___________ No. 95-2937 No. 95-3000

___________ Taylor Equipment, Inc., * doing business as Midcon * Equipment Company, * * Plaintiff-Appellee/ * Cross Appellant, * Appeal from the United States * District Court for the v. * District of South Dakota. * John Deere Company; John Deere * Industrial Equipment Company, * * Defendants-Appellants/ * Cross Appellees. *

___________ Submitted: June 12, 1996 Filed: October 18, 1996

___________ Before LOKEN, J. GIBSON, and HANSEN, Circuit Judges.

___________ LOKEN, Circuit Judge.

Deere & Company (formerly John Deere Co.) and its subsidiary, Joh n De ere Industrial Equipment Company (collectively, "Deere"), appeal a judgme nt in favor of Deere's former industrial equipment dealer, Midco n Equipment Company ("Midcon"). The judgment was entered after a jury found that Deere breached the implied covenant of good faith and fair dealin g when it refused to ap prove Midcon's proposed assignment of its dealership to a willing buyer, f orcing Midcon's owners to sell the business to other app roved buyers for $1,715,000 less. The dealer contract provided tha t Midcon could not assi gn its dealership "without the prior written consent of [Deere]." Because the implied covenant cannot override this

### -2-

express t erm of the contract, and because there was no proof that Deer e failed to exercise "honesty in fact," we reverse.

I. Factual Background.

Dee re manufactures construction and industrial equipment which i t sells to independent dealers who sell or lease t he equipment to end users. Deere dealers buy and sell parts and used equipment and service customer equipment. Because construction and industrial equipment is expensive , Deere provides its de alers "floor plan" financing -- the dealer must take title t o a piece of equipment, such as a $100,000 road grader, upon it s delivery into invento ry, but the dealer does not pay Deere until it sells
or leases the equipment, and it pays no interest on this credit transactio n for the first nine months after delivery. Given this financial stake in its dealers, Deere sc reens prospective dealers for financial strength and adequate capitalization.
Midcon was a long time Deere dealer in Sioux Falls, South Dakot a, and SiouxCity, Iowa. This controversy began in 1990 when Deere discovere d that Midc on had sold $370,000 in equipment "out of trust" by failing t o timelypay Deere after the sales. The dealer contract between Deere and Midcon provided that Deere could terminate immediately for cause (defined to include defaults such as selling equipment out of trust), and tha t eit her party could terminate without cause upon one hundred twenty day s written notice. Deer e notified Midcon's owners, Paul and Cecelia Taylor, that M idcon would be terminated because of these serious defaults

. However, in lieu of immediate termination, Deere advised that it woul d allowMidcon to continue as a dealer in good standing for up to eighteen months while the Taylors attempted to locate a buyer. The contract furthe r provided that it "cannot be assigned by the Dealer without prior written consent of [Deere]."

### -3- In the fall of 1991, Midcon entered into an "agreement in principle" to sell nearly all its assets to Interstate Companies of Minnesota, Inc. ("In terstate"). This tentative agreement was subject to a number o f cont ingencies, including Deere's consent to the assignment of Midcon' s dealer rights to Interstate. Though Deere had approved Interstate' s acquisitions of Deere dealers in Montana and Des Moines, Iowa, in 1987 and 1989, Deere notified Interstate that it would not approve this assignment unless Interstate enhanced its financial strength with additional equity capi tal. Interstate declined to do so, Deere refused to approve th e assignment, and Midcon's sale to Interstate fell through. In 1992, with Deere's approval of t he purchasers as successor dealers, the Taylors sold most of Midcon's Sioux Falls assets to Midwest Machinery, Inc. ("Midwest") , and most of the Sioux City assets to Swaney Equipment Co. ("Swaney"), on substantially less favorable terms than Intersta te had previously offered.

II. Procedural History.

Mid con then commenced this action, alleging wrongful cancellatio n under the South Dakota equipment dealer statute, S.D.C.L. §§ 37-5-3 and 4, and breac h of the implied covenant of good faith and fair dealing, whe n Deere refused to approve the assignment to Interstate. Deer e counterclaimed, alleg ing that Midcon had fraudulently obtained government customer discounts.
The district court summarily dismissed Midcon's wrongful cancel lation claim because the dealership was not cancelled, but it denied Deere summar y judgment on the breach of covenant claim. Prior to trial of that claim, the court severed Dee re's fraud counterclaim for separate trial. It also granted Midcon's moti on in limine to preclude evidence regarding Midcon's sales out of trust and Deere's intended termination on the ground that thi s eviden ce was irrelevant and unfairly prejudicial after dismissal of th e wrongful cancellation claim. The court ruled that the sole

### When pressed by Taylor, Deere representat ives told him to ask 1 

### Interstate why it was not approved. This was an appropriat e response since Deere's communi cations with Interstate had involved that company's confidential financial information. Early in the trial, Paul Taylor testified: "when Deere had 2 

