The Latest on the Duty of Good Faith Between Contracting Parties

Written by Irvin Schein and originally published at www.irvinschein.com.

The recent case of Ashbury Cleaners v. Crisolago Holdings may make the murky world of the law concerning the duty of good faith between contracting parties even murkier.

In this case, the Judge described the action as a claim “for damages for breach of contract and bad faith.” The Judge went on to say that “in order to be successful, the plaintiff must prove on the balance of probabilities that the defendant was acting in bad faith in deceiving the plaintiff of its stated intention.”

The law is very clear: there is no independent duty of good faith upon which one can sue for breach. Parties are obliged to act in good faith towards each other in the implementation of a contract but one cannot sue for damages for bad faith. There is a distinction, and this case is very close to the line.

The plaintiff worked part-time at a dry cleaning business owned and operated by the defendant. The plaintiff offered to buy the dry cleaning business from the defendant and the parties agreed to a purchase price of $250,000. Since the defendant owned the premises in which the business was located, they also agreed on a lease for the use of the premises for five years at $4,000 per month in rent. The lease included a right of first refusal for the plaintiff to lease the premises again after the end of the five-year term, exercisable if the defendant decides at that time to continue to lease the premises out. It was expressed this way because the defendant wanted the freedom to take the premises back after the five-year term to operate it himself.

At the end of the five-year term, the parties discussed a renewal. While the evidence of the parties differed with respect to their discussions, it appears that at the very least the defendant indicated that if the plaintiff wanted to lease the premises for a further term, the rent would be $4,500 per month. The plaintiff indicated that she could not afford to pay that much and asked the defendant whether or not he would be interested in buying the business back. The defendant expressed such an interest and offered the plaintiff $35,000 on a take it or leave it basis. She took it.

Several days later, another individual passed by the store and bumped into the defendant. This person knew the defendant because her employer had been a tenant at the premises several years before. The defendant asked this individual if she wanted to buy the dry cleaning business. She expressed interest and ultimately they agreed on a sale of the business for $225,000. A lease with the purchaser was entered into for a five-year term at $4,500 per month to start, increasing to almost $5,500 in the final year of the lease.

The plaintiff then sued, insisting that the defendant had deceived her into giving up her right of first refusal. The plaintiff advanced the theory that the defendant had the new buyer (and new tenant) in mind all along and persuaded the plaintiff to walk away from the business and the lease for very little compensation so that the business could be flipped at a significant profit.

The trial Judge found in favour of the defendant. The Judge was satisfied that there was no evidence that the defendant had intended anything other than to take the premises back and operate the business himself until, by coincidence, he bumped into a person who turned out to be a new purchaser and new tenant. There was no evidence of premeditation.

The problem I have is the trial Judge’s suggestion that the defendant would have been liable for damages if the plaintiff had been able to prove that the defendant had “breached the duty of good faith it owed to the plaintiff as its bargaining partner and deceived [the plaintiff] into signing away her rights under the lease.” In my view, even if the defendant had deprived the plaintiff of her right of first refusal by misleading her about his intentions, the fact is that the new lease entered into with the new purchaser provided for rental amounts which the plaintiff had clearly indicated that she simply could not afford. In other words, even had the plaintiff been told that the defendant had an opportunity to lease the space to someone else at $4,500 per month to start, increasing annually thereafter, the plaintiff would never have been able to match that offer. For that reason alone, in my view, there is some considerable doubt whether or not the plaintiff was deprived of her rights. In those circumstances, there is no question that the plaintiff would have been mistreated. However, shabby treatment does not amount to a cause of action in and of itself.