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United Airlines Inc. v. Good Taste, Inc. (7/9/99) sp-5139
Notice: This opinion is subject to correction before publication in
the Pacific Reporter. Readers are requested to bring errors to the attention of the
Clerk of the Appellate Courts, 303 K Street, Anchorage, Alaska 99501, phone (907)
264-0608, fax (907) 264-0878.
THE SUPREME COURT OF THE STATE OF ALASKA
UNITED AIRLINES, INC., )
) Supreme Court Nos. S-7917/7947
Appellant and, )
Cross-Appellee, ) Superior Court No.
) 3AN-91-4157 CI
GOOD TASTE, INC., d/b/a ) O P I N I O N
SAUCY SISTERS CATERING, )
) [No. 5139 - July 9, 1999]
Appellee and )
Appeal from the Superior Court of the State of
Alaska, Third Judicial District, Anchorage,
Brian C. Shortell, Judge.
Appearances: Lawrence S. Robbins and
Monica C. Burke, Mayer, Brown & Platt,
Washington, D.C., and Robert B. Baker, Baker, Brattain & Huguelet,
Anchorage, for Appellant/Cross-Appellee. Jeffrey A. Friedman and
Richard H. Friedman, Friedman, Rubin & White, Anchorage, and
Richard E. Speidel, Northwestern School of Law, Chicago, Illinois,
Before: Matthews, Chief Justice, Compton,
Eastaugh, Fabe, and Bryner, Justices.
MATTHEWS, Chief Justice, dissenting.
United Airlines terminated a catering contract with Saucy
Sisters Catering in Anchorage. Saucy Sisters sued, claiming fraud,
breach of contract, and breach of the implied covenant of good
faith and fair dealing. The trial court dismissed the breach of
contract claim but allowed the other claims to be tried. A jury,
finding no fraud but a breach of the implied covenant, awarded
Saucy Sisters damages. We hold that under Illinois law, which the
parties agree governs, the contract could be terminated at will,
and the implied covenant did not require United to have a
legitimate business reason for termination. We therefore remand
for entry of judgment for United.
I. FACTS AND PROCEEDINGS
The background facts are undisputed; the trial court
summarized them concisely as follows:
In 1987, United contacted Saucy Sisters'
President and invited her to bid on United's in-flight catering
contract. Shortly after United's invitation, Saucy Sisters entered
into discussions/negotiations with United regarding the particulars
of the catering contract and the obligations of the parties. On
March 14, 1988, United awarded Saucy Sisters the catering contract.
As a result of being awarded the contract, and in order to meet
United's operation requirements for contracting caterers, Saucy
Sisters expanded its operation extensively, spending roughly one
million dollars in the process. [Footnote omitted.] A "Catering
Agreement"("Agreement") was signed by the parties and was
performed for approximately one year. On May 18, 1989, United gave
Saucy Sisters a ninety (90) day notice of termination by which it
notified Saucy Sisters that its performance under the Agreement
would terminate as of August 15, 1989. The Agreement was
terminated August 15, 1989.
United's ninety day termination notice
was in accordance with a no-cause termination provision found in
the Catering Agreement. The provision states:
Term: The term of this
Agreement shall commence on May 1,
1988, and shall continue for a period of 3 years(s); provided,
however, either party may terminate this Agreement upon ninety (90)
days' prior written notice.
The facts surrounding this termination
provision are at the center of this dispute. In its version of the
facts, Saucy Sisters alleges that Roger Groth, United's contracting
representative, assured Saucy Sisters that United had never used
the ninety day termination provision in the past and that the
provision existed only to provide United with an "out"in the event
United chose not to fly to Anchorage in the future. Saucy Sisters
claims it would not have undertaken such a massive and expensive
expansion effort at the risk of a no-cause, ninety day termination
notice but for Roger Groth's allegedly fraudulent representations
regarding the restrictions on the termination provision. United
fails to dispute these facts anywhere in the record, but stated
during oral argument that Roger Groth would testify that he never
made such statements regarding the termination provision.
