Bad Faith Conduct Supports A Claim For Breach Of The Implied Covenant Of Good Faith And Fair Dealing

• Posted on: Aug 2 2017

It is well settled that “[e]very contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” Restatement (Second) of Contracts § 205 (1981). See also 511 W 232nd Owners Corp. v Jennifer Realty Co., 98 N.Y.2d 144, 153 (2002) (“In New York, all contracts imply a covenant of good faith and fair dealing in the course of performance”). “This covenant embraces a pledge that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.” 511 W 232nd Owners, 98 N.Y.2d at 153 (citations and internal quotation marks omitted). “While the duties of good faith and fair dealing do not imply obligations inconsistent with other terms of the contractual relationship, they do encompass any promises which a reasonable person in the position of the promisee would be justified in understanding were included.” Id. (citations and internal quotation marks omitted).

To state a cognizable claim, “[a] plaintiff must allege a specific implied contractual obligation and allege how the violation of that obligation denied the plaintiff the fruits of the contract.” Kagan v. HMC-New York, Inc., 94 A.D.3d 67, 77 (1st Dept. 2012) (citation omitted). Conduct that frustrates the purpose of a contract is often described as bad faith, and is identified by, among other things, “evasion of the spirit of the bargain,” “abuse of a power to specify terms,” “interference with or failure to cooperate in the other party’s performance,” and willful rendering of imperfect performance. E.g., Restatement (Second) of Contracts § 205 cmt. d. General allegations of bad faith are insufficient. Kagan, 94 A.D.2d at 77.

This Blog previously wrote about the covenant here.

On July 13, 2017, Justice Scarpulla of the Supreme Court, New York County, Commercial Division, considered these principles in holding that a defendant who gave a defective notice of lease renewal with the intent to prevent the plaintiff from finding another tenant stated a claim for breach of the covenant of good faith and fair dealing. Foscarini, Inc. v. Greenestreet Leasehold Partnership, 2017 NY Slip Op. 31493(U).

Background

On January 16, 2011, the plaintiff, Foscarini, Inc. (Foscarini”), leased a storefront from the defendant, The Greenestreet Leasehold Partnership (“Greenestreet”), for a five-year term that expired on January 16, 2015. The lease provided that Foscarini could renew the lease for an additional five years upon written notice of its intent to renew. Notice had to be provided between six and twelve months prior to the initial expiration of the lease.

On January 2, 2015, Foscarini informed Greenestreet in writing that it intended to renew the lease. Greenestreet alleged that the notice was defective, in that it was addressed and sent to the wrong party, and was equivocal regarding Foscarini’s intent to renew.  For various reasons, Greenestreet alleged that Foscarini merely acted as though it were renewing to give it time to seek alternate premises and to cloud title to the space.

The parties negotiated the renewal for several months. Unable to agree upon a renewal with acceptable terms, Foscarini sued Greenestreet seeking a declaratory judgment that it properly exercised its option to renew the lease, and that the lease had been renewed for a five-year term beginning on January 1, 2016; and for breach of the lease by failing to recognize Foscarini’s renewal. Greenestreet answered the complaint.

Upon the expiration of the initial term on January 15, 2016, Foscarini failed to vacate the premises. The following month, the parties entered into a so-ordered stipulation setting forth the terms of use and occupancy for the premises while Foscarini still occupied it. Greenestreet alleged that, having agreed to the stipulation, Foscarini continued to search for alternate commercial space without telling Greenestreet that it was doing so.

On August 9, 2016, Foscarini told Greenestreet that it was vacating the premises at the end of the month, and that it was withdrawing its cause of action for a declaratory judgment. Greenestreet alleged that three weeks’ notice was insufficient notice to vacate, as it left it unable to quickly locate a new tenant for the premises. Foscarini vacated the premises on August 31, 2016, and, thereafter, demanded the return of its security deposit. Greenestreet disputed Foscarini’s right to vacate the premises, to withdraw its cause of action, and to recover the security deposit.

