___________

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, John

Deere Industrial Equipment Company (collectively, "Deere"), appeal a

judgment in favor of Deere's former industrial equipment dealer, Midcon

Equipment Company ("Midcon"). The judgment was entered after a jury found

that Deere breached the implied covenant of good faith and fair dealing

when it refused to approve Midcon's proposed assignment of its dealership

to a willing buyer, forcing Midcon's owners to sell the business to other

approved buyers for $1,715,000 less. The dealer contract provided that

Midcon could not assign its dealership "without the prior written consent

of [Deere]." Because the implied covenant cannot override this
-2-

express term of the contract, and because there was no proof that Deere

failed to exercise "honesty in fact," we reverse.

I. Factual Background.

Deere manufactures construction and industrial equipment which it

sells to independent dealers who sell or lease the 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 dealers "floor plan" financing -- the dealer must take

title to a piece of equipment, such as a $100,000 road grader, upon its

delivery into inventory, but the dealer does not pay Deere until it sells

or leases the equipment, and it pays no interest on this credit transaction

for the first nine months after delivery. Given this financial stake in

its dealers, Deere screens prospective dealers for financial strength and

adequate capitalization. 

Midcon was a long time Deere dealer in Sioux Falls, South Dakota, and

Sioux City, Iowa. This controversy began in 1990 when Deere discovered

that Midcon had sold $370,000 in equipment "out of trust" by failing to

timely pay 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 that

either party could terminate without cause upon one hundred twenty days

written notice. Deere notified Midcon's owners, Paul and Cecelia Taylor,

that Midcon would be terminated because of these serious defaults.

However, in lieu of immediate termination, Deere advised that it would

allow Midcon to continue as a dealer in good standing for up to eighteen

months while the Taylors attempted to locate a buyer. The contract further

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.

("Interstate"). This tentative agreement was subject to a number of

contingencies, 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

capital. Interstate declined to do so, Deere refused to approve the

assignment, and Midcon's sale to Interstate fell through. In 1992, with

Deere's approval of the 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 Interstate had previously offered.

II. Procedural History.

Midcon then commenced this action, alleging wrongful cancellation

under the South Dakota equipment dealer statute, S.D.C.L. §§ 37-5-3 and 4,

and breach of the implied covenant of good faith and fair dealing, when

Deere refused to approve the assignment to Interstate. Deere

counterclaimed, alleging that Midcon had fraudulently obtained government

customer discounts.

The district court summarily dismissed Midcon's wrongful cancellation

claim because the dealership was not cancelled, but it denied Deere summary

judgment on the breach of covenant claim. Prior to trial of that claim,

the court severed Deere's fraud counterclaim for separate trial. It also

granted Midcon's motion in limine to preclude evidence regarding Midcon's

sales out of trust and Deere's intended termination on the ground that this

evidence was irrelevant and unfairly prejudicial after dismissal of the

wrongful cancellation claim. The court ruled that the sole
 When pressed by Taylor, Deere representatives told him to ask 1

Interstate why it was not approved. This was an appropriate

response since Deere's communications 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 would sell

the business." Deere argued that Midcon thereby opened up the

issue of its sales out of trust, but the district court adhered to

its earlier motion in limine ruling. This ruling left the jury

free to infer that Deere "pressured" Taylor as part of its secret

plan to eliminate small dealers, not because Midcon had breached

its dealer contract. The ruling also precluded Deere from

explaining why Taylor did not have the option of refusing to sell

the business if he found the Midwest and Swaney purchase offers

unattractive. Finally, the ruling foreclosed Deere from putting

its own actions in context, which is critical when a party's

"honesty in fact" is at issue. Indeed, the district court even

barred Deere from introducing evidence of Interstate's later

financial troubles, evidence that would have substantiated the

concerns that Deere contended were the reason for its refusal to

approve assignment of the Midcon 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 have

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 approve the

proposed assignment, discovery revealed Deere correspondence conditioning 1

approval on Interstate agreeing to enhance its equity capital. At trial,

Midcon's theory was that this demand was pretextual -- in fact, Deere had

forced Midcon to sell its businesses to two "key dealers," Midwest and

Swaney, to further Deere's secret plan to "rationalize" its dealer network

by eliminating fifty to one hundred small dealers during the 1990's. Deere

countered that the refusal was in fact based upon its good faith, rational

concern over Interstate's financial ability to expand in this fashion.