Saucy Sisters sued United, alleging wrongful termination
of the Catering Agreement, fraud, and breach of the covenant of
good faith and fair dealing. The parties filed opposing motions
for summary judgment: United sought judgment on all three claims;
Saucy Sisters moved for judgment on its claim of fraud. Superior
Court Judge Brian C. Shortell ruled on these motions. Relying on
Section 22 of the Agreement, [Fn. 1] Judge Shortell initially found
that Illinois law would apply to all claims. The judge went on to
find: (1) that the facts surrounding the fraud claim were disputed
and should go to the jury; (2) that the ninety-day termination
clause was an unambiguous no-cause termination provision and that
United did not breach the express terms of that clause; and (3)
that a genuine factual dispute existed as to Saucy Sisters'
covenant of good faith and fair dealing claim, which was
permissible under Illinois law, despite existence of a no-cause
termination clause. As to the implied covenant claim, the
judge specifically stated:
Applied to the facts of the instant case,
the covenant of good faith and fair dealing may impose limits on
the manner in which either of the parties could exercise the broad
discretion given them by the no-cause termination clause found in
Section III. . . . [A]lthough the implied covenant of good faith
and fair dealing does not create an enforceable legal duty to be
nice or to behave decently in a general way, it may require both
United and Saucy Sisters to exercise the discretion afforded to
them by the termination clause in a manner consistent with the
reasonable expectation of both parties. This means that even
though United did not breach the express terms of Section III of
the Catering Agreement, it might still be found to have breached
the contract by breaching the implied covenant of good faith and
fair dealing. Whether United acted in such a way as to breach that
covenant is a question of fact to be decided at trial.
United unsuccessfully moved for reconsideration of this
ruling. Later, at the close of evidence at trial, it
unsuccessfully moved for a directed verdict on the covenant claim.
The jury returned a verdict finding that United had not engaged in
fraud but had breached the covenant of good faith and fair dealing.
The jury awarded Saucy Sisters $1,541,000 in damages. After adding
prejudgment interest, costs, and attorney's fees to the verdict,
Judge Shortell entered judgment in Saucy Sisters' favor for
$3,604,843.57. United moved for a judgment notwithstanding the
verdict and, in the alternative, for a new trial. Judge Shortell
denied these motions.
United appeals, claiming that the superior court
misconstrued Illinois law in denying United's motion for summary
judgment on Saucy Sisters' claim for breach of the implied covenant
of good faith and fair dealing. United further contends that the
jury's award of damages also was contrary to Illinois law and that
the court erred in applying Alaska law in awarding attorney's fees
and prejudgment interest. Saucy Sisters cross-appeals, claiming
that, because the Agreement was ambiguous and extrinsic evidence
concerning its meaning differed, the trial court erred in granting
summary judgment against Saucy Sisters on its breach of contract
claim. For simplicity's sake, we consider Saucy Sisters' argument
on cross-appeal before we take up United's direct appeal arguments.
A. Under Illinois Law, the Trial Court Properly Granted
Summary Judgment to United on Saucy Sisters' Breach of Contract
Saucy Sisters asserts that the Agreement's ninety-day
termination clause was ambiguous and allowed for varying
interpretations, one of which might have sustained a breach of
contract claim. Saucy Sisters asserts that this ambiguity created
a genuine issue of material fact as to its claim for breach of
contract, precluding summary judgment and requiring the claim to be
submitted to the jury.
This court reviews trial court orders granting summary
judgment de novo, drawing all inferences in favor of the opposing
party, to determine whether genuine issues of material fact exist
and whether the moving party is entitled to judgment as a matter of
law. [Fn. 2] In the present case, the Agreement's ninety-day
termination clause provided:
Term: The term of this Agreement shall
commence on May 1, 1988, and shall continue for a period of 3
years(s); provided, however, either party may terminate this
Agreement upon ninety (90) days' prior written notice.
The superior court found this provision clear and
unambiguous, ruling that it "has only one reasonable interpreta
tion, which is that the contract period is for three years unless
one of the parties decides to take affirmative action to end it
early." Accordingly, the court determined as a matter of law that
United did not breach the express terms of the contract when it
terminated the catering contract upon ninety days' written notice.