### put a certain amount of pressure on me, I decided that I wou ld sell the business." Deere argued that Midcon thereby opened up th e issue of its sales out of trus t, but the district court adhered to its e arlier motion in limine ruling. This ruling left the jur y free to infer that Deere "pressured" Taylor as part of its secret pla n to eliminate small dealers, not because Midcon had breache d its dealer contract. The ruling also precluded Deere fro m explaining why Taylor did not have the option of refusing to sell the business if he found the Midwest and Swaney purchase offer s unattr active. Finally, the ruling foreclosed Deere from puttin g its own actions in context, which is critical when a party' s "hone styin fact" is at issue. Indeed, the district court eve n bar red Deere from introducing evidence of Interstate's late r financ ial troubles, evidence that would have substantiated th e concerns that Deere contended were the reason for its refusal t o approve assignment of the Midc on dealerships to Interstate. These evidentiary rulings left Deere to defend a claim of bad faith with one hand tied behind its back. Had we not concluded that Midcon's breach of covenant claim fails as a matter of law, we would hav e reversed and remanded for a new trial on this ground.
-4- issue at trial would be whether Deere acted in good faith when it refused to approve assignment of Midcon's contract to Interstate. Although Deere had not told Paul Taylor why it refused to appro ve the proposed assignment, discovery reve aled Deere correspondence conditioning 1 approval on Interstat e agreeing to enhance its equity capital. At trial, Midcon's theory was t hat this demand was pretextual -- in fact, Deere had force d Midcon to sell its businesses to two "key dealers," Midwest an d Swaney, to further Deere's secret plan to "ratio nalize" its dealer network by eliminating fifty to one hundred small dealers during the 1990's. Deer e countered that the refusal was in fact based upo n its good faith, rational
concer n over Interstate's financial ability to expand in this fashion

. Midcon responded with evidence that Deere's equity capital demand wa s
unusua l and unreasonable. The jury obviously credited Midcon's pretex t theory. 2

### Neither party challenges the district court's decision t o 3 

### apply S outh Dakota law, and we do not examine that issue su a sponte
. See Kostelec v. State Farm Fire & Cas. Co. , 64 F.3d 1220, 1224 (8th Cir. 1995).
-5- The jury awarded Midcon $1,715,710 in compensatory damages. Th e distric t court awarded $381,240.55 in prejudgment interest and denie d Deere's alternative motions for judgment as a matter of law or a new trial

. On appeal, Deere argu es (1) it is entitled to judgment as a matter of law
on Midcon's implied covenant claim; (2) the district court erred i n excluding evidence of Midcon's sales out of trust and government discount fraud, and Interstate's subsequent financial woes; (3) error in the jury instruction on "good faith"; and (4) improper da mages. In its conditional cross-appeal, Midcon argues that we should reinstate the claim for wrongfu l cancellation if we reverse the judgment for breach of the implied covenant

. Give n our interpretation of controlling South Dakota law, we need onl y 3 address the first and last issues.

III. The Implied Covenant Claim.

The district court concluded that "the South Dakota Supreme Cour t would imp ose on [Deere] a duty to act reasonably in deciding whether t o consent to a proposed dealership transfer." We review the court' s
con struction of state law de novo

. See Pate v. National Fund Raisin g Consultants, Inc. , 20 F.3d 341 (8th Cir. 1994). Application of the implie d covenant is a matter of contract interpretation, Cambee's Furniture, Inc. v. Doughboy Rec., Inc. , 825 F. 2d 167, 175 (8th Cir. 1987) (applying South Dakota l aw), a question we also reviewde novo

. Dirks v. Sioux Valle y Empire Elec. Ass'n, Inc. , 450 N.W.2d 426, 427-28 (S.D. 1990).

A.

The Supreme Court of South Dakota recently held that South Dako ta law implies a covenant of good faith and fair dealing into

### -6-

every contract. See Garrett v. BankWest, Inc. , 459 N.W.2d 833, 841 & n.7 (S.D. 1990). This covenant affords only contract remedies; there is n o independent tort for its breach. Moreover, "goo d faith is not a limitless dutyor obligation. The implied obligation must arise from the language used [in the contract] or it must be indispensable to effectuate th e intention of the part ies." Id . at 841-42 (quotation omitted). The Court in Garrett adopted fo r all contracts the definition of "good faith" found in S outh Dakota's uniform commercial code -- "honesty in fact in th e conduct or transaction concerned." S.D.C.L. § 57A-1-201(19).