Midcon responded with evidence that Deere's equity capital demand was

unusual and unreasonable. The jury obviously credited Midcon's pretext

theory.2
 Neither party challenges the district court's decision to

3

apply South Dakota law, and we do not examine that issue sua

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. The

district court awarded $381,240.55 in prejudgment interest and denied

Deere's alternative motions for judgment as a matter of law or a new trial.

On appeal, Deere argues (1) it is entitled to judgment as a matter of law

on Midcon's implied covenant claim; (2) the district court erred in

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 damages. In its conditional

cross-appeal, Midcon argues that we should reinstate the claim for wrongful

cancellation if we reverse the judgment for breach of the implied covenant.

Given our interpretation of controlling South Dakota law, we need only

3

address the first and last issues.

III. The Implied Covenant Claim.

The district court concluded that "the South Dakota Supreme Court

would impose on [Deere] a duty to act reasonably in deciding whether to

consent to a proposed dealership transfer." We review the court's

construction of state law de novo. See Pate v. National Fund Raising

Consultants, Inc., 20 F.3d 341 (8th Cir. 1994). Application of the implied

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 law), a question we also review de novo. Dirks v. Sioux Valley

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 Dakota law

implies a covenant of good faith and fair dealing into
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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 no

independent tort for its breach. Moreover, "good faith is not a limitless

duty or obligation. The implied obligation must arise from the language

used [in the contract] or it must be indispensable to effectuate the

intention of the parties." Id. at 841-42 (quotation omitted). The Court

in Garrett adopted for all contracts the definition of "good faith" found

in South Dakota's uniform commercial code -- "honesty in fact in the

conduct or transaction concerned." S.D.C.L. § 57A-1-201(19).

Though every contract includes the implied covenant, it does not

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 actually

negotiated" and therefore cannot "block use of terms that actually appear

in the contract." Continental Bank, N.A. v. Everett, 964 F.2d 701, 705

(7th Cir.), cert. denied, 506 U.S. 1035 (1992). Where parties have

addressed an issue in the contract, "no occasion to divine their intent or

supply implied terms arises." Cambee's, 825 F.2d at 175 n.13.

In Garrett, the Court declined to apply the implied covenant to

compel a lender to extend credit when the contract's express terms did not

require such action. 459 N.W.2d at 847. Similarly, that Court has refused

to "transplant[] the covenant of good faith and fair dealing into the

foreign soil of the employment-at-will doctrine." Breen v. Dakota Gear &

Joint Co., 433 N.W.2d 221, 224 (S.D. 1988). A claim that an employee was

terminated in bad faith is fundamentally inconsistent with the concept of

at-will employment. Therefore, the implied covenant may not be used to

restrict the employer's freedom to terminate. See Poff v. Western Nat'l

Mut. Ins. Co., 13 F.3d 1189, 1191 (8th Cir. 1994) (applying the same

principle in Minnesota law). 
 In Cambee's, we held that a distributor contract 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 agreement was not silent as to duration.

Moreover, Midcon had many years as a Deere dealer in which to

recoup its initial investment. 

-7-

Applying similar reasoning, many courts have held that the implied

covenant may not be applied to limit a clear contractual provision allowing

termination of the contract 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 also 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 annual

dealer agreement), rev'd in part on other grounds, 915 F.2d 1038 (6th Cir.

1990). The Deere-Midcon dealer contract was terminable by either party

without cause. This suggests that Deere's right to disapprove an

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 to

apply the implied covenant 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 the

rights or obligations under th[e] agreement shall be subject to assignment

. . . without the prior written consent of [the manufacturer]." The court

held that the implied covenant did not "override the express terms of the

agreement" which "unmistakably" granted an
 See Cunningham Implement Co. v. Deere & Co., No. C7-95-1148, 5

1995 WL 697555 (Minn. App., Nov. 28, 1995) (unpublished): "Deere

left nothing to implication . . . . [Denial of approval] was

Deere's contract right." 

