Being in the Washington, DC Metro area, I hear a lot about politics. On the same day that the Washington Post ran an article about the “impeachment march,” the ritual of taking articles of impeachment from the House to the Senate, there was an article about the “Impeachment Polka,” which American composer Charles Dupee Blake wrote in 1868, hoping to profit from Andrew Johnson’s impeachment.
As someone who is more interested in music than politics, I immediately thought about the difference between a musical march and a polka. A march is military music with an even meter (imagine a sergeant yelling, “left, right…”). For me, a march conjures up thoughts of well-known American composer John Phillip Sousa, author of the famous march Stars and Stripes Forever. Many classical composers also wrote marches. For instance, French composer Hector Berlioz includes a famous “March to the Gallows” in his Symphonie Fantastique, and Beethoven included a funeral march in his Third Symphony.
A polka is a dance written in double meter (two beats to a measure) of Eastern European origin. The polka originated in Bohemia in the early 19th century and is one of the “national” dances of Poland.
It seems odd that Blake chose to write a polka about an event as serious as impeachment. When I think of polkas, I remember performing in the orchestra for formal balls, where we played fast polkas to contrast with the slower, serious waltz music. Marches are militaristic and serious. Polkas are all about fun.
I had never heard of Charles Dupee Blake, but I was intrigued. I wanted to find out about the man who would write a lively polka about a serious event like an impeachment. He was a very prolific composer and wrote 500 or more musical compositions. Blake lived in the Boston area and was famous enough that his death at the age on November 23, 1903, at the age of 57, was published in the New York Times under the headline “Well-Known Composer Dead.”
Despite this, only 26 of Blakes’s compositions are on IMSLP, which includes hundreds of thousands of public domain musical scores. Sheet Music Plus, a vendor claiming to have the “world’s largest sheet music selection,” has only one of his compositions, the Hide and Seek Rondo for four clarinets.
The contrast between how history has treated two 19th century American composers, Sousa and Blake, caused me to think about legal concepts that developed when these composers were working.
For instance, the implied covenant of good faith and fair dealing (Implied Covenant) developed in the mid-19th century. Although the Implied Covenant and it was drilled into our minds in law school, it has only rarely been mentioned since I passed my first bar exam. This article discusses the Implied Covenant and its continuing relevance in real estate and business dealings.
What is the Implied Covenant of Good Faith and Fair Dealing?
The Implied Covenant exists, at least to some extent, in every state’s law. Section 1-304 of the Uniform Commercial Code (UCC), adopted in 49 states, states, “[e]very contract or duty within the [UCC] imposes an obligation of good faith in its performance and enforcement.” However, the UCC doesn’t clearly define “good faith.”
Section 205 of the Restatement (Second) of Contracts (Restatement) also describes the Implied Covenant: “Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” The Restatement says, “good faith’s” “meaning varies somewhat with the context.” Section 205’s discussion about “good faith and fair dealing” in contract performance does little to clarify the Implied Covenant’s meaning:
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 catalogue of types of bad faith is impossible, but the following types are among those which have 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.
What constitutes “good faith and fair dealing” can be nebulous. It is fact- and context-dependent.
How the Implied Covenant of Good Faith and Fair Dealing Affects Contract Terms
Rather than focusing on the actions of the party whose actions are being questioned, many courts look to the impact on the other party. Those courts have applied a sort of “no harm, no foul” rule by asking whether the second party has been denied enjoyment of the “fruits” of the contract.
For instance, in Moran v. Erk, the New York Court of Appeals refused to use the Implied Covenant to require a buyer to purchase real estate where the contract. The contract was contingent on the buyer’s attorneys’ approval. Buyer had used the contingency to void the contract without explaining why the attorney didn’t approve it. The court reasoned that because of the attorney approval contingency, the seller had no expectation of the transaction going forward until the attorney’s approval was obtained. Therefore, there were no “fruits” for the seller to lose.
Courts also use the Implied Covenant as a gap filler when contract language and the parties’ intentions aren’t clear. In those instances, the Implied Covenant might be used to avoid an interpretation that would yield an unfair result. If the Implied Covenant is used only as a gap filler, then a “gap” must exist before the Implied Covenant applies.
Some courts have considered the Implied Covenant a requirement that a party act reasonably when exercising discretion allowed it under the contract. But generally, courts have not used the Implied Covenant to negate express contract terms.
Can A Party Waive the Covenant of Good Faith and Fair Dealing?
If the Implied Covenant is a “gap filler” that applies only where the parties haven’t made a contrary agreement, it would seem that the parties might be able to agree to waive the Implied Covenant. Yet, the practical reality of attempted waivers of the Implied Covenant can be unsavory.
Some parties try to include waivers of the Implied Covenant in their contracts. However, usually, the requesting party has more bargaining power than the other party. In those instances, the waiver might look like a “take it or leave it” proposition, and a truly voluntary waiver may not be possible.
Whether waiver of the Implied Covenant is enforceable depends upon the facts and circumstances. Sometimes, there are statutes, such as the Delaware Limited Liability Company Act, which prohibit waiver of the Implied Covenant. Or, a court might find the waiver to be unenforceable because it is contrary to public policy or because the parties had such disparate bargaining power that the waiver wasn’t freely negotiated. Yet, other times, courts won’t disturb negotiated contract terms waiving the Implied Covenant.
Some parties don’t overtly ask for waivers of the Implied Covenant. More frequently, the attempt to obtain a waiver is more subtle and may take one of these forms:
Representation of Good Faith–The contract will include a representation that the parties have negotiated in good faith. Although this isn’t technically a waiver of the Implied Covenant, a representation like this will prevent the party from later claiming breach of the Implied Covenant–at least for the period before the contract was signed.
Sole Discretion–Loan agreements frequently give the lender options to make decisions about the collateral after a default. Limited liability company operating agreements also may give the manager or a majority member the right to make decisions for the company. Frequently, the agreements will say that the decisions can be made at the party’s “sole discretion.”
When “sole discretion” language exists, it’s not a huge surprise if the deciding party will make a decision in its best interest. But there can be a big difference between doing something in the party’s best interest and deciding something that affirmatively hurts other parties or is contrary to the spirit of the agreement’s terms. Some courts have interpreted such language to permit the party to make a decision that violates the Implied Covenant. Other courts disagreed.
Exculpation Clause–Many contracts have exculpation clauses that limit one or both parties’ liability. Exculpation clauses frequently include dollar limits or exclude certain types of damages, such as punitive damages. Some exculpation clauses limit liability for certain types of claims, such as negligence. However, an exculpation clause also can limit or eliminate a party’s ability to collect for breach of the Implied Covenant.
Don’t Let the Implied Covenant of Good Faith and Fair Dealing Be Forgotten
Just as a serious march is more appropriate than a lively polka for an impeachment or funeral march, context is critical when determining whether to apply the Implied Covenant. In addition, the rules vary from state to state.
Presumably, Blake considered the impact that his lively Impeachment Polka might have on listeners. Contracting parties should think about the Implied Covenant and consider how it might affect their contracts.
When negotiating contracts, parties should consider whether the proposed language might waive the Implied Covenant or whether silence might impose a more stringent good faith standard than the parties intend. And when performing contracts, parties should consider how their actions might be viewed through the lens of the Implied Covenant, lest the Implied Covenant, like Blake’s music, be forgotten.
This series draws from Elizabeth Whitman’s background in and passion for classical music to illustrate creative solutions for legal challenges experienced by businesses and real estate investors.