Thoughevery contract includes the implied covenant, it does no t affect every contract term. The covenant is "a method to fill gaps" in a contract. It has "nothing to do with the enforcement of terms actuall y negotiated" and there fore cannot "block use of terms that actually appear in the co ntract." Continental Bank, N.A. v. Everett , 964 F.2d 701, 70 5 (7th Cir. ), cert. denied , 506 U.S. 1035 (1992). Where parties hav e addressed an issue in the contract, "no occasionto divine their intent or supply implied terms arises." Cambee's , 825 F.2d at 175 n.13.

In Garret t , the Court declined to apply the implied covenant t o compel a lender to extend credit when the contra ct's express terms did not require such action. 459 N.W.2d at 847. Similarly, that Court has refuse d to "transp lant[] the covenant of good faith and fair dealing into th e foreign soil of the e mployment-at-will doctrine." Breen v. Dakota Gear & Joint Co. , 433 N.W.2d221, 224 (S.D. 1988). A claim that an employee was terminated in bad fai th is fundamentally inconsistent with the concept of at-will employment. Therefore, the implied covenant may not be used t o restrict the employer's freedom to terminate. See Poff v. Western Nat'l Mut. I ns. Co. , 13 F.3d 1189, 1191 (8th Cir. 1994) (applying the sam e principle in Minnesota law).

### In Cambee's , we held that a distributor c ontract silent as to 4 

### duration contained an implied covenant that the distributor would not be terminated without cause "for a period sufficient to allow [the distributor] to recoup its investment." 825 F.2d at 175

. However, the Deere-Midcon agre ement was not silent as to duration. Moreover, Midcon had many years as a Deere dealer in which t o recoup its initial investment.
-7- Applying similar reasoning, many courts have held that the implie d covenant may not be applied to limit a clear contractual provision allowin g termination of the co ntract without cause. See Grand Light & Supply Co., Inc. v. Honeywell, Inc. , 771 F.2d 672, 675, 679 (2d Cir. 1985); Triangle Min

. Co. v. Stauffer Chem. Co. , 753 F.2d 734, 739-40 (9th Cir. 1985) ; Cardinal Stone Co. v. Rival Mfg. Co. , 669 F.2d 395, 396 (6th Cir. 1982); Corenswet, Inc. v. Amana Refrig., Inc. , 594 F.2d 129, 138 (5th Cir.), cert
. denied , 444 U.S. 938 (1979); Blalock Mach. & Equip. Co. v. Iowa Mfg. Co. , 576 F. Supp. 774, 776-78 (N.D. Ga. 1983). See a lso General Aviation, Inc.

v. Cessna Aircraft Co. , 703 F. Supp. 637, 644 (W.D. Mich. 1988) (implied covenant may not restrict a party's right to refuse to renew an annua l dealer agreement), rev'd in part on other ground s , 915 F.2d 1038 (6th Cir. 199 0). The Deere-Midcon dealer contract was terminable by either part y witho ut cause. This suggests that Deere's right to disapprove a n assignment of the contract was intended to be absolute, because Deere in any event would be free to terminate an unwanted successor without cause. 4
This appeal involves a no-assignment -without-approval clause, rather than a termination clause. However, courts have also been reluctant t o apply the implied cov enant to block a party's exercise of its contractual right to withhold approval. In James v. Whirlpool Corp. , 806 F. Supp. 835 , 839 (E.D. Mo. 1992), for example, the contract provided that "[n]one of th e rights or obligations under th[e] agreement shal l be subject to assignment . . . without the prior written consent of [the manufacturer]." The court held that the impliedcovenant did not "override the express terms of the agreement" which "unmistakably" granted an

### See Cunning ham Implement Co. v. Deere & Co. , No. C7-95-1148, 5 

### 1995 WL 697555 (Minn. App., Nov. 28, 1995) (unpublished): "Deere left no thing to implication . . . . [Denial of approval] wa s Deere's contract right."
-8- unlimited right to disapprove assignments. Id

. at 843-44. See also In re Bellanca Aircraft Cor p. , 850 F.2d 1275, 1285 (8th Cir. 1988) (U.C.C. good faithobligation imposes no duty not to unreasonably withhold consent to assign a contract right).
Similarly, in Hubbard Chevrolet Co. v. General Motors Corp. , 87 3 F.2d 873, 877-78 (5th Cir. ), cert. denied , 493 U.S. 978 (1989), the court held that the implied covenant had "no role to play" in a dispute over th e manufacturer's refusa l to approve a dealer's relocation. "[The contract] gave GM th e authority to approve or disapprove relocation for its ow n reasons," the court explained; "we decline to allow a jury to reevaluate the wisdom of the parties' choice to leave relocation decisions to GM." Id