-8-

unlimited right to disapprove assignments. Id. at 843-44. See also In re

Bellanca Aircraft Corp., 850 F.2d 1275, 1285 (8th Cir. 1988) (U.C.C. good

faith obligation imposes no duty not to unreasonably withhold consent to

assign a contract right). 

Similarly, in Hubbard Chevrolet Co. v. General Motors Corp., 873 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 the

manufacturer's refusal to approve a dealer's relocation. "[The contract]

gave GM the authority to approve or disapprove relocation for its own

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 supplier refused to approve

a jobber's expansion under a contract stating that the supplier "must

approve each outlet"), cert. denied, 502 U.S. 925 (1991).

Were the Supreme Court of South Dakota to apply the holdings in these

cases to this fact setting, it is clear that Midcon's implied covenant

claim would fail as a matter 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 an 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 contract

rights. This contract term gave Midcon no justified expectation that

5

Deere was agreeing to surrender its absolute right to choose Midcon's

successor. Instead, the no-assignment-without-
 The provision is consistent with general contract principles 6

in that it confirms the parties' understanding that Midcon's rights

as a Deere dealer fell within the broad class of contract rights

that are not assignable without the other party's consent because

"they are coupled with liabilities, or . . . involve a relationship

of personal credit and confidence." Green v. Camlin, 92 S.E.2d

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 preserved that right. Cf. Massey v. Tandy Corp., 987 6

F.2d 1307, 1309-10 (8th Cir. 1993); Abbott v. Amoco Oil Co., 619 N.E.2d

789, 796 (Ill. App.) ("the dealers cannot complain when Amoco merely

exercises the discretion the dealers allowed Amoco to possess"), appeal

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 reference

to an implied undertaking not to take opportunistic advantage in a way that

could not have been contemplated at the time of [the contract's] drafting,

and which therefore was not resolved explicitly by the parties." The

Seventh Circuit further explained this concept in Original Great Amer.

Chocolate Chip Cookie Co. v. River Valley Cookies, Ltd., 970 F.2d 273, 280

(7th Cir. 1992):

Contract law imposes a duty, not to "be reasonable," but to

avoid taking advantage of gaps in a contract in order to

exploit the vulnerabilities that arise when contractual

performance is sequential 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 in the 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 implied

7

covenant required Deere "to act fairly and reasonably," and that

"[s]ubterfuge and evasions violate the obligation of good faith

. . . even though the actor believes its conduct to be justified."

These instructions erroneously expanded the implied covenant far

beyond "honesty in fact." In particular, the instruction regarding

"subterfuge and evasions" has no place in a case of this kind.

Deere's dealer strategies and its evaluation of Interstate's

financial statements involved sensitive business information. The

court should not have permitted the jury to find Deere guilty of

"subterfuge and evasions" because it failed to disclose such

information when it disapproved the assignment to Interstate. 

-10-

unreasonable and had to be reformed but because a provision 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 canceling the

franchise on a pretext . . . utterly trivial violations of the

contract that the company would have overlooked but for its

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 adoption of the U.C.C. standard, "honesty in fact." It is

inconsistent with the district court's imposition of a duty to act

"reasonably."7

We are frankly uncertain whether the Supreme Court of South Dakota

would hold that the implied covenant may not restrict an unlimited

contractual right of approval, following cases such as Grand Light & Supply

and James v. Whirlpool, or whether it would follow the above-quoted Seventh

Circuit decisions and hold that the implied covenant does bar dishonest

exercise of an otherwise absolute right to disapprove. But we need not

resolve that uncertainty in this case because Midcon 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 --

and the alleged secret reason -- a long term plan to consolidate

dealerships in the hands of key dealers -- are both legitimate business

reasons for not approving Interstate as Midcon's successor. Midcon had no

evidence of Deere's "dishonesty in fact" -- an intent to take

"opportunistic advantage" of Midcon's need to sell for any reason other

than Deere's business interests in choosing its dealers, interests

expressly protected in the contract. Thus, Deere is also entitled to

judgment as a matter of law under this interpretation of the implied

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 covenant

imposed a duty on Deere to act reasonably. In Larese, a franchise

agreement prohibited assignment "without the prior written consent of"

Creamland and declared any unapproved transfer "null and without effect."

