Opinion ID: 172572
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Heading: Limitations Imposed by the Covenant of Good Faith

Text: SCO also argued below that the covenant of good faith and fair dealing independently limits the scope of Novell's waiver rights under the APA. Under California law, [e]very contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement. Carma Developers (Cal.), Inc. v. Marathon Dev. Cal., Inc., 2 Cal.4th 342, 371, 6 Cal.Rptr.2d 467, 826 P.2d 710 (Cal. 1992). The covenant of good faith finds particular application in situations, as here, where one party is invested with a discretionary power affecting the rights of another. Id. [B]reach of the covenant of good faith has been characterized as an attempt by the party holding the discretionary power to use it to recapture opportunities forgone in contracting. Id. at 372, 6 Cal.Rptr.2d 467, 826 P.2d 710; see also Steven J. Burton, Breach of Contract and the Common Law Duty to Perform in Good Faith, 94 Harv.L.Rev. 369, 373 (1980). That said, [i]t is universally recognized [that] the scope of conduct prohibited by the covenant of good faith is circumscribed by the purposes and express terms of the contract. Id. The district court concluded that the covenant of good faith was inapplicable to constrain Novell's waiver rights, as a matter of law, reasoning that Novell would be acting within an explicit grant of contractual authority. Dist. Ct. Op. 87 (citing Carma Developers, Inc., 2 Cal.4th at 374, 6 Cal.Rptr.2d 467, 826 P.2d 710). Because we conclude that the scope of Novell's waiver rights is not clarified expressly by the contract, we must reverse the district court's judgment on this point. On remand, however, we caution that it is not always the case that an express grant of contractual authority is not constrained by the operation of the covenant of good faith. California recognizes at least two exceptional situations where the covenant of good faith may inform the interpretation of even an express grant of contractual authority. First, where the express discretion makes the contract, viewed as a whole, contradictory and ambiguous, the implied covenant may be applied to aid in construction. April Enterprises, Inc. v. KTTV, 147 Cal.App.3d 805, 816, 195 Cal.Rptr. 421 (Cal.Ct.App. 1983). Thus in April Enterprises, by the express terms of a contract, one party had the right to syndicate episodes of a television show, while the other had the right to erase episodes of the show. Both parties shared revenues from compensation. Although the contract expressly granted one party the right to erase episodes, the court applied the covenant of good faith, holding that the contract was contradictory and ambiguous as to whether tapes could be erased while the other party was negotiating for syndication. Id. Second, the covenant may aid in the interpretation of a contract seemingly expressly granting unbridled discretion in those relatively rare instances when reading the provision literally would, contrary to the parties' clear intention, result in an unenforceable, illusory agreement. Third Story Music, Inc. v. Waits, 41 Cal.App.4th 798, 808, 48 Cal. Rptr.2d 747 (Cal.Ct.App.1995). On remand, the district court may consider the applicability of either of these exceptions to the general rule that an express grant of contractual authority is not susceptible to limitation by the covenant of good faith.