burton has referred to in three of his writings,194 illustrates this point. In Tailored Woman, the defendant lessee, which operated a women’s clothing department store, contracted in 1939 to lease the first three floors of an eight-story Manhattan building located at the corner of Fifth Avenue and West Fifty- Seventh Street. Included as rent was four percent of all sales made “on, in, and from” the leased premises.195 The lease described the premises as having an address of 742 Fifth Avenue. 192 Burton, Good Faith in Articles 1 and 2, supra note 4, at 1535. 193 309 N.Y. 248, 128 N.E.2d 401 (1955), aff’g 283 A.D. 173, 126 N.Y.S.2d 573 (1st Dep’t 1953). 194 BURTON & ANDERSEN, supra note 4, at 55–57; Burton, Breach of Contract, supra note 4, at 384–85; Burton, More on Good Faith Performance, supra note 4, at 502–03. 195 See Tailored Woman, 309 N.Y. at 252, 128 N.E.2d at 402. CP_DUBROFF 5/22/2006 3:54:55 PM 608 ST. JOHN’S LAW REVIEW [Vol. 80 mission”205 for the good faith performance doctrine that saves it from being “redundant to other contract obligations.”206 In their book, Professors Burton and Anderson claim that “[m]ost cases invoking the obligation to perform in good faith can be synthesized using the following principle: a party performs in bad faith by using discretion in performance for reasons outside the justified expectations of the parties arising from their agreement.”207 As they apply this analysis to Tailored Woman, Professors Burton and Anderson observe that the court concluded, based on the justified expectations of the parties, that the exercise of discretion in moving the fur department was an expectable business practice.208 But such an observation does not address the real question of the case—how did the court determine what the justified expectations of the parties were? Once such a determination is made, the forgone opportunities will inevitably be revealed. It is apparent from reading Tailored Woman that the New York Court of Appeals, although not expressly relying on the plain meaning rule, reached its conclusion on the basis that the lease provisions, by their terms, did not preclude moving the fur department to the fifth floor.209 Although the court recited facts relating to the context of the transaction, such as the history of the fur department’s operation, the lessee’s alteration of the elevators, and the lessor’s not contemplating that the 1945 lease would enable the lessee to move the fur department, these facts were treated as essentially irrelevant in the face of a general provision in the 1945 lease allowing sales of women’s clothing without restrictions. Another court, adopting principles of interpretation embraced by the 205 Id. at 41. 206 Id. 207 Id. at 57. 208 Id. at 56. 209 The court said: There is nothing in the main lease to forbid the moving of the fur department and when plaintiff made [the 1945] lease, it again failed to include any restrictions as to the particular kinds of merchandise to be sold in one or the other part of the building . . . . True, the [1945] lease said that it would “not have any effect” on the earlier lease but the effect of the two leases, read together and enforcing both, was that defendant had the right to sell all kinds of women’s apparel, etc., in any part of [the leased premises], so long as not other use was made of the premises. As we see it, defendant merely exercised that right when it moved the fur department. 309 N.Y. at 253–54, 128 N.E.2d at 403. CP_DUBROFF 5/22/2006 3:54:55 PM 2006] IMPLIED COVENANT OF GOOD FAITH 609 Restatement Second, would proceed in a wholly different manner, however. After weighing the contextual factors and applying standards of interpretation based on knowledge or reason to know of the lessor and the lessee, and judging whether a gap existed given the purpose of the leases, such a court might conclude that the 1945 lease ought to be interpreted to limit fifth- floor sales to types of merchandise not sold on the first three floors at the time of the 1945 lease. Or, on the other hand, such a court might conclude that neither party had reason to know of the understanding of the other and that no gaps in need of filling existed, so that the lessee would be allowed to move the fur department to the fifth floor. Whichever way such a court decided the case, it is difficult to see how a consideration of either good faith or forgone opportunities would be either necessary or helpful. D. The Nondisclaimable, Nonbreachable, “Nonexcluderable” Implied Covenant of Good Faith The U.C.C., originally promulgated in 1951 under the joint sponsorship of the American Law Institute and the National Conference of Commissioners on Uniform State Laws, was the most significant development in the history of the implied covenant of good faith. Until then, as Professor Farnsworth observed, the covenant had been recognized in only a handful of jurisdictions.210 