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Current Developments in the Commercial Divisions of the
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Posted: April 17, 2015

Claim for Breach of the Implied Covenant of Good Faith and Fair Dealing Upheld

On April 9, 2015, the First Department issued a decision in Demetre v. HMS Holdings Corp., 2015 NY Slip Op. 03058, reinstating a claim for breach of the implied covenant of good faith and fair dealing.

In Demetre, the plaintiffs brought claims against the defendant relating to a stock purchase agreement. The trial court dismissed the plaintiffs’ claim for breach of the implied covenant of good faith and fair dealing as duplicative of their claim for breach of contract. The First Department reversed, explaining:

The dismissal of the claim for breach of the implied covenant of good faith and fair dealing, at this juncture, is premature. The court’s dismissal of the claim as duplicative of the breach of contract claim is inconsistent with its determination that the “best efforts” clause, allegedly being breached, is ambiguous as to whether it applied to [the defendant’s] post-acquisition operation of AMG. Because the issues are still undeveloped at this stage of the proceeding, both claims should be permitted to stand.

Further, to the extent the “best efforts” clause could be found inapplicable, plaintiffs have sufficiently pleaded a claim for breach of the implied covenant, as the allegations show that [the defendant], in bad faith, engaged in acts that had the effect of destroying or injuring plaintiffs’ right to receive the fruits of the contract, i.e., the contingent payments. [The defendant’s] contention that the claim would impose on it obligations that are inconsistent with other terms of the contract is unavailing, as plaintiffs were alleging that it failed to fulfill promises that a reasonable person in the position of the promisee would be justified in understanding were included.

(Internal quotations and citations omitted) (emphasis added). This decision illustrates the distinction between a claim for breach of contract and breach of the implied covenant of good faith and fair dealing.

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