Opinion ID: 1197889
Heading Depth: 1
Heading Rank: 2

Heading: Breach of Contract: Implied Covenant of Good Faith and Fair Dealing

Text: The dealers claimed that Amoco breached its contractual obligations under the implied covenant of good faith and fair dealing by abusing its power, acting outside the scope of its discretion, and usurping the benefits of the agreements. Specifically, the complaint alleged that Amoco reserved discretion to make certain decisions, including establishing the purchase price for motor fuel, station rentals, station hours, and credit arrangements. The dealers asserted that Amoco's use of the IVR Program for the internal calculation of rents resulted in redundant service bay charges. They claimed that, by charging twice for service bays, Amoco abused its discretion. This abuse resulted in a breach of Amoco's implied duty of good faith and fair dealing. Although the agreements were fully integrated, the trial court admitted parol evidence on the issue of breach of duty of good faith and fair dealing. The jury was instructed to enforce the agreements according to the reasonable expectations of the parties and determine rental overcharges for service bays based on the IVR method employed by Amoco. The jury found that Amoco breached its implied duty of good faith and fair dealing, rendered a verdict in favor of the dealers, and awarded the dealers a total of $987,125 in rental damages. On appeal, Amoco contended that the trial court's introduction of parol evidence in this case was improper because the lease agreements were unambiguous and fully integrated. See Radiology Professional Corp. v. Trinidad Area Health Ass'n, Inc., 195 Colo. 253, 256, 577 P.2d 748, 750 (1978). Amoco argued that the trial court improperly allowed the jury to rewrite unambiguous and fully integrated lease agreements in three respects: (1) dealers were relieved of their obligation to pay rents and Amoco was precluded from collecting rents; (2) the rental amount was rewritten entirely; [4] and (3) the paragraph barring both implied covenants and modifications absent written agreement of both parties was deleted. [5] The court of appeals rejected Amoco's arguments, holding that although payment [by the dealers] of the actual fixed monthly rental amount is non-discretionary, Amoco retained discretionary authority to modify the rent charges. Ervin, 885 P.2d at 251. This authority, granted by contract, is circumscribed by the duty of good faith and fair dealing. See id. at 250-51. The court of appeals concluded that the dealers were being charged twice for service bay charges in the rental calculation, and a jury could conclude that the covenant of good faith and fair dealing was breached. Id. at 251.
Colorado, like the majority of jurisdictions, recognizes that every contract contains an implied duty of good faith and fair dealing. § 4-1-203, 2 C.R.S. (1992) (Every contract or duty within this title imposes an obligation of good faith in its performance or enforcement.); see, e.g., Wells Fargo Realty Advisors Funding, Inc. v. Uioli, Inc., 872 P.2d 1359, 1362 (Colo.App.1994); Friedman v. Colorado Nat'l Bank, 825 P.2d 1033, 1042 (Colo.App.1991), rev'd on other grounds, 846 P.2d 159 (Colo.1993); Ruff v. Yuma County Transp. Co., 690 P.2d 1296, 1298 (Colo.App. 1984); see also Larese v. Creamland Dairies, Inc., 767 F.2d 716, 717 (10th Cir.1985) (explaining that the franchisor-franchisee relationship is one that requires the parties to deal with one another in good faith and in a commercially reasonable manner); see generally Restatement (Second) of Contracts § 205 (1981); 3 Arthur Linton Corbin, Corbin on Contracts § 561, at 278 n. 2 (1960); Steven J. Burton, Breach of Contract and the Common Law Duty to Perform in Good Faith, 94 Harv.L.Rev. 369, 369 (1980) [hereinafter Burton I]. The good faith performance doctrine is generally used to effectuate the intentions of the parties or to honor their reasonable expectations. See State Farm Mut. Auto. Ins. Co. v. Nissen, 851 P.2d 165, 168 (Colo. 1993); Davis v. M.L.G. Corp., 712 P.2d 985, 989 (Colo.1986); Steven J. Burton, More on Good Faith Performance of a Contract: A Reply to Professor Summers, 69 Iowa L.Rev. 497, 499 (1984) [hereinafter Burton II]. Good faith performance of a contract involves faithfulness to an agreed common purpose and consistency with the justified expectations of the other party. Wells Fargo, 872 P.2d at 1363 (citing Restatement (Second) of Contracts § 205 cmt. a (1981)). The application of the reasonable expectations doctrine often fails to give effect to some hornbook rules governing the construction of contracts, including the precept that contracts which are free from ambiguity are to be enforced as written.... Davis, 712 P.2d at 990 & n. 7. Nonetheless, adherence to this principle promotes the central policy underlying contract law, that of construing contracts so as to effectuate the parties' intentions.... Id. at 991; see also State Farm, 851 P.2d at 166-67; Simon v. Shelter