Devine Millimet | NH Law Firm

Implied Covenant of Good Faith and Fair Dealing & Efficient Contract Breaches

Matthew R. Johnson, Esq.
Joseph G. Mattson, Esq.
Devin K. Bolger, Esq.

July 8, 2020

As the current pandemic continues, parties may experience difficulty meeting their contractual obligations.  We suggest parties remember two contractual concepts as COVID-19 continues to impact the economy. 

I. The Implied Covenant of Good Faith and Fair Dealing

As a matter of common law, New Hampshire recognizes an implied covenant of good faith and fair dealing in every contractual relationship.  Richard v. Good Luck Trailer Court, 157 N.H. 65, 70 (2008).  The covenant exists only in a contractual relationship.  J & M Lumber & Constr. Co. v. Smyjunas, 161 N.H. 714, 724 (2011).   Parties who are not contractually linked cannot have a claim for breach of the implied covenant. 

New Hampshire has “not merely one rule of implied good-faith duty, but a series of doctrines . . . fall[ing] into three general categories: (1) contract formation; (2) termination of at-will employment agreements; and (3) limitation of discretion in contractual performance.”  Livingston v. 18 Mile Point Drive, Ltd., 158 N.H. 619, 624 (2009) (citing Great Lakes Aircraft Co. v. City of Claremont, 135 N.H. 270, 293 (1992)).

A. Contract Formation

Duties implied in contract negotiations “are tantamount to the traditional duties of care to refrain from misrepresentation and to correct subsequently discovered error, insofar as any representation is intended to induce, and is material to, another party’s decision to enter into a contract in justifiable reliance upon it.”  See Centronics Corp. v. Genicom Corp., 132 N.H. 133, 139 (1989).  Essentially, parties cannot lie about important facts to swindle others into contracts they would otherwise reject.  A party deceived in this manner can ask the court for rescission of the agreement and money damages.  Dawe v. American Universal Ins. Co., 120 N.H. 447, 450 (1980) (rescission); Tessier v. Rockefeller, 162 N.H. 324, 333 (2011) (money damages).

B. At-Will Employment

Other implied good-faith duties prohibit an employer from “firing an [at-will] employee out of malice or bad faith in retaliation for action taken or refused by the employee in consonance with public policy.”  Centronics Corp., 132 N.H. at 140 (citing Cloutier v. A. & P. Tea Co., Inc., 121 N.H. 915 (1981)).  While these duties are based in contract law, an employee discharged in bad faith and in violation of public policy has a tort claim for wrongful termination, and could be entitled to certain compensation, like emotional distress damages, that are unavailable in contract actions.  Porter v. City of Manchester, 151 N.H. 30, 43 (2004).

C. Contractual Discretion

This category of implied duties limits the discretion a party may exercise when performing contractual obligations.  Its function “is to prohibit behavior inconsistent with the parties’ agreed-upon common purpose and justified expectations as well as ‘with common standards of decency, fairness and reasonableness.’”  Livingston, 158 N.H. at 624 (quoting Great Lakes Aircraft Co., 135 N.H. at 293; Richard, 157 N.H. at 70).  Take, for example, a contract for the sale of real estate under which the buyer’s obligation to close is contingent on receiving financing, yet the contract does not require the buyer to seek financing.  A cold-feet buyer might try to use the financing contingency clause as an excuse to walk away from the deal without ever applying for a loan.  But implied good-faith duties prohibit such a scheme, and require the buyer to use reasonable efforts to obtain financing.  Renovest Co. v. Hodges Dev. Corp., 135 N.H. 72, 81 (1991).  Likewise, a municipality whose duty to pay for construction services is conditioned on receipt of federal funds must make good-faith efforts to seek those federal funds, even though the contract does not impose any such requirement.  See Seaward Construction Co. v. City of Rochester, 118 N.H. 128, 129 (1978).  Similar good-faith duties are also implied where a contract grants so much discretion that one party’s duties seem illusory.  In one case, the Court held that a contract for “such personal services as the plaintiff, in his sole discretion, may render,” required the plaintiff to provide a level of services consistent with good faith.  See Griswold v. Heat Corporation, 108 N.H. 119, 124 (1967). 

It should be cautioned that this category of implied good-faith duties does not require parties to sacrifice their rights in the name of fairness or reasonableness.  In a federal case applying New Hampshire law, the plaintiffs-mortgagors argued that the defendant-mortgagee violated the implied duty of good faith and fair dealing when it foreclosed on the plaintiffs’ property instead of considering their loss mitigation application.  The Court disagreed:  Implied duties are supposed to prohibit deviation from justified expectations, and in this case, the mortgagee had an express right to exercise the statutory power of foreclosure, so its exercise of that right was consistent with the parties’ expectations.  Dionne v. Fannie Mae, No. 15-CV-056-LM, 2016 U.S. Dist. LEXIS 77105 (D.N.H. June 14, 2016).

Lawsuits concerning this category of implied good-faith duties could increase as tenants stop paying rent, borrowers cease payments on secured loan obligations, and buyers think twice about closing.  Leases, lending agreements, and purchase and sale agreements could include contingencies or discretionary obligations that implicate implied good-faith obligations.  Parties would be wise to carefully examine their contracts and seek counsel before deciding on any course of action that could arguably frustrate common expectations or interfere with the other parties’ ability to perform.

II. Efficient Breach

Parties might also consider whether the benefits of breaching a contract outweigh the penalties.  “An efficient breach of contract occurs when a party breaches a contract, recognizing that even after it pays damages for its breach, it will still be in a better position than if it had performed the contract.”  Joseph Finn Co. v. P.H. Precision Prods. Corp., Case No. 07-C-0273, 2010 N.H. Super. LEXIS 79, *6 (Merrimack Cty. Super. Ct. June 3, 2010).  This is possible where, for example, a seller of a product breaches a contract with a buyer in order to sell the product at a much higher price to a different buyer, if the seller’s profit margin exceeds the first buyer’s damages (contract damages are intended to place non-breaching parties in the position they would have been had the contract been performed; this is usually equal to the difference between the economic benefit the non-breaching party stood to gain, less costs the non-breaching party would have incurred in completing its own performance). 

The risk associated with purposefully breaching a contract in this manner is that the non-breaching party may pursue a claim for attorney fees on top of contract damages.  Nonetheless, courts rarely award attorney fees unless required by a statute or contract, and a recent Superior Court decision suggests that the economic decision to “efficiently” breach a contract is not misconduct sufficient to justify an award of attorney fees.  Id. (suggesting that even in the context of an efficient breach, each party is generally responsible for its own attorney fees).

III. Conclusion

COVID-19 has created unprecedented economic circumstances.  In many respects, the legal landscape is also unchartered territory.  We here to help individuals, businesses, and public clients navigate their contractual rights and duties.

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