. at 878. See also Tidmore Oil Co. v. BP Oil Co. , 932 F.2d 1384, 1391 (11th Cir.) (no breach of the implied covenant where s upplier refused to approve
a jobbe r's expansion under a contract stating that the supplier "mus t approve each outlet"), cert. denied , 502 U.S. 925 (1991).
Were the Supreme Court of South Dakota to apply the holdings inthese
cases to this fact setting, it is clear that Midcon's implied covenan t claim would fail as amatter of law. The purpose of the implied covenant is to honor the parties' justified expectations. Garrett , 459 N.W.2d at 846. Absent contractual limitation, Deere has a n absolute right to choose its equipment dealers. Midcon's dealer contract granted Deere an express, unrestricted right to disapprove a proposed assignment of Midcon's contrac t rights. This contract term gave Midcon no justified expectation tha t

5 Deere w as agreeing to surrender its absolute right to choose Midcon' s successor. Instead, the no-assignment-without-

### The provisi on is consistent with general contract principles 6 

### in that it confirms the parties' understanding that Midcon's rights as a Dee re dealer fell within the broad class of contract right s that are not assignable without the other party's consent because "they are coupled with liabilities, or . . . involve a relat ionship of personal credit and confidence." Green v. Camlin , 92 S.E.2 d 125, 127 (S.C. 1956); see Berliner Foods Corp. v. Pillsbury Co. , 633 F. Supp. 557 (D. Md. 1986); Jennings v. Foremost Dairies , Inc. , 235 N.Y.S.2d 566, 573 (N.Y. Sup. Ct. 1962) (dealer contract).
-9- Deere-approval term preservedthat ri ght. Cf. Massey v. Tandy Corp. , 987 6 F.2d 1307 , 1309-10 (8th Cir. 1993); Abbott v. Amoco Oil Co. , 619 N.E.2 d 789, 796 (Ill. App.) ("the dealers cannot complain when Amoco merel y exerci ses the discretion the dealers allowed Amoco to possess"), appea l denied , 624 N.E.2d 804 (Ill. 1993).

B.

There is another line of cases that suggest some role, albeit a limited role, for the implied covenant in a dispute involving exercise of
a contractual right to disapprove assignment of a dealer contract. In Kham & Nate's Shoes No. 2, Inc. v. First Bank of Whiting , 908 F.2d 1351, 1357 (7th Cir. 1990), the court explained: "'Good faith' is a compact referenc e to an implied undertaking not to take opportunistic advantage in a way tha t could not have been contemplated at the time of [the contract's] drafting, and which therefore was not resolved explicitly by the parties." Th e Sevent hCircuit further explained this concept in Original Great Amer

. Chocolate Chip Cookie Co. v. River Valley Cookie s, Ltd. , 970 F.2d 273, 280 (7th Cir. 1992):

Contrac t law imposes a duty, not to "be reasonable," but t o avoid ta king advantage of gaps in a contract in order t o exp loit the vulnerabilities that arise when contractua l performance is sequentia l rather than simultaneous. Suppose A hires B to paint his portrait to his satisfaction, and B paints it and A in fact is satisfied but says he is not inthe hope of chivvying down the agreed-upon price . . . . This . . . would be bad faith, not because any provision of the contract was

### The district court instructed the jury that the implie d 7 

### cov enant required Deere "to act fairly and reasonably," and tha t "[s] ubterfuge and evasions violate the obligation of good fait h . . . even though the actor be lieves its conduct to be justified." Th ese instructions erroneously expanded the implied covenant fa r beyond "honesty in fact." In particular, the instruction re garding "s ubterfuge and evasions" has no place in a case of this kind

. Dee re's dealer strategies and its evaluation of Interstate' s financial statements involved sensitive business information. The court sh ould not have permitted the jury to find Deere guilty o f "subte rfuge and evasions" because it failed to disclose suc h information when it disapproved the assignment to Interstate.
-10- unreasonable and had to be reformed but because a p rovision had been invoked dishonestly to achieve a purpose contrary to that for which the contract had been made. The same would be true here, we may assume, if . . . the Cookie Company had tried to appropriate the value [the Sigels] had created by c anceling the franchise on a pretext . . . utterly trivial violations of the con tract that the company would have overlooked but for it s desire to take advantage of the Sigels' vulnerable position

. (Citations omitted.)

Under this interpretation of the implied covenant, Deere would be liable if it dishonestly withheld approval of a proposed assignment, but not if its decision was simply unreasonable. This interpretation is consistent with Garrett 's adopti on of the U.C.C. standard, "honesty in fact." It is inconsis tent with the district court's imposition of a duty to ac t "reasonably." 7

We are f rankly uncertain whether the Supreme Court of South Dakot a would ho ld that the implied covenant may not restrict an unlimite d contractual right of approval, following cases such as Grand Light & Suppl y and James v. Whirlpool , or whether it would follow the above-quoted Sevent h Cir cuit decisions and hold that the implied covenant does bar dishones t exercise of an otherwise absolute right to disapprove. But we need no t resolve that uncertainty in this case because Mi dcon presented no evidence that Deere acted dishonestly when it disapproved the proposed assignment to Interstate.