Under Illinois law, the question of whether a contract is
ambiguous is ordinarily one for the court to determine. [Fn. 3] A
disagreement as to contract terms does not in itself create an
ambiguity; the reviewing court must initially seek to ascertain the
meaning of the contract from the provisions of the contract itself.
[Fn. 4] Contract terms are to "be given their plain, ordinary,
popular, and natural meaning."[Fn. 5] And "[w]hen the language of
a contract is unambiguous, the express provision governs and there
is no need for construction or inquiry as to the intention of the
Here, the meaning of the disputed termination clause is
clear and unambiguous on its face when its words are given "their
plain, ordinary, popular, and natural meaning."[Fn. 7] This
provision clearly fixes the Agreement's term at three years, but
allows each party to end it earlier by doing nothing more than
giving the other party ninety days' notice. As the superior court
aptly noted, such termination clauses are hardly uncommon:
Anyone familiar with real world business
practices would instantly recognize this provision as a no-cause
termination provision that is often used to limit an otherwise
definite term. No-cause termination clauses like the one
considered here are widely used, and this one in particular would
not cause anyone to second-guess its clear and unambiguous terms.
Because the Agreement's no-cause termination provision
was clear and unambiguous on its face, the trial court, applying
Illinois law, had no occasion to consider extrinsic evidence
supporting Saucy Sisters' assertion that it actually understood the
provision to have a different meaning. [Fn. 8] And because United
undisputedly abided by the literal terms of the provision --
terminating the Agreement upon ninety days' written notice to Saucy
Sisters -- the trial court properly concluded that no genuine issue
of material fact existed and that United was entitled to summary
judgment on Saucy Sisters' breach of contract claim.
B. Under Illinois Law, the Trial Court Erred in Denying
United's Motion for Summary Judgment on Saucy Sisters' Covenant of
Good Faith and Fair Dealing Claim.
United asserts that Illinois law does not permit an
implied covenant of good faith and fair dealing to supplant the
clear language of a contract allowing termination without cause.
According to United, because the disputed Agreement clearly and
unambiguously allowed either party to terminate upon ninety days'
notice and did not require good cause for termination, the trial
court erred in finding the implied covenant applicable and in
denying United summary judgment on this claim.
Saucy Sisters responds that the ninety-day termination
clause gave both parties broad discretion to terminate their
agreement. In such situations, Saucy Sisters argues, Illinois law
applies the implied covenant of good faith and fair dealing as a
limit on the permissible bounds of contractual discretion. Thus,
in Saucy Sisters' view, the implied covenant applied in this case,
and the trial court properly allowed this claim to go to the jury.
We review orders denying summary judgment de novo and
affirm if we find that a genuine issue of material fact exists or
that the moving party is not entitled to judgment as a matter of
law. [Fn. 9] In deciding if a genuine issue of material fact
exists, we draw all reasonable inferences in favor of the non-
moving party. [Fn. 10] Here, the primary dispute concerning the
trial court's summary judgment ruling centers on the correct
interpretation of Illinois law. This is a purely legal question
that we decide independently, based on our review and evaluation of
applicable Illinois precedent.
The covenant of good faith and fair dealing is well
accepted in Illinois, and its broad contours are firmly
established: the covenant is implied in every contract. [Fn. 11]
The implied covenant guides the construction of contracts without
creating independent duties for the contracting parties. [Fn. 12]
Its implied terms cannot modify the express terms of the contract.
The covenant operates to define the intent of contracting
parties when a contract is ambiguous or when it vests the parties
with broad discretion as to its performance. [Fn. 14] In cases
involving unambiguous contracts that vest broad discretion in one
of the parties, the covenant operates by constraining that party to
exercise its discretion reasonably and fairly: "not arbitrarily,
capriciously, or in a manner inconsistent with the reasonable
expectation of the parties."[Fn. 15]
Of course, a contractual no-cause termination clause may
accurately be characterized as vesting the parties with broad
discretion as to the termination of their contract; for this
reason, it might be plausible to argue in the case of a no-cause
termination clause that the implied covenant requires the parties
to terminate reasonably -- that is, for some legitimate reason.
