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The duty of good faith and fair dealing applies when one party has discretionary authority to determine certain terms of the contract, such as quantity, price, or time.
Amoco Oil Company (“Amoco”) entered into written lease and dealer supply agreements (agreements) with various dealers in the state of Colorado. The lease agreements provided that "lessee shall pay to Lessor as rent for the Premises, the sum of [a designated amount] per month during the term of this Lease unless a variable monthly rental is indicated below…" Under these agreements, Amoco leased both service station facilities and real property to each dealer. Both the lease and supply agreements had terms of one to three years; contained integration, cancellation, and merger clauses; and included specific dollar amounts of rent. Pursuant to the agreements, Amoco internally calculated the amount of rent it would collect from each dealer for its service station properties based on the asset value of each service station. The dealers contend they are being double charged on the service bays because the capital improvement component covered that cost. Amoco adds the capital charge, average maintenance cost, taxes, and service bay charges to calculate the rent for a particular location. On June 20, 1988, the dealers initiated suit against Amoco, alleging breach of the agreements and tortious interference with prospective business relations. The dealers' complaint contained seven claims, four of which were dismissed prior to trial. The remaining three counts were submitted to the jury. The jury returned a verdict in favor of the dealers for over $ 2.5 million in damages, prejudgment interest, and costs for breach of an implied covenant of good faith and fair dealing and tortious interference with prospective business relations. On appeal, the court of appeals affirmed the judgment of the trial court.
Did Amoco follow the principles of good faith and fair dealing in the performance of its contracts with the service dealers?
Under the agreements, Amoco retained discretion to modify the monthly rental amount. The dealers depended upon the good faith of Amoco in setting the rental terms. Although the parties established specific rental figures at contract formation, they also decided to allow Amoco to modify rental terms. By allowing Amoco to adjust the rental terms the parties, in effect, left these future provisions open. The open rental terms required the dealers to depend upon Amoco's good faith. The general rule implying the covenant in every contract, combined with the specific discretion regarding rental terms, created a duty of good faith and fair dealing for Amoco. Testimony at trial revealed that, in addition to being charged eight percent of the value of the land and capital assets, the dealers were charged an additional amount for the service bays. The record also reflects that Amoco was aware of the double charging. However, during and after contract negotiations, Amoco never disclosed the implications of its IVR calculations. Evidence shows that the additional charge was not disclosed to the dealers until 1988. That evidence also suggests that the dealers never agreed to be charged twice for any goods or services under the lease agreements. The dealers were justified in expecting that, in determining the appropriate rent, Amoco would not charge double for any one element of the calculation. The evidence at trial supported the jury's finding that, by duplicate charging, Amoco did not perform the contracts in accordance with the dealers' reasonable expectations.