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today we're going to begin in-depth exploration of a topic we've already come across a few times the duty of good faith we're going to start by discussing sentronics corporation versus Jenna calm corporation the case decided by the Supreme Court of New Hampshire in 1989 the case concerned a rather complicated transaction for financial assets sentronics agreed to sell and Jenna calm agreed to purchase certain business assets the parties agreed that the purchase price of the assets would be pegged to the assets value at closing because the price a value couldn't be known at the time that the contract was formed the parties agreed that disputes over the ultimate purchase price would be referred to an accounting firm for arbitration the parties also agreed that pending finding final valuation of the assets Jenna calm would deposit a portion of the purchase price into escrow the parties did indeed disagree about the value of the assets at closing and so began our betray ssin the arbitration process apparently was taking longer than the parties anticipated and while arbitration was still ongoing sentronics requested that Jenna calm released from escrow the portion of the funds that were not in dispute Jenna calm refused to do so in sentronics sued arguing that Jenna calm had breached an implied obligation of good faith Jenna calm moved for summary judgment which the trial court granted the New Hampshire Supreme Court in an opinion by then judge a now former Supreme Court Justice David Souter affirmed Souter did not deny that an obligation of good faith existed rather his opinion focused on what good faith requires Souter outlined three categories of cases in which good-faith disputes might arise cases dealing with standards of conduct and contract formation that's the first category the second is cases concerning at-will termination of employment contracts and the third is limits on discretion in contractual performance these three categories corresponds to three different times of the contracts existence its formation its termination and what happens in between the good-faith requirement can always be seen as limiting discretionary behavior Souter saw that the limits on discretion though differ depending on whether we're talking about a contractor's discretion in forming or terminating a contract or an exercising discretion during the contract that is how to perform a contract when there is some discretion granted one side or the other under category one concerning good faith in formation good faith is tantamount to the traditional duties of care to refrain from misrepresentation and to correct subsequently discovered error insofar as any representation is intended to induce and is material to another party's decision to enter into a contract in justifiable reliance upon it basically Souter is saying that you have to be honest both explicitly and implicitly when dealing at arm's length in negotiating the possible formation of a contract under category two concerning at-will termination of the contract the good faith obligation limits and employers power to fire an at-will employee good faith is violated when employer fires an at-will employee quote out of malice or bad faith in retaliation for action taken or refused by the employee in consonance with public policy unquote combing through precedent the Court determined that good faith in the third category of cases into which the instant dispute fell requires quote an implied obligation of good faith to observe reasonable limits in exercising that discretion consistent with the party's purpose or purposes in contracting unquote the court further broke down the analysis required for category three discretionary performance cases into 4 questions first whether the contracting question aloud or conferred upon the defendant a degree of discretion in performance that was tantamount to a power deprive the plaintiff abstention proportion of the agreements value second if it did whether the evidence suggested that the parties intended to make a legally enforceable contract third if so whether the defendant exercise exercise of discretion exceeded the limits of reasonableness a question that required identifying the purpose of the contract and fourth whether the damage complained of resulted from events beyond the control of either party but the court didn't need to run through each of these four questions because it determined in the decision in answering the very first question that the contract did it found did not confer discretion upon Jenna calm to deprive sentronics of the substantial proportion of the agreements value the court examined the contractual provisions governing release of the funds from escrow the escrow agreement provided that quote in accordance with section 2.0 7 of the purchase agreement the escrow agent shall hold the escrow funds in its possession until instructed in writing unquote by the parties lawyers quote to distribute the same or same portion thereof to sentronics or jenna calm as the case may be section 2.0 7 of the purchase agreement entitled final payment of purchase price stated quote final settlement and payment of the purchase price shall be made not later than ten days after determination of the closing value and computation of the purchase price whether by agreement of the parties or decision of the arbitrator these provisions were in the courts words Express and unequivocal they gave Jenna calm no discretion to withhold pay out for approved for approval beyond that time or to affect the timing of the arbitration itself because of this the court concluded that genican was not given discretion such that it could deprive sentronics indefinitely of a portion of the agreed consideration for the business assets previously transferred the court addressed discretion beyond the time line specified in the agreement what about before that timeline does Jenna calm have discretion to release the funds before ten days after determination of closing value the court believed the text of the agreement supported the claim that the parties intended the escrow agent to leave the