How to Save Your Covid-Impaired Contract /Business

READING THIS DOCUMENT MEANS THAT YOU RECOGNIZE THE PROPRIETARY NATURE OF MY STRATEGY AND AGREE TO JUSTLY AND EQUITABLY COMPENSATE ME FOR ITS USE IN ACHIEVING ANY BENEFIT FOR YOURSELF

Any party to a Covid-19-impaired contract, can rely on the implied covenant of good faith and fair dealing (“GFFD”) to achieve relief.

It is widely recognized that New York was the first jurisdiction to identify the GFFD duty as an implied covenant in every contract. As eloquently stated by Justice Cardozo in Wood v. Lucy, Lady Duff — Gordon:

The law has outgrown its primitive stage of formalism when the precise word was the sovereign talisman, and every slip was fatal. It takes a broader view today. A promise may be lacking, and yet the whole writing may be “instinct with an obligation,” imperfectly expressed. If that is so, there is a contract.

I note for background only, that as many have written in briefs and articles:

A party to a contract breaches these duties when his/her conduct frustrates the purpose of the contract, e.g., by failing to perform the things necessary to carry out the purpose for which the contract was entered and to refrain from destroying or injuring the other party’s right to receive the fruits of the contract. Such conduct 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.

The covenant:

“is violated by dishonest conduct [in enforcing contract rights] such as conjuring up a pretended dispute, asserting an interpretation contrary to one’s own understanding, or falsification of facts.’” Good Faith as Contract’s Core Value, Markovitz (emphasis added)[1]. … On this view, now expressed in Daniel Friedmann’s words, good faith imposes “restraints on self-interest in deference to a much heavier interest of another party’”.

He goes on to say:

“On the other hand, it is equally familiar that good faith requires less than fiduciary loyalty and devotion. A fiduciary, as it is sometimes said, is “required to treat his principal as if the principal were he.” In fact, a fiduciary must treat his principal more carefully still: there is any number of risks that a person might (even reasonably) take on his own account that he may not, acting as fiduciary, take on his principal’s. Good faith, by contrast, does not require contracting parties to display substantive other-regard or altruism, preferring their partners’ interests over their own, or even weighting the two interests equally, within their contracts. Good faith, in the words of one prominent opinion, “does not mean that a party vested with a clear right is obligated to exercise that right to its own detriment for the purpose of benefiting another party to the contract.” Another prominent American court draws the contrast between good faith and fiduciary loyalty more directly still. “‘[G]ood faith,’” the court observes, “does not envision loyalty to the contractual counterparty, but rather faithfulness to the scope, purpose, and terms of the parties’ contract.”…

Judge Richard Posner puts this point more colorfully, observing in Market Street Associates Limited Partnership v. Frey, that “[t]he contractual duty of good faith is thus not some newfangled bit of welfare-state paternalism or the sediment of an altruistic strain in contract law.” Similarly, “even after you have signed a contract, you are not obliged to become an altruist toward the other party.” Nor does good faith require contracting parties to adopt even an attitude of substantive impartiality between their contractual interests and the interests of their contracting partners. The duty of good faith in performance applies, after all, to every contract, including to contracts among sophisticated parties who can take good care of their own interests. The law does not seek, “in the name of good faith, to make every contract signatory his brother’s keeper.”47 Good faith is not a principle of substantive fairness even just in the face of new contingencies that arise within the contract relation. Good faith thus leaves the parties free to be self-interested within their contracts — as self-interested.

Good faith thus provides little help in drawing a line between permissible and impermissible conduct in between the outer and inner bounds (fraud on the one hand, and fiduciary loyalty on the other) just set out.

The task of legal theory is not simply to help decide (close) cases. Legal theory also seeks to illuminate the character of legal relations. …. Good faith thus characterizes contract obligation’s form and identifies an attitude towards contractual obligations: good faith supports the parties’ contractual settlement, working to “effectuate the intentions of the parties, or to protect their reasonable expectations. According to Judge Posner, the duty of good faith “is a stab at approximating the terms the parties would have negotiated had they foreseen the circumstances that have given rise to their dispute.” Good faith, on this approach, is thus just another “way[] of formulating the overriding purpose of contract law, which is to give the parties what they would have stipulated for expressly if at the time of making the contract they had had complete knowledge of the future and the costs of negotiating and adding provisions to the contract had been zero.”

Emphasis added as this perfectly describes the COVID situation. Going forward, every lease and mortgage or contract of any kind will have a negotiated clause to deal with a shutdown. Since this situation was for all intents and purposes completely unforeseeable, the parties have to act in good faith to carry out the purposes of the contract The GFFD covenant makes the contract somewhat of a living, breathing document that can adapt to preserve the intent of the contract in unforeseen times; it allows the intent of the contract to function had you known then what you know now, not only about the market, but also the world.