This is essentially the view that Saucy Sisters advocated at trial.
And in denying United's pretrial motion for summary judgment on the
implied covenant claim, the court adopted Saucy Sisters' theory:
[A]lthough the implied covenant of good faith
and fair dealing does not create an enforceable legal duty to be
nice or to behave decently in a general way, it may require both
United and Saucy Sisters to exercise the discretion afforded to
them by the termination clause in a manner consistent with the
reasonable expectation of both parties.
Saucy Sisters thereafter relied on this theory at trial.
It expressly argued to the jury that even if United made no
misrepresentations concerning the ninety-day no-cause termination
clause, the implied covenant prevented it from violating Saucy
Sisters' reasonable expectation that the agreement would be
terminated only for a legitimate business reason:
[Y]ou can't terminate for an arbitrary or
capricious reason or to prevent the other party from obtaining
reasonably anticipated benefits. You can't violate those
reasonable expectations just because you find a better deal. Just
because it's now in your financial interest to walk away from the
agreement that you made.
Saucy Sisters invoked the same theme in opposing United's
motions for judgment notwithstanding the verdict and a new trial on
the implied covenant claim:
[T]he United catering contract gave both
parties discretion. There was, however, no express provision
saying either party could exercise that discretion unreasonably.
Accordingly, the implied covenant of good faith and fair dealing
was applicable, and neither party was permitted to terminate the
contract for arbitrary and capricious reasons.
Applying this view of the law to the facts here, Saucy
Sisters insisted that the jury's verdict on the implied covenant
claim should be upheld because "reasonable jurors could have found
that [Saucy Sisters] performed the contract properly, that any
problems in performance were caused by United, and that United
terminated the contract without any legitimate business reason
But as far as we can determine, Illinois courts have
never held the implied covenant to require good cause or a
legitimate business reason for terminating a contract with an
express no-cause termination provision. To the contrary, Illinois
courts seem to have recognized consistently that "terminable-at-
will contracts are generally held to permit termination for any
reason, good cause or not, or for no cause at all."[Fn. 16] The
courts have likewise recognized that applying the implied covenant
to limit the terms of a no-cause termination provision would be
"incongruous"with this general rule [Fn. 17] and might "eviscerate
the at will doctrine altogether."[Fn. 18]
Several courts have reconciled this tension between no-
cause termination clauses and the implied good faith covenant by
explaining that parties to contracts with such clauses must
reasonably expect the possibility of termination for any reason or
no reason at all. [Fn. 19] But in any event, the prevailing rule
in Illinois, however rationalized, unmistakably favors the
provisions of an express no-cause contract over potentially
conflicting demands of the implied covenant: "[T]he duty of good
faith and fair dealing does not override the clear right to
terminate at will, since no obligation can be implied which would
be inconsistent with and destructive of the unfettered right to
terminate at will."[Fn. 20]
To be sure, some Illinois precedent hints that the
implied covenant might apply in particular at-will termination
situations. In Hentze v. Unverfehrt, the Illinois Court of
Appeals, finding bad faith conduct that amounted to "opportunistic
advantage-taking,"held the implied covenant applicable when a
company terminated an at-will dealership contract and engaged in a
variety of other bad-faith tactics specifically aimed at driving
one of two competing dealers out of business. [Fn. 21]
Saucy Sisters relies heavily on Hentze. It asserts that,
as interpreted in Hentze, "[T]he covenant of good faith and fair
dealing requires, at a minimum, a proper motive to exercise the
power [of termination without cause]." Because, in Saucy Sisters'
view, the evidence at trial supported the conclusion that United
ended its catering contract to seek a more lucrative arrangement
with a competing caterer (Marriott), Saucy Sisters asserts that
United's action, under Hentze's approach, amounted to impermissible
advantage-taking: "[A] party engages in opportunistic advantage-
taking in Illinois when exercising the reserved power to terminate
unreasonably and with an improper motive[.]"
