Greer Props., Inc. v. LaSalle Nat'l Bank - 874 F.2d 457 (7th Cir. 1989)

Rule:

Under Illinois law, every contract implies good faith and fair dealing between the parties to it. This implied obligation of good faith and fair dealing in the performance of contracts acts as a limit on the discretion possessed by the parties. In Illinois, a party vested with contractual discretion must exercise his discretion reasonably and may not do so arbitrarily or capriciously. If discretion is exercised in bad faith, a breach of contract occurs and the court must grant relief to the aggrieved party.

Facts:

As part of the real estate contract, the sellers were required to remove any environmental contamination at their own expense. The sellers were also allowed to terminate the contract if the cost of the clean-up became economically impracticable. The sellers terminated the contract upon receiving a final report from their soil consultant, estimating the clean-up costs at between $190,000 and $240,000. After the termination, the sellers indicated to the purchaser that he could still buy the property if it increased the purchase price by $250,000. The purchaser never made the higher offer. Subsequently, the purchaser filed a complaint, seeking specific performance of the contract and money damages. The sellers answered the complaint and filed a counterclaim seeking a declaratory judgment that their termination of the contract was proper. The sellers also filed a motion for summary judgment on their counterclaim. The district court granted the sellers’ motion for summary judgment, concluding that no genuine issue of material fact existed and that Sellers were entitled to judgment as a matter of law. The district court found that, under Illinois law, the language of the contract gave the sellers broad discretion to terminate upon receipt of the soil consultant's study. The purchaser appealed, arguing that genuine issues of material fact existed as to whether the sellers were acting in bad faith when they terminated the contract.

Issue:

Did the district court err in granting summary judgment in favor of the sellers on the issue of whether the sellers terminated the contract in good faith? 

Answer:

Yes.

Conclusion:

The court found that the sellers were empowered with broad discretion to terminate the contract under their best business judgment. However, this discretion was tempered by the implied duty to act in good faith. The circumstances of this termination raised many questions of fact concerning the motive behind the termination. These questions went directly to the issue of whether the sellers breached their duty of good faith and fair dealing by terminating the contract. Therefore, the district court's entry of summary judgment on the issue of whether the sellers terminated the contract in good faith was reversed.