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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: August 11, 2020

Claim for Breach of Covenant of Good Faith and Fair Dealing Upheld Even Though it Sought the Same Damages as Breach of Contract Claim

On August 6, 2020, Justice Borrok of the New York County Commercial Division issued a decision in Truetox Labs., LLC v. Healthfirst PHSP, Inc., 2020 NY Slip Op. 50900(U), upholding a claim for breach of the covenant of good faith and fair dealing even though it sought the same damages as the plaintiff’s breach of contract claim, explaining:

The Defendants argue that the second cause of action for breach of the covenant of good faith and fair dealing should be dismissed as duplicative of the first cause of action for breach of contract. In its opposition papers, the Plaintiff argues that its claim for breach of the implied covenant is not duplicative because it relies on additional facts beyond its breach of contract claim.

The obligation of good faith and fair dealing implicit in every contract requires 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. In other words, the law implies in every contract a promise of good faith and fair dealing that is breached when a party acts in a manner that — although not expressly forbidden by any contractual provision — would deprive the other party of receiving the benefits under their agreement.

Here, in sum and substance, the Plaintiff alleges that the Defendants’ breached the implied covenant by not only imposing an onerous audit, but also by providing inconsistent reasons for their denial of payment, all as a pretextual to avoid payments to which the Plaintiff was entitled. As described above, when one reason to deny payment did not hold ground, the Defendants allegedly fabricated new reasons to deny payment.

At the pleadings stage, this is sufficient to make out a claim for breach of the implied covenant of good faith and fair dealing. Inasmuch as the Defendants argue that this claim must be dismissed as duplicative because it seeks identical damages, the argument fails. The Plaintiff is entitled to plead this claim in the alternative at this juncture. Accordingly, the branch of the motion to dismiss the breach of the implied covenant cause of action is denied.

(Internal quotations and citations omitted).

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 face 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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Posted in Commercial, Contracts
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