New York Law Review

Tag: Implied Covenant of Good Faith

  • 511 West 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144 (2002): Implied Covenant of Good Faith in Cooperative Conversion

    511 West 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144 (2002)

    In New York, every contract contains an implied covenant of good faith and fair dealing in the course of its performance, ensuring neither party injures the other’s right to receive the benefits of the agreement; this is particularly important in cooperative conversions where sponsors owe tenants high standards of fair dealing.

    Summary

    A cooperative corporation and tenant-shareholders sued the sponsor of their building’s conversion, alleging breach of contract for failing to sell the remaining unsold shares after the conversion. The New York Court of Appeals held that the plaintiffs sufficiently pleaded a breach of contract cause of action to survive a motion to dismiss. The court emphasized the implied covenant of good faith and fair dealing inherent in all contracts, particularly significant in cooperative conversions due to the unequal bargaining power between sponsors and tenants. The sponsor’s retention of a majority of shares, frustrating the creation of a viable cooperative, could constitute a breach.

    Facts

    Jennifer Realty Co. (the sponsor) converted a 66-unit rent-regulated apartment building into a cooperative in 1988 under a non-eviction plan after obtaining the Attorney General’s approval. After the conversion, the sponsor sold some shares but retained over 62% of the shares, corresponding to 41 apartments. The sponsor stopped updating the offering plan in 1996, preventing them from selling additional shares. In 1998, the tenant-owners learned that the sponsor had rejected bona fide purchase offers for vacant apartments. The tenant-owners argued that the sponsor’s actions undermined the viability of the cooperative.

    Procedural History

    The tenant-owners and the Co-op Board sued the sponsor, alleging breach of contract. The Supreme Court dismissed the contract claim. The Appellate Division reinstated the contract cause of action. The Appellate Division granted the sponsor leave to appeal to the Court of Appeals, certifying the question of whether the Appellate Division’s order was properly made.

    Issue(s)

    Whether the plaintiffs sufficiently pleaded a cause of action for breach of contract based on the sponsor’s alleged failure to act in good faith and deal fairly in fulfilling the terms and promises of the cooperative offering plan.

    Holding

    Yes, because based on the offering plan and the sponsor’s conduct, the plaintiffs sufficiently alleged that the sponsor undertook a duty in good faith to timely sell enough shares to create a viable cooperative, and that the sponsor’s retention of a majority of shares and rejection of purchase offers undermined that duty.

    Court’s Reasoning

    The Court of Appeals emphasized that on a motion to dismiss, the court must determine whether the pleadings state a cause of action, liberally construing the complaint and accepting the facts alleged as true. The Court found that the plaintiffs’ complaint alleged that the sponsor, by offering the shares for sale but retaining a majority, failed to act in good faith to create a viable cooperative.

    The Court relied on the principle that New York law implies a covenant of good faith and fair dealing in every contract. “This covenant embraces a pledge 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’” (quoting Dalton v. Educational Testing Serv., 87 N.Y.2d 384, 389 (1995)). The Court further cited Vermeer Owners v Guterman, 78 N.Y.2d 1114, 1116 (1991) which stated that cooperative sponsors must meet “high standards of fair dealing and good faith toward tenants” because tenants lack equal bargaining power.

    Specifically, the plaintiffs asserted that the sponsor frustrated their ability to resell shares, interfered with refinancing, and caused maintenance payments to increase, thus undermining the fundamental objective of creating a viable cooperative. The court concluded that the sponsor’s documentary evidence did not clearly refute these assertions. Because the Attorney General imposes a duty on the sponsor not to abandon the offering plan (13 NYCRR 18.3 [r] [11]), the sponsor’s CPLR 3211 motion to dismiss must fail. The Court explicitly limited its holding to the sufficiency of the pleadings and did not address the merits of the claim or whether the sponsor had impliedly promised to sell all unsold shares.

  • Dalton v. Educational Testing Service, 87 N.Y.2d 384 (1995): Implied Duty of Good Faith in Contract Performance

    87 N.Y.2d 384 (1995)

    A party exercising contractual discretion must do so in good faith by considering relevant information provided by the other party, even if the contract does not explicitly require investigation.

    Summary

    Brian Dalton, a high school student, sued Educational Testing Service (ETS) after ETS questioned the validity of his SAT score due to a significant score increase and handwriting discrepancies. Dalton provided additional information to ETS, but ETS maintained its concerns. The trial court found that ETS failed to adequately evaluate Dalton’s information and breached its contract. The Court of Appeals agreed that ETS breached its contract by failing to consider relevant information, violating its implied duty of good faith. However, it modified the remedy, requiring ETS to reconsider Dalton’s information rather than release the questioned score.

    Facts

    Brian Dalton’s SAT score increased by 410 points between May and November. ETS questioned the score’s validity due to the increase and handwriting discrepancies. ETS notified Dalton of its concerns and offered him options, including providing additional information. Dalton submitted information, including medical records, diagnostic test results, and statements from a proctor and fellow students. ETS obtained a second document examiner report confirming handwriting discrepancies.

    Procedural History

    Dalton’s father filed a proceeding to prohibit ETS from canceling the score and to compel its release. The trial court ruled that ETS breached its contract by failing to adequately evaluate Dalton’s information and ordered ETS to release the score. The Appellate Division affirmed. The New York Court of Appeals modified the Appellate Division order, requiring ETS to reconsider the information rather than release the score.

    Issue(s)

    1. Whether ETS breached its contract with Dalton by failing to adequately consider the information he provided regarding the validity of his SAT score.
    2. Whether specific performance in this case should consist of requiring ETS to release the challenged SAT score or to reconsider the test-taker’s submitted evidence.