Ultimately, every state adopted all of the articles of the U.C.C., except for Louisiana, which did not adopt Article 2. The original U.C.C. contained several provisions and comments referring to good faith in specific applications, as well as a general provision in Article 1 requiring good faith in the performance and enforcement of all contracts.211 Article 1 defined good faith as honesty in fact, but a special definition for purposes of Article 2 defined good faith in the case of merchants as honesty in fact and observance of reasonable commercial standards. The Article 1 limitation of good faith to honesty in fact was probably the most controversial aspect of the original U.C.C.’s good faith provisions. The limitation was roundly criticized by commentators, and revised Article 1, adopted in 2001, expanded 210 Farnsworth, Good Faith Performance, supra note 4, at 671. 211 See BURTON & ANDERSEN, supra note 4, at 115. CP_DUBROFF 5/22/2006 3:54:55 PM 610 ST. JOHN’S LAW REVIEW [Vol. 80 the general definition of good faith to require objective good faith (i.e., observance of reasonable commercial standards of fair dealing) as well as subjective good faith. In other words, the general Article 1 definition of good faith now follows the original special definition adopted for purposes of Article 2, except that the requirement of objective good faith is no longer limited to merchants. The debate over the absence of a general objective standard of good faith overshadowed three other questions raised by the good faith provisions of the U.C.C. These other three questions, which are more relevant to the hypothesis of this Article, will be explored here. The first was raised by Professor Summers, who believes that the concept of good faith has no meaning other than as an excluder of bad faith, which itself should not be defined. His seminal article in Virginia Law Review strongly criticized the original U.C.C. in treating good faith as an affirmative duty capable of definition.212 As was discussed above, Professor Summers’ view clearly influenced the content of Restatement Second.213 Given that the American Law Institute was one of the two joint sponsors of the U.C.C. as well as the promulgator of Restatement Second, it is odd that the 2001 revision of U.C.C. Article 1 retains the good faith covenant as an affirmative concept, not an excluder, and, perhaps more significantly, retains virtually the same definition of good faith as appeared in Article 2 of the original version.214 Moreover, the official comment to the revised Article 1, although relatively lengthy, gives no hint of the excluder analysis contained in the comments to Restatement Second section 205 and no legislative history of the Article 1 revision seems to address the question. One is left to wonder at the utility of a concept so unsettled that even the question of whether it is capable of definition arouses contradictory answers 212 Summers, “Good Faith” in General Contract Law, supra note 4, at 215. 213 See supra notes 150–52 and accompanying text. 214 Professor Summers’ most severe criticisms of the U.C.C. good faith provisions were aimed at the subjective definition of good faith in Article 1. See Summers, “Good Faith” in General Contract Law, supra note 4, at 207–16. To the extent that the revised Article 1 now incorporates both a subjective and an objective requirement of good faith, the revision can be said to have responded positively to Professor Summers’ view. Nevertheless, his influence here is diluted by virtue of the fact that the other two leading commentators on the U.C.C. good faith provisions had also condemned Article 1’s limitation of good faith to honesty in fact. See Burton, Good Faith in Articles 1 and 2, supra note 4, at 1560–63; Farnsworth, Good Faith Performance, supra note 4, at 666, 673–74. CP_DUBROFF 5/22/2006 3:54:55 PM 2006] IMPLIED COVENANT OF GOOD FAITH 613 enforce a duty or obligation under the contract, it seems reasonable to presume that such duty or obligation has been breached.221 If that is the case, then the comment seems to suggest that even if the contract has been breached, a remedy will not be available if the breach is not asserted in good faith. Interpreted this way, the comment is far from trivially true (the case with the provision with respect to good faith performance). Here the suggestion is that the breaching party can defend on the ground that the victim of the breach is not acting in good faith in claiming a remedy. Providing that failure to enforce in good faith is an independent ground for excusing performance seems inconsistent with the main thrust of the comment that no independent cause of action exists for bad faith performance.222 It is hard to imagine why the PEB would bury such a significant principle of law in an amendment to the official comments having to do with whether the breach of the duty of good faith is actionable. But what else could the language of the comment mean? The second troublesome passage from the amended official comment is that “the doctrine of good faith [as opposed to creating a separate duty of good faith] merely directs a court towards interpreting contracts within the commercial context in which they are created, performed and enforced.”223 Much of Commentary No. 10 is devoted to reviewing various U.C.C. provisions relating to how an agreement is interpreted and 221 If the obligation or duty is not breached, no remedy should be available regardless of the good faith or bad faith of the actor. 