### -11- Midcon's case was built upon pretext and unreasonableness. Deere's stated reason for disapproving -- Interstate's inadequate equity capital -

- an d the alleged secret reason -- a long term plan to consolidat e dealerships in the hands of key dealers -- are both legitimate busines s reasons for not approving Interstate as Midcon's successor. Midcon had no evi dence of Deere's "dishonesty in fact" -- an intent to tak e "op portunistic advantage" of Midcon's need to sell for any reason othe r than Deere's business interests in choosing its dealers, interest s expressly protected in the contract. Thus, Deere is also entitled t o judg ment as a matter of law under this interpretation of the implie d covenant.

C.
The district court relied upon Larese v. Creamland Dairies, Inc

. , 767 F.2d 716 (10th Cir. 1985), for its conclusion that the implied covenan t imposed a duty on Deere to act reasonably. In Larese , a franchis e agre ement prohibited assignment "without the prior written consent of " Creamland and declare d any unapproved transfer "null and without effect." Id

. at 71 7. Applying Colorado law, the court held that the implie d covenant required that the franchisor not unreasonably withhold consent. In a passage quoted approvingly by the district court, the court in Larese opined that "the franchisor must bargain for a provision expressly grantin g the right to withholdconsent unreasonably, to insure that the franchisee is put on notice." Id . at 718. We disagree.

The normal meaning of the approval clause in the Deere-Midco n agreement is that Deere has an unrestricted righ t to withhold approval, at least if it acts honestly. As review of any contract drafting treatis e will confirm, if the parties to a contract agree that the discretio n granted under such an approval clause should be more limited, thei r draftsman will insert a provision stating that "consent to assignment shal l not be unreasonably withheld," like the contract at issue in Anheuser

Busch, Inc. v. Natural Bev.

### -12-

Distribs. , 69 F.3d 33 7, 345 (9th Cir. 1995). See generallyR.A. Feldman, Draftin g Effective Contracts: A Practitioner's Guide § 5-J.2[a] (199 6 Supp.). Unlike litigation, drafting a contract is a positive exercis e among parties contemplating beneficial, harmonious relations. N o experienced draftsman would think of inserting a provision to the effect that "this clause per mits Party A to act unreasonably." Thus, we decline to follow Larese because it would impose an unre alistic drafting burden on parties who intend to create an unrestricted approval clause whose exercis e will not be supplanted by a jury's notion of reasonableness.

"[I]n commercial transactions it doe s not in the end promote justice to seek s trained interpretations in aid of those who do not protec t themselves." James B aird Co. v. Gimbel Bros., Inc. , 64 F.2d 344, 346 (2d Cir. 1933) (L. Hand, J.). Paul Taylor was an experienced businessman who had no justified expectation that Midcon's dealer contract would permit hi m to se cond-guess Deere's choice of Midcon's successor. Accordingly , Midcon's claim for breach of the implied covenant of good faith and fair dealing fails as a matter of law under any reasonable application of the implied covenant defined in Garrett
.
III. The Wrongful Cancellation Claim.
Midcon argues that the district cour t erred in summarily dismissing, without discovery, its claim that Deere cancelled the dealer contract in violation of S.D.C.L. §§ 37-5-3 and 37-5-4. Section 37-5-3 provides that
a construction equipment manufacturer may not "unfairly, without due regar d to the equities of the dealer and without just provocation . . . cancel th e franchise of any dealer." Section 37-5-4 creates a cause of action fo r damages resulting from a wrongful cancellation.

Midcon argues that Deere could be found to have constructivel y cancelled the dealerships in early 1991 when Deere advised that

### Midcon has no authority for its constructive cancellatio n 8 

### theory. It cites Groseth Int' l, Inc. v. Tenneco, Inc. , 410 N.W.2d 159 (S.D. 1987), but there the dealer's franchise was in fac t cancelled. Unlike the dealer in Groseth , Midcon continued t o serve as a D eere dealer after the "constructive cancellation" and wa s able to sell on-going businesses. See also Zeno Buick-GMC, Inc. v. GMC Truck and Coach , 844 F. Supp. 1340, 1351 (E.D. Ark. 1992 ) (Kan sas statute does not apply to constructive franchis e termin ations), aff'd , 9 F.3d 115 (8th Cir. 1993); Carlock v

. PillsburyCo. , 719 F. Supp. 791, 852 (D. Minn. 1989) (n o "constructive termination" claim under Washington Franchis e Investment Protection Act). Midcon's reply brief asserts for the first time that Midcon 9 

