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Current Developments in the Commercial Divisions of the
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Posted: December 2, 2017

Implied Covenant of Good Faith Cannot be Used to Create New Contract Rights

On November 16, 2017, Justice Sherwood of the New York County Commercial Division issued a decision in 3839 Holdings LLC v. Theodore Farnsworth, Highland Holdings Group, Inc., 2017 NY Slip Op. 32433(U), dismissing a claim for breach of the covenant of good faith and fair dealing because that covenant cannot be used to create new contract rights, explaining:

A claim that defendants breached the implied covenant of good faith and fair dealing may be properly dismissed as duplicative of the breach of contract claim when both claims arise from the same facts. As the Farnsworth Defendants correctly note the first and second causes of action are virtually identical. For this reason, plaintiffs second cause of action must be dismissed.

Even if this claim were not duplicative of plaintiff’s first cause of action, it would still fail. The implied covenant of good faith and fair dealing embraces a pledge that neither party shall do anything that wil1 have the effect of destroying or injuring the right of the other party to receive the fruits of the contract. The implied covenant is breached when a party acts in a manner that, although not expressly forbidden by the contractual provision, would deprive the other party of the benefits of the agreement. However, the obligations imposed by an implied covenant are limited to obligations in aid and furtherance of the explicit terms of the parties’ agreement. The implied covenant cannot be construed so broadly as to nullify the express terms of a contract, or to create independent contractual rights. To establish a breach of the implied covenant, the plaintiff must allege facts that tend to show that the defendants sought to prevent performance of the contract or to withhold its benefits from the plaintiff. Plaintiffs second cause of action fails to identify any existing contractual obligations that were obstructed, but rather seeks to advance independent contractual rights not already provided for in the agreement. This claim shall be dismissed.

(Internal quotations and citations omitted) (emphasis added).

The implied covenant of good faith and fair dealing is an important, if often misunderstood, part of New York law. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client faces a situation where a party is being deprived of the benefits of its contract, even if you cannot point to a specific contract term that is being breached.

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