Seidenberg v. Summit Bank

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Brief Fact Summary.

the bad-faith course of conduct that thwarted Seidenberg (P) reasonable expectations which related to compensation under the contract, was the basis of Seidenberg’s (P) claim that Summit (D) breached the implied covenant of good faith and fair dealing that arose from the contract they had between each other.

Synopsis of Rule of Law.

(1) that the plaintiff was not financially vulnerable when the contract was been formed and because the plaintiff bargained the contract with the assistance of highly competent counsel, does not mean that a claim of breach of the implied covenant of good faith and fair dealing is precluded due to the fact that the parties possessed equal bargaining power.
(2) The parol evidence rule does not affect the plaintiff’s ability to substantiate claims of reasonable expectations arising from the contract or that the defendant failed to perform its contractual obligations in good faith when a plaintiff asserts a claim of breach of the implied covenant of good faith and fair dealing.
(3) In a situation where the complaint alleges facts, which if proven true, will show that the defendant exercised a right to terminate in bad faith or used its discretionary rights to thwart the reason the contract was formed, a claim of breach of the implied covenant of good faith and fair dealing may not be dismissed.
(4) Where it has been confirmed that the plaintiff suffered from the defendant’s actions which were “wanton and willful and without privilege or right, allegations of bad faith and ill motives are sufficient to survive dismissal.

Facts.

Summit (D) purchased brokerage firms from Seidenberg (P) and Raymond (collectively, “Seidenberg (P)”). As part of this transaction between these two parties, Seidenberg (P) maintained his position as an executive of the brokerage firms and was also to be in charge of the daily operations of any other employee benefits insurance business that might be part of Summit (D) in the future. The employment agreement which Summit (D) had with Seidenberg (P), acknowledged the parties’ joint obligation to work together, keeping in mind that the future performance of the brokerage firms and Seidenberg (P) compensation were tied to the firms growth and success and the line of business at Summit (D).
Seidenberg (P) filed suit against Summit (D) after he had been relieved of his appointment, claiming inter alia, that Summit (D) had breached the implied covenant of good faith and fair dealing by failing to support and by even deliberately sabotaging the growth of the firms and business. Seidenberg (P) also alleged that the conduct of Summit (D) pointed to the fact that Summit (D) never had the intention of fulfilling its own side of the bargain and that from the inception of the contract, Summit (D) had not been committed to the development of the business with him, but wanted its own broker to run or grow the business after its acquisition. The trial court however granted Summit’s (D) motion for the dismissal of Seidenberg’s (P) claim on the ground that Seidenberg (P) was seeking to assert the existence (and obtain enforcement) of a verbal agreement allegedly formed beyond the scope of the written transaction agreements, in violation of the parol evidence rule and that the respective parties had equal bargaining power. The state’s intermediate court however granted review to this ruling.

Issue.

(1) can it be said that because the parties possessed equal bargaining power, financial vulnerability of the plaintiff during the contract’s formation and plaintiff negotiation of the contract with the assistance of highly competent counsel, are reasons why a claim of breach of the implied covenant of good faith and fair dealing are precluded?
(2) Does the parol evidence affect the plaintiff’s ability to substantiate claims of reasonable expectations arising from the contract or that the defendant failed to perform its contractual obligations in good faith when a plaintiff asserts a claim of breach of the implied covenant of good faith and fair dealing?
(3) In a situation where the complaint alleges facts if proven true will show that the defendant exercised a right to terminate in bad faith or used its discretionary rights to sabotage the reason the contract was formed, will a claim of breach of the implied covenant of good faith and fair dealing be dismissed?
(4) Where it has been confirmed that the plaintiff suffered from the defendant’s action which were “wanton and willful and (1) can it be said that because the parties possessed equal bargaining power, financial vulnerability of the plaintiff during the contract’s formation and plaintiff negotiation of the contract with the assistance of highly competent counsel, are reasons why a claim of breach of the implied covenant of good faith and fair dealing are precluded?
(2) Does the parol evidence affect the plaintiff’s ability to substantiate claims of reasonable expectations arising from the contract or that the defendant failed to perform its contractual obligations in good faith when a plaintiff asserts a claim of breach of the implied covenant of good faith and fair dealing?
(3) In a situation where the complaint alleges facts if proven true will show that the defendant exercised a right to terminate in bad faith or used its discretionary rights to sabotage the reason the contract was formed, will a claim of breach of the implied covenant of good faith and fair dealing be dismissed?
(4) Where it has been confirmed that the plaintiff suffered from the defendant’s action which were “wanton and willful and without privilege or right”, are allegations of bad faith and ill motives sufficient to survive dismissal?

Held.