### is entitled to pursue a claim that Deere violated S.D.C.L. § 37-5-2 by threatening cancellation. However, this claim was not pleaded in Midcon's complaint nor raised in its notice of cross-appeal.
-13- Midcon was $370,000 out of trust and would be terminated if the dealership s
were not sold within eighteen months. However, Midcon's brief acknowledge d that it continued to be an active Deere dealer until June 1992 when th e businesses were sold to Midwest and S waney. Indeed, Midcon could take no 8 other position if it wished to pursue its implied covenant claim because termin ation of the dealerships would have destroyed Midcon's power t o assign them. The plain language of § 37-5-3 lim its its scope to instances of "un fair cancellation." In these circumstances, the district cour t prope rlyperceived the factual inconsistency in Midcon's claims an d dismissed a wrongful cancellation claim that was fundamentally at odds wit h the events at issue. 9

The j udgment of the district court is reversed and the case i s remande d with instructions to enter a judgment in favor of defendant s dismissing all of Midcon's claims.
JOHN R. GIBSON, Circuit Judge, dissenting.
I respectfully dissent.

### -14- I believe that the court today takes a far too narrow view of South Dakota law with respect to Deere's refusal to approve the purchasers o f Midcon's business.
I must first say that were we consid ering adoption of a federal rule with respe ct to the covenant of good faith, I would join much of th e court's opinion today with substantial enthusias m. The issue, however, is far more narrow; namely, a prediction of the rul e that would be applied by the South Dakota Supreme Court.

Th e two district judges involved in this case denied motions fo r summary judgment with respect to the implied cov enant of good faith issue. The first such decision was articulated in open court after considerable argument, relying on this court's earlier decision in Cambee's Furniture, Inc. v. Doughboy Rec. , Inc. , 825 F.2d 167 (8th Cir. 1987), based on South Dakota law.

The seco nd judge, in a thoughtful and detailed analysis of severa l South Dakota cases on the implied covenant of go od faith undertaken by the court, concluded:

In this case, the implied covenant of good faith and fai r dealing arises from the language of the assignment claus e expressly stated in the written dealership agreements. Se e Nelson v. Web Water Dev. Ass'n, Inc. , 507 N.W.2d 69 1, 698 (S.D. 1993) (reversing grant of summary judgment on issue of breach of contractual good faith and fair dealing where high cour t determined a valid employment contract existed). Cf. Garrett [v. Ban kWest, Inc. ,] 459 N.W.2d [833,] 844 [(S.D. 1990)] , (holdi ng that no implied covenant arose because no contract s exi sted). Although the South Dakota Supreme Court has no t decided a similar case, this Court concludes, based on Nelson , Garrett and Groseth [Int'l, Inc. v. Tenneco, Inc. , 410 N.W.2d 159 (S.D. 1987)], that, construing the contract language used her e, the South Dakota Supreme Court would impose on th e fra nchisor a duty to act reasonably in deciding whether t o con sent to a proposed dealership transfer. See Larese , 76 7 F.2d [716,] 716-17 [(10th Cir. 1985)].

### -15- The cour t continued, reasoning that there was no evidence that th e assignment clause resulted from arms-length negotiation between th e parties. In addition , Taylor testified in his deposition that long after the ag reements were reached, Deere executive, Gene Griffith, had tol d Taylor "several times " that he would not be unreasonable about [approving
or disapproving transfer of the dealership agreements]. The district judg e stated:

[U]nder the contract lan guage as written, the implied covenant of goo d faith and fair dealing is necessary as an aid t o interpreting the assignment clause. Plaintiff Midcon had a reasonable expectation that defendant would exercis e good faith and fair dealing in making its decision as to whethe r dealership agreements could be transferred.

Later, inruling on post-trial motions, the district judge referred to the earlier order on the motion for summary judgment and ordered that the judgment should s tand. It rejected Deere's argument that the reasons it gave for not approving Interstate as a purcha ser presented questions of law rather than questions of fact. The judge, v iewing the evidence in the light most favorable to the plaintiff, held there was sufficient evidence fromwhich the jury could find that Deere's actions were not reasonable.

The jur y was instructed that the obligation of good faith and fai r dealing is implied in the expressed written terms of the contract, which provid ed that Midcon could not transfer its dealership agreements t o another dealer "witho ut the express written consent of Deere Industrial." The instruction continued:

The i mplied obligation of good faith and fair dealin g required Deere Industria l to exercise good faith toward Midcon and to act fairly and reasonably when Midcon requested Deer e Industrial's permission to assign its dealership agreements in connection with the sale of Midcon to Interstate Companies.

### -16- Good f aith means honesty in fact in the conduct o r transaction concerned. Subterfuges and evasions violate the obligation of goo d fai thin performance of a contract even though the acto r believes its conduct to be justified.

The jury was further instructed that Deere was entitled to exercise its busi ness judgment, and that error in business judgment was no t sufficient to establish lack of good faith and fair dealing.

