Under an agreement that appears by word or silence to invest one party with a degree of discretion in performance sufficient to deprive another party of a substantial proportion of the agreement's value, the parties' intent to be bound by an enforceable contract raises an implied obligation of good faith to observe reasonable limits in exercising that discretion, consistent with the parties' purpose or purposes in contracting.
A contract between plaintiff buyer and defendant seller provided for arbitration of disputes on the price and required an escrow deposit of a portion of the price pending final valuation. When the arbitration dragged on, the seller sought an escrow distribution in an amount that the seller claimed was in excess of what would be the eventual purchase price. When the buyer refused, the seller charged the buyer with breach of an implied covenant of good faith. The trial court found that the contract did not require the buyer to agree to a distribution during arbitration and that the seller was merely seeking to revise the contract. The trial court of Hillsborough County (New Hampshire) granted summary judgment in favor of the buyer.
Did the defendant, in refusing during arbitration to release a portion of the escrow fund claimed to be free from "dispute,” breach an implied covenant of good faith?
On appeal, the court affirmed. The court found that the implied obligation of good faith at common law set limits on discretion in contractual performance. The contract did not confer such discretion on the buyer over the timing of distributions from the fund that, in the absence of some good-faith limitation, it could deny the seller a substantial proportion of the contract's benefit. To the contrary, the contract contained express and unequivocal provisions governing the timing of payment. The buyer had no discretion to withhold approval or to affect the timing of the arbitration. Alternatively, the buyer's refusal was not bad faith as an exercise of discretion meant to recapture an opportunity foregone at the creation of the contract.