Case Law Summaries

Seidenberg v. Summit Bank

• Opinion Date: February 28, 2002
• Business Law
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WARRANTIES — A claim under the implied warranty of good faith and fair dealing is not negated just because the claimant had equal bargaining power or was not financially vulnerable or engaged talented counsel when negotiating the agreement.

Two individuals sold their insurance brokerage businesses to a bank. They continued as executives of the brokerage firms and “were to be placed in charge of the daily operations of any other employee benefits insurance business which might be acquired by [the bank].” The employment agreements with the bank acknowledged the “joint obligation to work together with respect to the future performance of the brokerage firms,” and provided that the buyer and seller would work together to formulate a joint marketing program so that the continuing brokerage firm would have access to the market resources of the bank. The arrangement didn’t work out and, despite the employment agreement, the two sellers were terminated from their positions. That triggered a law suit. Part of the law suit was based upon the failure of the bank to honor its joint marketing promises. The two sellers argued that the bank’s “lack of performance ... impacted their reasonable expectations of compensation and future involvement.” In their pleadings, the two individuals asserted that the allegations gave “rise to an inference of bad faith,” demonstrated that the bank “never had any intention to perform to begin with,” and that the bank “from the start, ... never [was] committed to developing the business with [them], but rather simply wanted to acquire the business and seek out their own broker to run it or grow it.” A partial settlement was reached eliminating all claims except the sellers’ “claim of a breach of the implied covenant of good faith and fair dealing.” The lower court dismissed that claim, holding instead that the sellers were “seeking to prove the existence (and obtain enforcement) of an oral agreement allegedly made beyond the four corners of the written agreements and violations of the parole evidence rule.” The lower court placed emphasis on the bargaining power of the parties, where both the sellers and the bank were quite sophisticated and had the assistance of “very able counsel.” The Appellate Division started “with the premise that in New Jersey the covenant and good faith and fair dealing is contained in all contracts and mandates that ‘neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.’” The Court opined that “application of the implied covenant of good faith of fair dealing has addressed three distinct type[s] of situations: (1) when the contract does not provide a term necessary to fulfill the parties’ expectations, ...; (2) when bad faith served as a pretext for the exercise of a contractual right to terminate, ...; and (3) when the contract expressly provides a party with discretion regarding its performance.” It then found that the lower court erred in holding that the parol evidence rule was “an insurmountable obstacle” to the seller’s claim. The rule “prohibits introduction of oral promises which tend to alter or vary an integrated written instrument,” but parol evidence may be “admitted in order to provide understanding into the parties’ intentions.” According to the Court, put in the context of this particular case, “it must first be observed that the parol evidence rule does not even come into play ‘until it first determined what the true agreement of the parties is.’” Consequently, the rule could not inhibit the application of the implied covenant of good faith and fair dealing because that covenant is contained in all contracts by operation of law. Further, because “the central premise of the implied covenant is the enhanced status of the parties’ reasonable expectations,” if the parol evidence rule is vigorously applied in such situations, the opportunity to pursue such a claim would be extremely limited. Therefore, the lower court was required to determine whether the complaint alleged circumstances which, if proven, “might support a claim based upon [the bank’s] termination of the relationship.” That would bring into play the application of the implied covenant claim with respect to termination of the contractual relationship and also whether the bank “used insufficient energy in discretionary areas.” In summary, the seller’s “claim of a breach of the implied covenant in good faith and fair dealing [was] not precluded merely because the parties possessed equal bargaining power, or because [the sellers] were not financially vulnerable during the contract’s formation, or even if the [sellers] negotiated a contract with the assistance of highly competent counsel.” These were factors that a trier of fact might consider, but they were not the only factors. Further, the Court concluded that the “parol evidence rule presently [appeared] to have no impact upon the ability of [the sellers] to substantiate either their claim that they had reasonable expectation of a continued relationship (notwithstanding the expressed right of [the bank] to terminate), or their claim that [the bank] failed to perform its contractual obligations in good faith.” Viewing the pleadings with liberality, the matter was remanded to the lower court to give the parties “a full and fair opportunity for further investigation and discovery.”

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