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Gorca Systems, Inc. v. Bayer Corporation

A-1744-01T3 (N.J. Super. App. Div. 2003) (Unpublished)

CONTRACTS; GOOD FAITH; FAIR DEALING—There is no dichotomy between the principles of good faith or of fair dealing because they are either inextricably bound together or intended to express essentially the same kind of duty.

A medical technologies company executed a “teaming agreement” with a digital imaging business. The technologies company was to provide support needed by the imaging company to make a bid to the federal government. If that bid were selected, the two companies “were to negotiate a fixed price sub-contract for [the medical technologies company’s] further services under the government contract.” The contract was awarded, but contrary to the teaming agreement, the imaging company did not tell its “partner” of the award. This was because of a change in personnel at the imaging company where the new person in charge of the project was unaware of the teaming agreement and, further, the imaging company “declined to negotiate a fixed-price subcontract” with the medical technologies company. Without endeavoring to resolve the dispute, the medical technologies company filed suit, seeking damages as well as specific performance.

Upon learning of the suit, the imaging company sought to negotiate the subcontract, but the technologies company “was reluctant, having lost faith in [the imaging company’s] trustworthiness.” The lower court concluded that the imaging company breached an implied duty of fair dealing in failing to negotiate a subcontract. It also concluded that “such misfeasance was primarily due to [the imaging company’s] poor internal communication coupled with the loss of the key employee.” The lower court also held that the imaging company “attempted to negotiate a subcontract as soon as it learned of” the suit, and therefore, it was the medical technologies company “who then failed to meet the good-faith settlement efforts of the [imaging company] and unfairly refused to negotiate.” Consequently, the lower court only awarded the medical technologies company monies to reimburse it for its expense in assisting with the preparation of the initial proposal.

The Appellate Division agreed with the lower court’s result, but disagreed with the lower court’s analysis. The lower court had drawn “a dichotomy between principles of ‘good faith,’ which according to the judge dealt with the actor’s state of mind and ‘fair dealing,’ which the judge believed encompassed ‘the impact of the act upon others.’” On a factual basis, the Appellate Division pointed to a provision of the teaming agreement calling for the two parties, upon award of a prime contract, to negotiate, in good faith, a firm fixed price subcontract. The record showed that the imaging company did not notify the medical technologies company and did not attempt to negotiate with it for approximately eight months. “The failure, however reasonably explained, constituted a breach of the agreement to negotiate in ‘good faith.’” “Good faith” and “fair dealing” are either “inextricably bound together or intended to express essentially the same kind of duty. ... The law already recognizes that the good faith and fair dealing standard includes protection from one party’s unintentional but nonetheless harmful actions, i.e., any behaviors which ‘injure the right of the other to receive the fruits of the agreement.’ ... Thus, there was no reason to parse the ‘fair dealing’ component in this case to conclude that [the imaging company] breached the teaming agreement.” Nonetheless, the Appellate Division believed that the imaging company’s breach “did not excuse further performance by [the medical technologies company] because only material breaches relieve the non-breaching party of further obligations under the contract. ... A material breach is one that defeats the purpose of the contract.” Here, the medical technologies company filed suit before contacting its “partner’s” legal department or attempting to further resolve the dispute. It also refused to negotiate after it filed suit when it could have done so “to enjoy the fruits of the prime contract as the parties had originally intended.” Further, the contract specifically excluded award of “special, incidental, indirect or consequential damages arising from or connected with [the] agreement.” Lost profits are consequential damages. Reliance damages are actually special damages.

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