Gen. Ins. Co., 842 P.2d 236, 240 (Colo.1992). The duty of good faith and fair dealing applies when one party has discretionary authority to determine certain terms of the contract, such as quantity, price, or time. Hubbard Chevrolet Co. v. General Motors Corp., 873 F.2d 873, 876 (5th Cir.), cert. denied, 493 U.S. 978, 110 S.Ct. 506, 107 L.Ed.2d 508 (1989); Burton II, supra, at 501. The covenant may be relied upon only when the manner of performance under a specific contract term allows for discretion on the part of either party. See Hubbard Chevrolet Co., 873 F.2d at 877. However, it will not contradict terms or conditions for which a party has bargained. Id. The concept of discretion in performance refers to one party's power after contract formation to set or control the terms of performance. Burton II, supra, at 501. Discretion occurs when the parties, at formation, defer a decision regarding performance terms of the contract. Id. Generally, the good faith performance doctrine may be used to protect a weaker party from a stronger party. Weakness and strength in this context, however, do not refer to the relative bargaining power of the parties. One commentor explained: Good faith performance cases typically involve arm's-length transactions, often between sophisticated business persons. The relative strength of the party exercising discretion typically arises from an agreement of the parties to confer control of a contract term on that party. The dependent party then is left to the good faith of the party in control. Burton I, supra, at 383-84. Under the agreements, Amoco retained discretion to modify the monthly rental amount. The dealers depended upon the good faith of Amoco in setting the rental terms. Although the parties established specific rental figures at contract formation, they also decided to allow Amoco to modify rental terms. By allowing Amoco to adjust the rental terms the parties, in effect, left these future provisions open. The open rental terms required the dealers to depend upon Amoco's good faith. The general rule implying the covenant in every contract, combined with the specific discretion regarding rental terms, created a duty of good faith and fair dealing for Amoco. Whether a party acted in good faith is a question of fact which must be determined on a case by case basis. Testimony at trial revealed that, in addition to being charged eight percent of the value of the land and capital assets, the dealers were charged an additional amount for the service bays. The record also reflects that Amoco was aware of the double charging. However, during and after contract negotiations, Amoco never disclosed the implications of its IVR calculations. Evidence shows that the additional charge was not disclosed to the dealers until 1988. That evidence also suggests that the dealers never agreed to be charged twice for any goods or services under the lease agreements. The dealers were justified in expecting that, in determining the appropriate rent, Amoco would not charge double for any one element of the calculation. That is, although the dealers left the rental calculation to Amoco's discretion, they presumably would not have signed the agreements had they known Amoco would charge a duplicate amount for service bays. The trial court properly instructed the jury regarding the implied covenant of good faith and fair dealing. The trial court informed the jury that Colorado law provides that each contract has an implied covenant that parties shall act in good faith and deal fairly. The trial court further instructed the jury that the law requires each party to a contract to act in such a manner that each party will attain their reasonable expectations under the contract. The evidence at trial supported the jury's finding that, by duplicate charging, Amoco did not perform the contracts in accordance with the dealers' reasonable expectations. Considering its acknowledgment of franchisor-franchisee interdependence, the jury could have concluded that Amoco breached the implied covenant of good faith and fair dealing. On review, we will not disturb a properly instructed jury's findings of fact.
Amoco asserts that the good faith covenant cannot be implied because the agreements stated that there were no implied covenants. The court of appeals disagreed with Amoco, holding that because an implied covenant of good faith and fair dealing is implied at law in every contract, the provision precluding implied covenants did not prevent recovery in this case. We agree. The covenant of good faith and fair dealing exists in every contract to enforce the reasonable expectations of the parties. The merger and integration clauses do not permit Amoco to breach the implied covenant of good faith and fair dealing by duplicate charging. The reasonable expectations of the parties remain vital considerations in every contract. See Simon, 842 P.2d at 240. The record supports the jury's conclusion that Amoco breached its implied covenant of good faith and fair dealing.