Opinion ID: 492085
Heading Depth: 1
Heading Rank: 3

Heading: the implied covenant of good faith and fair dealing

Text: 24 Cambee's alleges Doughboy violated an implied covenant of good faith and fair dealing by terminating Cambee's distributorship. Doughboy argues that South Dakota has not recognized breach of the good faith and fair dealing covenant as a separate cause of action. Cambee's points to South Dakota's U.C.C. provision that [e]very contract or duty within this title imposes an obligation of good faith in its performance or enforcement. S.D.Codified Laws Sec. 57A-1-203 (1980).  'Good faith' in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade. S.D.Codified Laws Sec. 57A-2-103(1)(b). In addition, the Supreme Court of South Dakota has applied a test of good faith to protect an aggrieved party from unfairness in the performance of a contract not falling within the ambit of the code. Teigen Construction, Inc. v. Pavement Specialists, Inc., 267 N.W.2d 574, 578 (S.D.1978) (requirements contract). The court has authorized a cause of action for an insurer's bad faith in refusing to settle within policy limits, Kunkel v. United Security Insurance Co. of New Jersey, 84 S.D. 116, 121-22, 168 N.W.2d 723, 726 (1969), 12 and has examined for good faith a party's performance or enforcement of contracts in a variety of other settings. See, e.g., Hicks v. Brookings Mall, Inc., 353 N.W.2d 54, 56 (S.D.1984) (tenant exercised good faith in attempting to operate business profitably); Richardson v. Afdahl, 313 N.W.2d 457, 460 (S.D.1981) (seller's good faith in refusing to complete sale a question for the jury); Brezina Construction Co. v. South Dakota Department of Transportation, 297 N.W.2d 168, 169-70 (S.D.1980) (engineer designated by parties determine questions related to execution must act in good faith); Schneider v. McLaughlin Independent School District No. 21, 90 S.D. 356, 367, 241 N.W.2d 574, 579 (1976) (decision not to renew principal's contract made in good faith). Thus, we find South Dakota law in accord with our statement that [i]n every contract there is an implied covenant of good faith and fair dealing .... Bain, 692 F.2d at 47. We need not, in this case, construe the covenant of good faith and fair dealing to state a separate cause of action. We merely point out that South Dakota law permits consideration of a party's good faith and fairness as an aid to contract interpretation. 25 Cambee's had a reasonable expectation that, absent good cause for termination, the distributorship agreement would endure for a period sufficient to allow Cambee's to recoup its investment, and we need have no fear that applying the good faith obligation would override an express contractual term, as the agreement between the parties is silent as to duration or the power to terminate. 13 26 The covenant of good faith and fair dealing serves at least two functions in this case. First, it tends to support the conclusion that an implied term of the agreement is that Cambee's would have an opportunity to recoup. Second, it offers a means to analyze Doughboy's claim that it terminated the agreement for good cause. Doughboy argues that, even assuming Cambee's otherwise had a right to recoup its alleged investment, Doughboy terminated the agreement for good cause, Cambee's alleged poor payment and credit history. Cambee's counters with evidence that its Doughboy account was current as of the termination date. Further, Cambee's produced evidence showing that Doughboy's credit manager did not consider the late payments a serious problem, and that he considered Cambee's withholding of payments justified in light of the unresolved dispute over the alleged incursions by other dealers into Cambee's exclusive territory. Consequently, a genuine issue of material fact arises as to whether Doughboy exercised good faith in asserting Cambee's credit history as its motive for termination, or whether it was merely a pretext for terminating the relationship. See Carlson Machine Tools, Inc. v. American Tool, Inc., 678 F.2d 1253, 1262 (5th Cir.1982) (factual question arose as to whether manufacturer's asserted just cause for termination was pretextual, notwithstanding contract provision that manufacturer was to be the sole judge of whether to continue); cf. Carlson Equipment Co. v. International Harvester Co., 710 F.2d 481, 482-83 (8th Cir.1983) (good faith instruction afforded protection provided by good cause term in contract). 27 In short, we agree with the district court that Cambee's assertion of the implied covenant of good faith and fair dealing does not state a claim separate from the breach of contract claim. Even so, the existence of a terminable at will contract does not obviate the parties' obligation to act in good faith, and Cambee's is entitled to have the trier of fact determine whether Doughboy may overcome the recoupment claim by demonstrating good cause, asserted in good faith, for termination. 14