Id. at 717. Applying Colorado law, the court held that the implied

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 granting

the right to withhold consent 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-Midcon

agreement is that Deere has an unrestricted right to withhold approval, at

least if it acts honestly. As review of any contract drafting treatise

will confirm, if the parties to a contract agree that the discretion

granted under such an approval clause should be more limited, their

draftsman will insert a provision stating that "consent to assignment shall

not be unreasonably withheld," like the contract at issue in AnheuserBusch, Inc. v. Natural Bev.
-12-

Distribs., 69 F.3d 337, 345 (9th Cir. 1995). See generally R.A. Feldman,

Drafting Effective Contracts: A Practitioner's Guide § 5-J.2[a] (1996

Supp.). Unlike litigation, drafting a contract is a positive exercise

among parties contemplating beneficial, harmonious relations. No

experienced draftsman would think of inserting a provision to the effect

that "this clause permits Party A to act unreasonably." Thus, we decline

to follow Larese because it would impose an unrealistic drafting burden on

parties who intend to create an unrestricted approval clause whose exercise

will not be supplanted by a jury's notion of reasonableness.

"[I]n commercial transactions it does not in the end promote justice

to seek strained interpretations in aid of those who do not protect

themselves." James Baird 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 him

to second-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 court 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 regard

to the equities of the dealer and without just provocation . . . cancel the

franchise of any dealer." Section 37-5-4 creates a cause of action for

damages resulting from a wrongful cancellation. 

Midcon argues that Deere could be found to have constructively

cancelled the dealerships in early 1991 when Deere advised that
 Midcon has no authority for its constructive cancellation

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 fact

cancelled. Unlike the dealer in Groseth, Midcon continued to serve

as a Deere dealer after the "constructive cancellation" and was

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)

(Kansas statute does not apply to constructive franchise

terminations), aff'd, 9 F.3d 115 (8th Cir. 1993); Carlock v.

Pillsbury Co., 719 F. Supp. 791, 852 (D. Minn. 1989) (no

"constructive termination" claim under Washington Franchise

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 dealerships

were not sold within eighteen months. However, Midcon's brief acknowledged

that it continued to be an active Deere dealer until June 1992 when the

businesses were sold to Midwest and Swaney. Indeed, Midcon could take no 8

other position if it wished to pursue its implied covenant claim because

termination of the dealerships would have destroyed Midcon's power to

assign them. The plain language of § 37-5-3 limits its scope to instances

of "unfair cancellation." In these circumstances, the district court

properly perceived the factual inconsistency in Midcon's claims and

dismissed a wrongful cancellation claim that was fundamentally at odds with

the events at issue.9

The judgment of the district court is reversed and the case is

remanded with instructions to enter a judgment in favor of defendants

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 of

Midcon's business. 

I must first say that were we considering adoption of a federal rule

with respect to the covenant of good faith, I would join much of the

court's opinion today with substantial enthusiasm. The issue, however, is

far more narrow; namely, a prediction of the rule that would be applied by

the South Dakota Supreme Court.

The two district judges involved in this case denied motions for

summary judgment with respect to the implied covenant 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 second judge, in a thoughtful and detailed analysis of several

South Dakota cases on the implied covenant of good faith undertaken by the

court, concluded: 

In this case, the implied covenant of good faith and fair

dealing arises from the language of the assignment clause

expressly stated in the written dealership agreements. See

Nelson v. Web Water Dev. Ass'n, Inc., 507 N.W.2d 691, 698 (S.D.