    Holding

    1. Yes, because ETS has a duty to act in good faith and that duty includes considering relevant material submitted by the test-taker.
    2. The appropriate remedy is to require ETS to reconsider the submitted information because that is all ETS promised in the contract.

    Court’s Reasoning

    The Court reasoned that ETS had a contractual duty to consider relevant information provided by Dalton, stemming from the implied covenant of good faith and fair dealing in all contracts. The Court found that ETS framed the key issue as potential impersonation, making Dalton’s evidence of his presence during the exam relevant. The Court stated that test proctor and classmate’s statements, along with medical documentation and diagnostic test results, were relevant. The Court deferred to the lower courts’ findings that ETS Board members testified they believed evidence of Dalton’s presence during the exam was “a non-issue…not an issue at all to be considered”.

    The Court emphasized that it cannot review findings of fact supported by the record. Because lower courts found that ETS failed to evaluate Dalton’s material, the Court held that ETS breached its contract. The Court distinguished cases where the testing service considered but then rejected the evidence, noting that ETS “refuses to exercise its discretion in the first instance by declining even to consider relevant material submitted by the test-taker”. The Court modified the remedy to require ETS to reconsider Dalton’s information in good faith, holding that ordering the release of the score would exceed ETS’s contractual promise and undermine the reliance of others on the validity of ETS scores. As the Court stated, “Dalton is entitled to relief that comports with ETS’ contractual promise — good-faith consideration of the material he submitted to ETS”.

  • Van Valkenburgh, Nooger & Neville, Inc. v. Hayden Pub. Co., 30 N.Y.2d 34 (1972): Author’s Rights and Publisher’s Duty of “Best Efforts”

    Van Valkenburgh, Nooger & Neville, Inc. v. Hayden Pub. Co., 30 N.Y.2d 34 (1972)

    A publisher’s agreement to use its “best efforts” to promote an author’s work does not preclude the publisher from issuing competing works, but there is a point where the publisher’s actions are so harmful to the author as to breach the covenant of good faith and fair dealing.

    Summary

    Van Valkenburgh, Nooger & Neville, Inc. (the author) sued Hayden Publishing Co. (the publisher) for breach of contract after the publisher began selling a competing series of books (“Mileaf books”). The author claimed the publisher failed to use its “best efforts” to promote the author’s books. The trial court found a fiduciary relationship and issued an injunction against the Mileaf books. The Appellate Division reversed the finding of a fiduciary duty, but found a breach of contract in the failure to use “best efforts,” awarding monetary damages. The Court of Appeals affirmed, holding that while a publisher can generally publish competing works, a breach occurs when such activity significantly harms the author’s royalties, violating the implied covenant of good faith.

    Facts

    Plaintiff (author) contracted with Defendant (publisher) to publish a series of electronics books, with royalties to the author at 15% of list price. The contract included a “best efforts” clause for promotion.
    The author’s books became bestsellers. Later, the publisher began discussing a new edition, seeking reduced royalties, but the author refused.
    The publisher then hired other writers (including Mileaf) to create a new, competing series of books, concealing this from the author.
    The Mileaf books closely resembled the author’s in organization and presentation. When the author inquired, the publisher denied the new project.
    Upon publication of the Mileaf books, the publisher actively marketed them to customers who previously purchased the author’s books, even suspending advertising for the author’s works. The publisher dedicated significant time to promoting the Mileaf series.

    Procedural History

    The trial court found a fiduciary relationship and issued a permanent injunction against the publisher, ordering destruction of the Mileaf books and an accounting of profits.
    The Appellate Division modified the decision, finding no fiduciary relationship, but a breach of contract for failure to use “best efforts.” It reversed the injunction and ordered a hearing on monetary damages.
    The Court of Appeals granted cross-appeals on certified questions of law.

    Issue(s)

    Whether the publisher’s actions in producing and promoting a competing series of books constituted a breach of the “best efforts” clause and the implied covenant of good faith and fair dealing in the contract with the author.
    Whether money damages are a sufficient remedy for the publisher’s breach, precluding injunctive relief.

    Holding

    No, because while a publisher has the right to issue competing books, there is a point where the publisher’s activity is so manifestly harmful to the author as to constitute a breach of the covenant to promote the author’s work.
    Yes, because the Appellate Division found that money damages resulting from the breach of the specific undertaking by the publisher in promotion of the author’s work would afford “adequate relief”.

    Court’s Reasoning

    The court acknowledged the implied covenant of fair dealing and good faith in all contracts, including publishing agreements, citing Brassil v. Maryland Gas. Co. and Kirke La Shelle Co. v. Armstrong Co.
    The court recognized the publisher’s general right to issue books on the same subject and promote them, even if it adversely affects the contracting author’s sales, referencing arguments made by the Association of American Publishers, Inc.
    The court drew an analogy to patent and copyright licensing agreements, where licensees are not limited to promoting the licensor’s product absent a specific agreement, citing Eclipse Bicycle Co. v. Farrow and Thorn Wire Co. v. Washburn & Moen Co.
    However, the court emphasized that this freedom is not absolute. There’s a point where the publisher’s actions are so harmful to the author that it breaches the covenant to promote the author’s work, which is a factual question.
    The Court deferred to the Appellate Division’s finding of a narrow breach in the failure to use “best efforts” and its determination that money damages were sufficient.
    The court noted that the publisher’s argument against damages couldn’t be determined as a matter of law, as the evidence was conflicting. The court stated, “Although a publisher has a general right to act on its own interests in a way that may incidentally lessen an author’s royalties, there may be a point where that activity is so manifestly harmful to the author, and must have been seen by the publisher so to be harmful, as to justify the court in saying there was a breach of the covenant to promote the author’s work.”