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RGG Iselin, Inc. v. Wunderman

A-6713-02T1 (N.J. Super. App. Div. 2004) (Unpublished)

CONTRACTS; IMPLIED COVENANT; GOOD FAITH AND FAIR DEALING—A party’s performance under a contract may breach the implied covenant of good faith and fair dealing even if no express covenant has been violated; that can happen when one party does something in bad faith that deprives the other of the reasonably expected benefit of the contract.

An employment agency referred a potential employee to a company. The contract between the agency and the hiring company provided that if a referred employee were terminated within ninety days of the start of his employment, the placement agency fee would be refunded. After some financial difficulties, the company fired the employee on the eighty-fifth day of the contract. It then notified the employment agency that it would not pay the placement fee because the employee had been terminated within the ninety-day contractual period. In response, the employment agency brought suit, contending that it provided a service from which the other company profited and that its customer breached the implied covenant of “good faith and fair dealing” by failing to pay for that service.

The lower court ruled in favor of the employment agency and awarded it the placement fee. The Appellate Division reversed the judgment, holding that parties can generally fix their own contractual terms and that those terms should be enforced as written. A court may not make a better or more sensible contract for the parties than the one they made for themselves. However, the Court noted that although the “implied covenant of good faith and fair dealing” cannot override an express term in a contract, a party’s performance under a contract may breach the covenant even though that performance does not violate an express term of its contract. The covenant provides that neither party shall do anything that will injure the right of the other party to receive the benefits of the contract.

The hiring company asserted that the contract clearly allowed it to fire the employee within ninety days without a penalty, and the Appellate Division was convinced that the company had a legitimate, good faith business reason for doing so. The hiring company had fallen under financial difficulties and the employee was an imperfect fit to the company.

The Court noted that the result of depriving the employment agency its commission was harsh, but that the situation could have been avoided by a contractual provision drafted to protect the agency in the event of termination. Therefore, because the Court held that the employee was terminated within the ninety-day period for a good faith reason, it reversed the lower court’s decision and held that the employer was not obligated to pay the commission.


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