1993) (reversing grant of summary judgment on issue of breach

of contractual good faith and fair dealing where high court

determined a valid employment contract existed). Cf. Garrett

[v. BankWest, Inc.,] 459 N.W.2d [833,] 844 [(S.D. 1990)],

(holding that no implied covenant arose because no contracts

existed). Although the South Dakota Supreme Court has not

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

here, the South Dakota Supreme Court would impose on the

franchisor a duty to act reasonably in deciding whether to

consent to a proposed dealership transfer. See Larese, 767

F.2d [716,] 716-17 [(10th Cir. 1985)].
-15-

The court continued, reasoning that there was no evidence that the

assignment clause resulted from arms-length negotiation between the

parties. In addition, Taylor testified in his deposition that long after

the agreements were reached, Deere executive, Gene Griffith, had told

Taylor "several times" that he would not be unreasonable about [approving

or disapproving transfer of the dealership agreements]. The district judge

stated: 

[U]nder the contract language as written, the implied covenant

of good faith and fair dealing is necessary as an aid to

interpreting the assignment clause. Plaintiff Midcon had a

reasonable expectation that defendant would exercise good faith

and fair dealing in making its decision as to whether

dealership agreements could be transferred.

Later, in ruling on post-trial motions, the district judge referred

to the earlier order on the motion for summary judgment and ordered that

the judgment should stand. It rejected Deere's argument that the reasons

it gave for not approving Interstate as a purchaser presented questions of

law rather than questions of fact. The judge, viewing the evidence in the

light most favorable to the plaintiff, held there was sufficient evidence

from which the jury could find that Deere's actions were not reasonable.

The jury was instructed that the obligation of good faith and fair

dealing is implied in the expressed written terms of the contract, which

provided that Midcon could not transfer its dealership agreements to

another dealer "without the express written consent of Deere Industrial."

The instruction continued: 

The implied obligation of good faith and fair dealing

required Deere Industrial to exercise good faith toward Midcon

and to act fairly and reasonably when Midcon requested Deere

Industrial's permission to assign its dealership agreements in

connection with the sale of Midcon to Interstate Companies. 
-16-

Good faith means honesty in fact in the conduct or

transaction concerned. 

Subterfuges and evasions violate the obligation of good

faith in performance of a contract even though the actor

believes its conduct to be justified.

The jury was further instructed that Deere was entitled to exercise

its business judgment, and that error in business judgment was not

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 the implied covenant of good faith, but then proceeds

to loose a volley of federal cases from other circuits 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-withoutapproval 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 Original Great American Chocolate Chip Cookie Co. v. River Valley

Cookies, Ltd., 970 F.2d 273 (7th Cir. 1992), slip. op. at 9, both based

upon Illinois law, that involve exercise of a contractual right to

disapprove assignment of a dealer contract. From Cookie, the court

reasons that the Seventh Circuit's interpretation of Illinois law would

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, 841

(S.D. 1990), which is "honesty in fact," but is inconsistent with the

district court's imposition of a duty to act reasonably. Because it

concludes that Midcon presented no evidence
 "Every contract or duty within this title imposes an

10

obligation of good faith in its performance or enforcement." S.D.

Codified Laws § 57A-1-203 (1988). Good faith is defined as

"honesty in fact in the conduct or transaction concerned." S.D.

Codified Laws § 57A-1-201 (1988). 

-17-

that Deere acted dishonestly when it disapproved the proposed assignment,

it reverses the district court.

Notably, the court treats Garrett in a most cursory fashion, paying

no heed to Garrett's discussion of the basis of the adoption of the good

faith rule, and in part coupling Garrett with reference to termination of

at-will employment, which is inapposite. By failing to carefully examine

the foundation on which Garrett sits, and by failing to consider other

relevant South Dakota precedent, however, the court fails to focus on the

central issue of the case -- whether the South Dakota courts would

interpret the covenant of good faith to incorporate acting reasonably.

The court today concedes that the South Dakota courts have not

provided a clear answer to the issue before us. Nonetheless, there is no

question but that in this diversity case we must apply the law of South

Dakota, and if the issue has not been decided by its courts, our obligation

is to predict the manner in which the issue will be decided. 