The court 's opinion today first makes reference to the Garrett case and its adoption of t he implied covenant of good faith, but then proceeds to loose a volley of federal cases from other ci rcuits and other districts holding that the implied covenant did not restrict an employer's freedom to terminate an employee at will, or to terminate a contract. Next, the court's opinion refers to cases dealing with the no-assignment-without

approval clauses that are based on law from states other than South Dakota

.

Finally, the court considers two Seventh Circuit cases, Kham & Nate's Shoes No. 2, Inc. v. First Bank of Whiting , 908 F.2d 1351 (7th Cir. 1990), and Ori ginal Great American Chocolate Chip Cookie Co. v. River Valle y Cookies , Ltd. , 970 F.2d 273 (7th Cir. 1992), slip. op. at 9, both base d upon Ill inois law, that involve exercise of a contractual right t o disa pprove assignment of a dealer contract. From Cookie , the cour t
reason s that the Seventh Circuit's interpretation of Illinois law woul d point to liability if Deere dishonestly withheld approval of the proposed assignment, but not if the withholding of approval was simply unreasonable

. It concludes that this interpretation is consistent with the adoption of the U.C.C. standard in Garrett v. Bankwest, Inc. , 459 N.W. 2d 833, 84 1 (S.D. 1990 ), which is "honesty in fact," but is inconsistent with th e dist rict court's imposition of a duty to act reasonably. Because i t concludes that Midcon presented no evidence

### " Every contract or duty within this title imposes a n 10 

### obligation of good faith in it s performance or enforcement." S.D. Codified Laws § 57A-1-203 (1988). Good faith is defined a s "honestyin fact in the conduct or transaction concerned." S.D

. Codified Laws § 57A-1-201 (1988).
-17- that Deere acted dish onestly when it disapproved the proposed assignment, it reverses the district court.

Notably, the court treats Garrett i n a most cursory fashion, paying
no heed to Garrett 's discussion of the basis of the adoption of the good faith rule, and in pa rt coupling Garrett with reference to termination of at-will employment, which is inapposite. By failing to carefully examine the f oundation on which Garrett sits, and by failing to consider othe r relevant South Dakotaprecedent, however, the court fails to focus on the
cen tral issue of the case -- whether the South Dakota courts woul d interpret the covenant of good faith to incorporate acting reasonably.

The co urt today concedes that the South Dakota courts have no t provided a clear answ er to the issue before us. Nonetheless, there is no questio n but that in this diversity case we must apply the law of Sout h Dakota, and if the issue has not been decided by its courts, our obligatio n is to predict the manner in which the issue will be decided.

The dist rict court pointed to Garrett , which is the first decisio n that explicitly adopted the implied covenant of good faith. Garret t referred not only to the provisions of the U.C.C., § 1-203 as adopted by South Dakota, but also made numerous references to the Restatemen t 10 (Second) of Contracts § 205 (1981). Garrett stated:

Good faith is derived from the transaction and conduct of the par ties. Its meaning varies with the context and emphasize s faithfulness to an agreed common purpose and consistency with the justified expectations of the other

### -18- party. Restatement (Second) of Contracts , [§ 205], Comment a. But goo d faith is not a limitless duty or obligation. Th e imp lied obligation "must arise from the language used or i t mu st be indispensable to effectuate the intention of th e parties ." Sessions, Inc. v. Morton , 491 F.2d 854, 857 (9t h Cir. 1974).

459 N.W.2d at 841.

In its detailed analysis of the facts, Garrett quotes:

[G]ood faith is an `excl uder.' It is a phrase without general meaning (or meanings) of its own and serves to exclude a wide range o f heterogeneous forms of bad faith. In a particula r context the phrase takes on specific meaning, but usually this is only by way of contra st with the specific form of bad faith actually or hypothetically ruled out.

Id. at 845 (quoting Robert S. Summers, Good Fai th in General Contract Law and the Sales Provision of the Uniform Commercial Code , 54 Va. L. Rev. 195 , 201 (1968)). Garrett continues:

Professor Summers suggests some categories to identify ba d faithin performance of a contract including: evasion of the spi rit of the deal; abuse of power to determine compliance ; and , interference with or failure to cooperate in the othe r party's performance. [Summers at 201.] Restatement (Second) of Contracts , [§ 205] Comment e. And, as noted in Se ssions, Inc. v. Morton , supra , the good faith must arise from the language use d or be indispensable to effectuate the intention of th e parties.

Id. Garrett held that, though every contract co ntains an implied covenant of good faith, there had been no violation of the covenant because there ha d been no violation of the spirit of the contract or justifie d expectations of the parties, and no abuse of power to determine compliance , nor failure to cooperate in the performance. Id. at 846.