fund intact until the point of final payment if any that would be due to sentronics ten days after the final price determination good faith did not require Jen calm to do something inconsistent with the terms of the agreement and here I'm quoting what sentronics claims to be Jenna comms discretion over the timing of distribution is in reality of power that each party may exercise but only jointly with the other to agree to remove some or all of the escrowed funds from the ambit of the otherwise mandatory payout provision unquote the opinion further agreed with the trial court that it wasn't the judges duty to quote insert a provision in the contract for partial payments where such provision does not exist the court will not renegotiate the contract between the parties to obtain this result in determining how to approach the good-faith question Souter discussed two scholars summers and Burton and their differing understandings of the meaning of good faith summers adheres to an excluder analysis he defines good faith as anything that isn't bad faith he denied that certain words or phrases have a general positive meaning of their own but instead quote functioned to rule out various things according to context unquote one example he offered is the word voluntary in criminal law quoting the philosopher summers argued that when we say someone acted voluntarily the word serves to exclude a heterogeneous range of cases such as physical compulsion coercion by threats accidents wickets mistakes etc voluntary itself didn't designate a specific mental state summers believes that good faith is similar it functions as an excluder to rule out a wide range of heterogeneous forms of bad faith such forms of bad faith include evading the spirit of bargain and abuse of the power to define specific terms Burton by contrast advocates what he calls a recapture theory he explained that parties give up certain opportunities at the time that they contract he termed this the expected cost of performance a party acted in bad faith Burton argued quote precisely when discretion is used to recapture opportunities for gone upon contracting when the discretion exercising party refuses to pay the expected cost of performance for the purposes of analyzing good faith and discretion during contract performance this third category Souter said that he found summers analysis more in line with the New Hampshire precedent nevertheless before question test he set out reads especially with its emphasis on contracts purpose somewhat like an implementation of Burton's recapture theory in any case Souter explicitly attempted to analyze the case in recapture terms and determined that even by those terms Jenny Cobbs actions wouldn't constitute bad faith this is because first Genna calms refusal to consent to distribution from ESCO quote neither recaptures nor gains Jenna calm anything in and of itself the refusal removes no issue from the contingencies of arbitration and gives Jenna Cobb no present or future rights to the money it wishes to obtain unquote more significantly the Court emphasized that to Burton's parties affected cost depend upon an objective analysis of the parties expectation as they may be inferred from the express contract terms in light of the ordinary course of business and customary practice the court's objective analysis found that the parties expected the escrow to remain intact during the arbitration the parties thus quote never bargained away the right of either of them to condition any distribution on completing the arbitration of any disputes Jen income by insisting arbitration be completed before releasing escrow funds then was not trying to recapture a forgone opportunity i'm not assured that jenna calm had not by default bargained away the right to resist releasing SQL bounds not at risk with rational parties give Jenna calmness power of insistence it it gives Jenna calm bargaining power to possibly get sentronics to agree to less than the arbitrator would ultimately give judge Souter seems to think this bargaining power was what sentronics signed up for so Jenna calm wasn't using its digression to get anything extra but a contrary ruling that was explicitly a default might not have been contracted around by many parties then again this bargaining power might have also affected the initial price sale price that was offered knowing that there would be difficulty negotiating in its shadow more generally how should a court think about a use of discretion that gives defendant very little and cost the plaintiff a lot if choosing X instead of instead of Y gains the defendant a penny but cost the plaintiff $100 is that bad faith if it gains the defendant $99 but cost the plaintiff 100 is that small and efficiency bad faith if it gains the defendant $100 but cost the plaintiff $100 and is just a transfer of well can that ever be bad faith I'd be attracted saying that using discretion even discretion in refusing to modify contract should be bad faith if it creates massive inefficiency imagine though that Jen and Comm were found to have acted in bad faith in performing the contract is that a separate cause of action well some jurisdictions do recognize a separate cause of action for failure to perform or enforce in good faith but most do not instead construing the failure to perform specific contractual terms in good faith as a breach of contract Restatement section 205 says that the appropriate remedies in breach of good faith cases can vary according to context sentronics is a pretty packed case there's a lot to take away from it the primary takeaway the one most relevant to the dispute between sentronics and Jenna calm was that good faith and contractual performance arises only in the context of the parties exercise of discretion but beyond that we talked about suitors classification of different good faith scenarios and corresponding understandings of what could good faith entails we also discussed two influential and very different understandings of good faith the excluder theory espoused by summers and the expected cost or recapture theory exchanged by Burton think about which of these you find more persuasive