222 One group of cases that involve this issue has to do with the perfect tender rule of the U.C.C., which permits a buyer, unless otherwise agreed, to reject goods that “fail in any respect to conform to the contract.” U.C.C. § 2-601(a). A variety of specific statutory exceptions apply to the rule. But if no explicit exception exists, a question can arise whether a buyer can only reject in good faith. Some courts have suggested that failure of a perfect tender gives the buyer an absolute right to reject regardless of its motives, others have suggested that if the rejection is motivated by a desire to avoid the deal rather than with dissatisfaction with the nonconformity, the implied covenant of good faith is violated. See JAMES J. WHITE & ROBERT S. SUMMERS, UNIFORM COMMERCIAL CODE § 8-3(b) (4th ed. 1995). The preferable method of deciding these cases is to focus on the “otherwise agreed” exception to the perfect tender rule, rather than on the question of good faith. Based on familiar principles of interpretation and gap-filling, it should be determinable whether the agreement precluded a pretextual rejection. Dissatisfaction with the draconian policy behind the perfect tender rule is a separate issue, and should not be a basis, under the guise of good faith, for stripping a buyer of a statutorily-granted right of rejection. 223 U.C.C. § 1-304 cmt. 1. CP_DUBROFF 5/22/2006 3:54:55 PM 614 ST. JOHN’S LAW REVIEW [Vol. 80 enforced, including the provisions with respect to trade usage, course of dealing, course of performance, and the weight accorded these factors relative to each other and to the express language of the agreement. In view of these elaborate provisions determining commercial context that are part of the statutory law, why is it necessary to have another provision that “merely directs a court towards interpreting contracts” in accordance with the statute? What Commentary No. 10 brings most clearly to mind is Professor Burton’s suggestion that if the purpose of the doctrine of good faith is simply to justify contract interpretation so as to effectuate the reasonable expectations of the parties, the doctrine has no “mission” that justifies its existence. The third question raised by the U.C.C. good faith provision concerns the parties’ ability to eliminate or modify the duty by agreement. Section 1-302(b) provides that the duty of good faith cannot be disclaimed, but the agreement of the parties “may determine the standards by which the performance of [the good faith obligation] . . . is to be measured if those standards are not manifestly unreasonable.”224 Professors Burton and Farnsworth have both criticized this provision’s ambiguity and limitation on individual autonomy,225 but still another question arises from the interaction of this provision with Commentary No. 10. Based on the commentary and the revised official comment to the provision imposing the good faith obligation, we now know that it is not possible to independently breach the obligation of good faith. Rather, the obligation simply directs a court’s attention to the principles of interpretation embraced by the U.C.C., the most important of which are the language of the agreement, trade usage, course of dealing, and course of performance.226 Of course, at the outset it is hard to imagine parties providing in their agreement that it can be performed or enforced in bad faith. But they might provide that “a court interpreting this agreement shall disregard the question whether a party has performed or enforced in good faith.” Since such a provision would negate the interpretation of good faith set forth in Commentary No. 10, it would seem that such a provision would be invalidated by section 224 Id. § 1-302(b). 225 Burton, Good Faith Performance, supra note 4, at 25 (proposing revision of nondisclaimability provision); Farnsworth, Good Faith Performance, supra note 4, at 676–78. 