(Fisher, J.)
(1)    No. Parties’ possession of equal bargaining power, financial vulnerability of the plaintiff during the contract’s formation and plaintiff negotiation of the contract with the assistance of highly competent counsel, are not reasons why a claim of breach of the implied covenant of good faith and fair dealing are precluded. Although the bargaining power of the parties is one of the factors which determine whether there has been a breach of the implied contract, it is not the only factor. Finding which shows that the implied covenant was beached is not precluded on the ground that the parties were represented by competent counsels, financially solvent and were all sophisticated. These factors may be significant and must therefore be weighed accordingly by a fact finder; they are not exclusively the deciding factors of the issue.
(2)    No. The parol evidence rule does not affect the plaintiff’s ability to substantiate claims of reasonable expectations arising from the contract or the defendant failure to perform its contractual obligations in good faith when a plaintiff asserts a claim of breach of the implied covenant of good faith and fair dealing. Determination of the true agreement of the parties is the prerequisite for the application of parol evidence. Despite this prerequisite, the rule cannot sabotage the application of the implied covenant of good faith and fair dealing due to the fact that the covenant is contained in all contracts as a matter of law. Since the primary ground upon which implied covenant stands is on the enhanced status of the parties’ reasonable expectations, the opportunity to pursue such claim will be curtailed by the vigorous application of the parol evidence. There are three situations in which the implied covenant is applied: (a) in a situation where the terms and conditions have not been expressly and clearly stated in the written contract but are required in order to give effect to the expectations of the parties; (b) in a situation where there have been bad faith performance of agreement by a party even when it is obvious that the defendant have not contravened any express term; and (c) in a situation where there is derogation of the parties expectation due to the fact that one of the party to the agreement exercised its discretion granted by the contract terms. Considering these, the first and second situations are implied and the parol evidence should not come to play although there is a high probability that it can come into play. Because the obligation of the party to act with good faith and fair dealing is by its very nature “implied”, the parol evidence is not impacted in a case of this nature. Parol evidence is prohibited from changing or varying written contracts and this is applicable only to the formation of the contract. It was not the intention of Seidenberg (P) to change the status quo of the agreement or change any express term in the written contract, but to question Summit’s (D) bona fides in its performance and termination of the contract. With this, there is no concern about the manner in which Seidenberg (P) seeks the application of the implied covenant because it is in consonance with the parol evidence rule. The court must look into what both parties expected from the contract and the purposes for which the contract was formed in order to arrive at the conclusion of whether there was good faith performance. The court will find this easy by looking into the evidence outside the written contract. Hence, the court must allow for parol evidence and point out that a ruling on the need for parol evidence is fatal to the complaint is erroneous, in determining whether a breach of the covenant has indeed occurred.
(3)    No. In a situation where the complaint alleges facts, which if proven true, will show that the defendant exercised a right to terminate in bad faith or used its discretionary rights to thwart the reason the contract was formed, a claim of breach of the implied covenant of good and fair dealing may not dismissed. These are two out of the three factets of implied covenant discussed in issue #2 above. The onus is on the court to determine whether a course of action consistent with any of these categories has been sufficiently alleged. A claim under the second facet is satisfied on the premise of the termination of Seidenberg (P) in bad faith, which Summit (D) have express right to do, and of Seidenberg (P) expectation of continued employment. The claim under the third facet is therefore sufficiently alleged by the failure of Summit (D) to take action in discretionary areas.
(4)    Yes. Where it has been confirmed that the plaintiff suffered from the defendant’s actions which were “wanton and willful and without privilege or right”, allegations of bad faith and ill motives are sufficient to survive dismissal. When a party under a contract exercises its discretionary authority arbitrarily, unreasonably, or capriciously, with the aim of curtailing the other party from receiving its reasonably expected fruits under the contract, then, that party exercising its discretionary authority is said to be acting in bad faith. An inquiry into the defendant’s state of mind and the scenario which brought up the claim, which is a fact-specific inquiry, is required in order to determine whether a defendant acted in bad faith. The trier of this fact is in the position to determine the existence of bad faith and this implies that until the parties are at least given a full and fair opportunity for further investigation and discovery, the issue cannot be resolved. Seidenberg (P) claim of injury by Summit (D) actions which were “wanton and willful and without privilege or right,” constitute enough ground for the issue to go to trial because Seidenberg (P) sufficiently pleaded bad faith.

Discussion.

Implied covenant of good faith and fair dealing is never used to override or change an express contract term and it is very important to keep this in mind. On the other hand, implied obligation can be seen as a tool for safeguarding the negotiations which the parties themselves have made against subsequent attempts of sabotage by either of the parties.