On October 25, 2016, the parties stipulated that Greenestreet could file an amended answer to the complaint. In the amended answer, Greenestreet asserted five counterclaims for: (1) breach of the lease; (2) breach of the lease’s implied covenant of good faith and fair dealing; (3) abuse of process; (4) holdover at fair market value; and (5) for a declaratory judgment that Greenestreet could retain all of Foscarini’s security deposit.

Foscarini moved, pursuant to CPLR 3211(a)(7), to dismiss the second and third counterclaims for breach of the implied covenant of good faith and fair dealing and abuse of process. Greenestreet later withdrew the abuse of process counterclaim.

Greenestreet claimed that Foscarini breached the implied covenant in three ways: 1) Foscarini commenced “a litigation it knew to be without merit” to gain a negotiating advantage over Greenestreet and to continue paying “under-market use and occupancy” while looking for a new location; 2) Foscarini failed to vacate the premises when the lease expired; and 3) Foscarini sent a renewal notice that it knew was defective. Greenestreet argued that Foscarini acted in bad faith in that it had no intention of staying in the premises and that it refused to vacate the premises at the end of the lease term, and then, by leaving on only twenty days’ notice, depriving Greenestreet of the six-month notice period provided for in the lease, and the ability to timely market the premises or obtain a new tenant.

In response, Foscarini maintained that the counterclaim was duplicative of Greenestreet’s counterclaim for breach of the lease, as both claims alleged that Foscarini failed to comply with the lease by sending a proper renewal notice or by vacating the premises when the lease expired. Foscarini also claimed that Greenestreet had not been denied the fruits of its bargain.

The Court’s Decision

Justice Scarpulla rejected the first two bases asserted by Greenestreet for a breach of the implied covenant, but sustained the third one – that Foscarini sent the renewal notice to Greenestreet with no intent to remain in the premises. In doing so, the Court accepted Greenestreet’s contention that implied from the renewal provisions of the lease was an obligation to send a renewal notification only if Foscarini actually intended to renew. Foscarini’s defective notice impeded Greenestreet’s ability to lease the premises once the lease expired and, therefore, frustrated the fruits of the parties’ bargain:

The strict notice period provided for renewing the lease is alleged to have been part of the fruits of Greenestreet’s bargain, allowing it the necessary time to relet the premises if Foscarini decided not to renew the lease. Foscarini’s faulty notice impeded Greenestreet’s ability to lease the premises once the lease expired. Indeed, Greenestreet alleges that the faulty renewal notice was merely the beginning of Foscarini’s attempts to prolong its occupancy while searching for new space, as shown by Foscarini’s principal telling a real estate broker in June 2015 that it would either renew the lease or look for new space. Greenestreet has successfully alleged that Foscarini breached its implied obligation to send a renewal notice only if it genuinely meant to renew the lease, and that Greenestreet was damaged in its inability to relet the premises upon Foscarini’s departure.

The Court also rejected Foscarini’s argument that Greenestreet alleged that the improper renewal of the lease was a basis for both a breach of contract and implied covenant claim, finding that “Greenestreet’s claim of a bad faith renewal could not be brought as an express breach claim.” In this regard, the Court noted that “[t]he lease does not place any express, stated conditions on Foscarini’s decision to exercise its right to renew, nor … does the lease provide that Foscarini’s exercise of its right to renew the lease is irrevocable.”

Takeaway

“The essence of contract law is the bargain: parties of equivalent bargaining power negotiate the terms of the transaction and each is then entitled to the benefit of the bargain.” Detroit Edison Co. v. NABCO, Inc., 35 F.3d 236, 239 (6th Cir. 1994).  “Neither ha[s] the right to undermine the other’s reasonable expectations, or to make performance more difficult.” Standard Chartered Bank v. AWB (USA) LTD., No. 05 Civ. 2013 (AKH) (S.D.N.Y. Feb. 16, 2010). When one party acts in way that denies the fruits of the contract for the other, he/she breaches the implied covenant of good faith and fair dealing – a lesson that Foscarini learned in its case with Greenestreet.

Tagged with: Business Litigation, Commercial Litigation, Covenant of Good Faith and Fair Dealing