### -19- Nelson v. Web Water Dev. Ass'n , 507 N.W.2d 691, 698 (S.D. 1993), is further evidence that the South Dakota Supreme Court will continue to appl y the doctrine of impli ed good faith as it did in Garrett
. Nelson directly quoted Garrett 's definition of the implied coven ant of good faith and fair dealing and again referred specifically to the Restatement of Contracts. See 507 N.W.2d at 698 . The district court referred to and relied on both Nelsonand Garrett in its determination that the reasonableness of Deere's actions is a good faith issue.

Because of the Supreme Court of South Dakota's consistent relianc e
on the Restatement (Second) of Contracts, I am persuaded that the cour t would l ook further to the Restatement in ascertaining whethe r reasonableness falls within the definition of good faith. The length y definitio n given to good faith in Garrett was not considered to be all

inclusive. Indeed, G arrett stated that the meaning of good faith "varies withthe context and emphasizes faithfulness to an agreed common purpose and co nsistency with the justified expectations of the other party. " Garrett , 459 N.W.2d at 841. The Restatement of Contracts phrases the duty
as one of good faith and fair dealing in the performance and enforcement of the contracts. Re statement § 205 comment a, in discussing the meaning of good faith, refers to honesty in fact, but continues:
Good faith performance o r enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party; it excludes a variety of types of conduct characterized as involving "ba d faith" because they violate community standards of decency , fairness or reasonableness

. Restatement (Second) of Contracts § 205 cmt. a (emphasis added).

Comment e , specifically referred to in Garrett , further defines the obligation of good faith in the enforcement of

### -20-

contracts. The obligation of good faith "also e xtends to dealing which is candid but unfair, such as taking advantage of the necessitou s circumstances of the other party to extort a modification of a contract fo r the sa le of goods without legitimate commercial reason." Restatemen t (Second) of Contracts § 205 cmt. e.
Finally , it must be observed that the court instructed the jury t o consider not only whether Deere had acted fairly and reasonably with Midco n
concer ning permission to assign, but also that subterfuges and evasion s violate the obligation of good faith. This instruction is directly supported by Comment d of the Restatement:

Subterfuges and evasions violate the obligation of good faith in performance even though the actor believes his c onduct to be justified. But the obligation goes further; bad faith may be overt or may consist of inaction, and fair dealing may require more than honesty. A co mplete catalogue of types of bad faith is impossible, but the following types are among those whic h had been recognized in judicial decisions: evasion of th e spi rit of the bargain, lack of diligence and slacking off , willful rendering of imperfect performance, abuse o f a power to specify terms, and interference with or failure to cooperate in the other party's performance.

Restatement (Second) of Contracts § 205 cmt. d.

I beli eve that the district court did not err in concluding fro m Nelson and Garrett that their reliance on section 205 of the Restatement of Contracts would support the conclusion that reasonableness, along with subterfuges and evasions, all terms enumerated in the Restatement comments , are issues properly t o be considered by the jury in determining the issue of good fa ith. Further, the district court's reliance on Garrett an d Nelson , and in turn the reference of those two c ases to section 205 of the Restatement of Contracts, supports the district court's reference

### -21-

to Larese , contrary to the extended arguments made by the court today.

While th e court's comments today concerning the ruling on Midcon's motion in limine to preclude evidence regarding Midcon's sales out of trus t and Deere's intended termination may be but dict um in view of its holding, just a few words are in order to explain why I b elieve the court also errs in this respect. Mid con's claim was pleaded in six counts. The district court dismissed five of these counts, including that for wrongfu l termination, at Deere's urging. At the hearing on this motion, Deere' s counsel argued that no cancellation of the franc hise had been alleged, but only "that Deere said you should find someone el se to buy your business or we will terminate. We never got to the we will terminate part, because he did, in fact, find someone else to buy his busin esses." Counsel continued to advocate that what had happened in this case was the resignation of a dealer after a buyer was found. Thus, the sole issue that was tried to th e jury was the questionof the implied covenant of good faith on refusal to approve the assignment. The district court expl ained that it excluded the evide nce because it was prejudicial in light of the fact that Midcon' s wrongful termination claim had been dismissed. In denying the post-trial motion for new trial on this ground, the district court referred to this order in the pretrial motions, and stated that Deere had provided no new evidence or argument to justify a reversal of these rulings and therefore denied relief. The trial judge has wide discretion in ruling on th e admissibility of evidence, and its decisions the reon will not be disturbed unless there is a clear and prejudicial abuse of discretion. Robertson Oi l Co. v. Phillips Petro leum Co. , 930 F.2d 1342, 1346 (8th Cir. 1991), cert. denied , 114 S.Ct. 2120 (1994). I would not conclude that the distric t court abused its discretion in this matter.

### -22- I would a ffirm the judgment of the district court because I believe it to be based firmly on South Dakota law and anaccurate prediction as to how South Dakota courts would decide the issue before us.

A true copy.

Attest:

CLERK, U. S. OF APPEALS, EIGHTH CIRCUIT.