Good Faith in Contract Formation

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    1. Good Faith in Contract Formation
      1. Definitions
        1. Good Faith is a total absence of any intention to seek an unfair advantage or to defraud another party; an honest and sincere intention to fulfill one’s obligations.
        2. Good faith in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade. (UCC §2-103(b))
        3. Also called BFP: Bona Fide Purchaser
        4. Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement. UCC §1-203, Restatement 2d §205.
          1. UCC 1-203 (revised edition 1-304): “every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement;” closely comparable is 2nd Rst., Sec. 205
      2. Negotiating a New Contract
        1. There is no requirement in America that parties negotiating must come to a contract. As seen below in Racine & Laramie, this is true too of contract extensions/expansions.
        2. The implied covenant of good faith and fair dealing rests upon the existence of some specific contractual obligation.
        3. Some Civil Law jurisdictions take a different approach in that damages may be awarded to an injured party from negotiations in bad faith. This is the doctrine of culpa in contrahendo.
      3. Racine & Laramie, Ltd., Inc. v. Department of Parks and Recreation
        1. Facts: Π entered a long term K with Δ for leasing an area of a park for concessions. Midway through the lease, Π wanted to negotiate an addition to the contract to allow them to expand the operation.
        2. Rule: There is no obligation to deal fairly or in good faith absent an existing contract. If there exists a contractual relationship between the parties, as was the case here, the implied covenant is limited to assuring compliance with the express terms of the contract, and cannot be extended to create obligations not contemplated in the contract.
          1. The court finds no express contractual obligation here to negotiate a modification of the concession contract; the provision closest to a possible obligation falls far short of the imposition of any obligation on either party to even participate in activity leading to a modification of the concession.
          2. Exception: During the course of negotiations things may be done which do then impose a duty of continued bargaining only in good faith, such as:
            1. A preexisting agreement may impose an obligation of good faith bargaining with respect to the modification of some term of the agreement.
            2. The preexisting agreement which vests a discretionary power of alteration of the terms of the agreement may impliedly require that such be done in good faith.
            3. In anticipation of an agreement, the parties may, by letter of intent or otherwise, agree that they will bargain in good faith for the purpose of reaching an agreement.
            4. In the course of negotiations it is possible for a party to so mislead another by promises of representations, upon which the second party detrimentally relies (bringing in promissory estoppel).
          3. None of these exceptions were present in the instant case.
        3. Held: There can be no breach of the covenant of good faith by a refusal to enter into a new contract.
      4. New England Insulation Co. v. General Dynamics Corp.
        1. Facts: Π was invited by Δ to bid on a contract. Π designed a solution to fit the needs that included confidential engineering ideas. Δ then made Π’s bid available to a 3rd company that Δ got kickbacks from.
        2. Result: remanded for trial reversing the dismissal. The court held that the implied contract to perform in good faith meant that Δ did not have the right to give the contents of the bid to third parties, and that they had the obligation to judge the bids fairly.