The district court pointed to Garrett, which is the first decision

that explicitly adopted the implied covenant of good faith. Garrett

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 Restatement

10

(Second) of Contracts § 205 (1981). Garrett stated: 

Good faith is derived from the transaction and conduct of the

parties. Its meaning varies with the context and emphasizes

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 good faith is not a limitless duty or obligation. The

implied obligation "must arise from the language used or it

must be indispensable to effectuate the intention of the

parties." Sessions, Inc. v. Morton, 491 F.2d 854, 857 (9th

Cir. 1974). 

459 N.W.2d at 841.

In its detailed analysis of the facts, Garrett quotes:

[G]ood faith is an `excluder.' It is a phrase without general

meaning (or meanings) of its own and serves to exclude a wide

range of heterogeneous forms of bad faith. In a particular

context the phrase takes on specific meaning, but usually this

is only by way of contrast with the specific form of bad faith

actually or hypothetically ruled out. 

Id. at 845 (quoting Robert S. Summers, Good Faith 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 bad

faith in performance of a contract including: evasion of the

spirit of the deal; abuse of power to determine compliance;

and, interference with or failure to cooperate in the other

party's performance. [Summers at 201.] Restatement (Second) of

Contracts, [§ 205] Comment e. And, as noted in Sessions, Inc.

v. Morton, supra, the good faith must arise from the language

used or be indispensable to effectuate the intention of the

parties.

Id. Garrett held that, though every contract contains an implied covenant

of good faith, there had been no violation of the covenant because there

had been no violation of the spirit of the contract or justified

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 apply

the doctrine of implied good faith as it did in Garrett. Nelson directly

quoted Garrett's definition of the implied covenant 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

Nelson and 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 reliance

on the Restatement (Second) of Contracts, I am persuaded that the court

would look further to the Restatement in ascertaining whether

reasonableness falls within the definition of good faith. The lengthy

definition given to good faith in Garrett was not considered to be allinclusive. Indeed, Garrett stated that the meaning of good faith "varies

with the context and emphasizes faithfulness to an agreed common purpose

and consistency 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. Restatement § 205 comment a, in discussing the meaning

of good faith, refers to honesty in fact, but continues: 

Good faith performance or 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 "bad

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 extends to dealing which is

candid but unfair, such as taking advantage of the necessitous

circumstances of the other party to extort a modification of a contract for

the sale of goods without legitimate commercial reason." Restatement

(Second) of Contracts § 205 cmt. e. 

Finally, it must be observed that the court instructed the jury to

consider not only whether Deere had acted fairly and reasonably with Midcon

concerning permission to assign, but also that subterfuges and evasions

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 conduct 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 complete catalogue of types of bad faith

is impossible, but the following types are among those which

had been recognized in judicial decisions: evasion of the

spirit of the bargain, lack of diligence and slacking off,

willful rendering of imperfect performance, abuse of 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 believe that the district court did not err in concluding from

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 to be considered by the jury in determining the issue

of good faith. Further, the district court's reliance on Garrett and

Nelson, and in turn the reference of those two cases 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 the court's comments today concerning the ruling on Midcon's

motion in limine to preclude evidence regarding Midcon's sales out of trust

and Deere's intended termination may be but dictum in view of its holding,

just a few words are in order to explain why I believe the court also errs

in this respect. Midcon's claim was pleaded in six counts. The district

court dismissed five of these counts, including that for wrongful

termination, at Deere's urging. At the hearing on this motion, Deere's

counsel argued that no cancellation of the franchise had been alleged, but

only "that Deere said you should find someone else 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 businesses." 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 the

jury was the question of the implied covenant of good faith on refusal to

approve the assignment. The district court explained that it excluded the

evidence 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 the

admissibility of evidence, and its decisions thereon will not be disturbed

unless there is a clear and prejudicial abuse of discretion. Robertson Oil

Co. v. Phillips Petroleum Co., 930 F.2d 1342, 1346 (8th Cir. 1991), cert.

denied, 114 S.Ct. 2120 (1994). I would not conclude that the district

court abused its discretion in this matter. 
-22-

I would affirm the judgment of the district court because I believe

it to be based firmly on South Dakota law and an accurate prediction as to

how South Dakota courts would decide the issue before us. 

A true copy.

Attest:

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