226 See U.C.C. § 1-303. CP_DUBROFF 5/22/2006 3:54:55 PM 2006] IMPLIED COVENANT OF GOOD FAITH 615 1-302(b). The official comments to the U.C.C. parol evidence rule, however, provide that the parties to an agreement may negate a court’s ability to interpret the agreement in light of trade usage, course of dealing, or course of performance.227 If the parties can negate these contextual factors of interpretation, why cannot they also negate a rule that directs a court’s attention to such factors? If so, there is little or nothing left to the domain of the nondisclaimability of good faith. Of course, it may be argued that the nondisclaimability provision nevertheless has meaning since it prevents the parties from negating the express terms of their agreement, and no provision or comment of the U.C.C. provides that the parties may negate the language of their agreement. Perhaps, then, this is the role of the nondisclaimability provision—to invalidate a contract term providing that “no court shall interpret this agreement in accordance with its terms.” CONCLUSION The implied covenant of good faith and fair dealing originated in the late Nineteenth and early Twentieth Centuries, primarily in the common law of New York. It has been suggested in this Article that its origination was a reaction to the rigid interpretation and parol evidence rule of formalist jurisprudence. The implied covenant gave the New York courts a way to achieve a reasonable result without rejecting well-embedded precedent. Despite the receptivity of New York courts (and a few others) to the covenant, for the first fifty years or so of its existence it was not widely recognized and was not included in Restatement First. Then, embraced by Karl Llewellyn, the principal draftsman of the U.C.C. and a great believer in fairness and reasonableness in commercial transactions, the implied covenant found its way into the major commercial statute of the Twentieth Century and subsequently into Restatement Second. The implied covenant quickly gained prominence in the law of contracts—it became part of the common law of most states and is frequently raised in commercial litigation in a variety of contexts; it also became the subject of a small avalanche of law review articles seeking to define its meaning, role, and scope. 227 Id. § 2-202 cmt. 2. CP_DUBROFF 5/22/2006 3:54:55 PM 618 ST. JOHN’S LAW REVIEW [Vol. 80 do not do so in good faith? The reduction of the clarity of contract provisions and the enhancement of the possibility of contract disputes has probably led parties to reject including general good faith covenants in contracts, and therefore there is no basis for implying such a covenant based on supposed actual or presumed intent. What then of good faith as an implied term required by fairness, policy, or established law? Established law, of course, it is, but should it be? Broadly speaking, two justifications are offered for the implied covenant of good faith. The first, based on the writings of Professors Farnsworth, Burton and others, and reflected in the official comments to the U.C.C., is that implied good faith is a useful justification or tool for protecting the justified or reasonable expectations of contracting parties by the implication of terms to fill gaps or resolve ambiguities. It has been argued here that modern interpretation and gap-filling techniques, as embodied in Restatement Second and the U.C.C., provide a more rational and principled basis for resolving interpretative issues that inevitably arise in express agreements, shackled as they are to the inherent imprecision in language and the fallibility of human drafting. Moreover, the implied covenant of good faith, the meaning of which is widely disputed, is far from a harmless duplication of interpretative principles and actually may subvert appropriate interpretation and gap-filling techniques. The second justification for an implied obligation of good faith, based on the writings of Professors Summers and Hillman, and to a lesser extent on the comments to Restatement Second, is that the implied covenant is justified only in part by its protecting the reasonable expectations of the parties. It is also based on notions of morality that may apply to defeat party expectations. Professor Summers also argues that implied good faith should apply to contract negotiation and formation as well as to performance and enforcement.230 No view is expressed here as to whether good faith should be required in contract negotiation and formation other than to observe that Professor Summers’ view generally does not apply in this country although it may in others.231 On the other hand, there seems to be scant justification for an implied covenant in 230 Summers, “Good Faith” in General Contract Law, supra note 4, at 220–34. 231 See id. at 198. CP_DUBROFF 5/22/2006 3:54:55 PM 2006] IMPLIED COVENANT OF GOOD FAITH 619 policing behavior once a contract is formed. If the contract is a fair one, the principle of individual autonomy should require that it be enforced without the uncertainties that would be created by enabling a party disadvantaged by enforcement of the deal to claim bad faith as a defense. If the contract is unfair, the unconscionability doctrine is the existing and appropriate tool for relieving the disadvantaged party.