But Saucy Sisters reads Hentze too broadly. The Hentze
court took pains to acknowledge that, under the settled Illinois
rule, the defendant company, DECO, "had the right to terminate the
[dealership] contract for no reason at all."[Fn. 22] So too, the
Hentze court emphasized that, "[h]ad DECO merely . . . sent Hentze
a termination letter . . . , we would be hard-pressed to find any
absence of good faith."[Fn. 23] The court thus made clear that
its invocation of the implied covenant rested not on DECO's
termination of the contract without, as Saucy Sisters puts it, "a
proper motive to exercise the power,"but rather on DECO's
deliberate efforts to drive Hentze out of business by using other
"tactics . . . [that] went far beyond the intendments of any at-
will clause."[Fn. 24]
In short, the opportunistic advantage-taking described in
Hentze was considerably more than an absence of the "legitimate
business reason"that Saucy Sisters insists is a necessary
ingredient for a valid at-will termination under Illinois law; it
was instead a subjectively improper purpose -- the malicious goal
of driving Hentze out of business -- combined with a variety of
objectively unfair tactics designed to achieve that goal. [Fn. 25]
Stripped of its implied covenant trappings, Saucy
Sisters' broad reading of Hentze -- its contention that United
could not act arbitrarily or capriciously, but instead was required
to have a legitimate business reason for termination -- amounts to
a claim that United could terminate the catering contract only for
cause. But, as we have seen, this claim cannot be countenanced
under Illinois law. The settled rule in Illinois remains that a
contract expressly terminable at will may be ended for any reason
or no reason at all. [Fn. 26] Hentze does indicate that Illinois
law might provide a measure of protection against a termination
specifically motivated by bad faith and accompanied by unfair
tactics. [Fn. 27] But Saucy Sisters neither alleged nor proved
"opportunistic advantage-taking"[Fn. 28] of this kind. To the
contrary, Saucy Sisters' complaint alleged no ulterior motive or
subjective bad faith on United's part for terminating the contract,
and its evidence at trial suggested only that United might have
ended the contract in order to strike a better bargain with
Marriott, not -- as United claimed -- because of Saucy Sisters'
United's alleged desire for a more advantageous
arrangement with Marriott certainly might not amount to "good
cause"for terminating Saucy Sisters' contract, and from Saucy
Sisters' perspective termination for this reason might even amount
to arbitrary or capricious conduct, carried out for no legitimate
business reason. But under Illinois law, the goal of achieving
higher profits from a lower-bidding supplier is not itself
inherently impermissible and does not amount to opportunistic
advantage-taking; neither does reliance on an express at-will
termination clause to attain this goal evince subjective bad faith
or amount to an objectively unfair tactic.
Citing Dayan v. McDonald's Corporation, [Fn. 29] the
dissent concludes that Illinois would invoke the implied covenant
to preclude United from terminating its contract "in a manner
inconsistent with the reasonable expectations of the parties."[Fn.
30] But Dayan does not support this conclusion. [Fn. 31] Instead,
it narrowly limits its broad view of the implied covenant to
franchise contracts, noting that this view reflects "judicial
concern over longstanding abuses in franchise relationships,
particularly contract provisions giving the franchisor broad
unilateral powers of termination at will."[Fn. 32] And even in
franchise cases, Dayan seemingly would apply its broad
interpretation of the good faith requirement only when "the
exercise of discretion [is] vested in one of the parties to a
In fact, Dayan expressly recognizes that Illinois law
applies a narrower interpretation of the implied covenant outside
the area of franchise contracts. Dayan describes Illinois law as
holding that the covenant protects at-will employees only when a
termination is "inspired by an improper motive, such as a desire to
deprive the employee of health or pension benefits[.]"[Fn. 34]
This is essentially the rule of law that we conclude Illinois would
apply to the present case. As a matter of Illinois law, the
appropriateness of this narrow view of the implied covenant --
rather than Dayan's broader franchise rule -- seems apparent given
that the contract at issue here does not involve a franchise.
Moreover, the contract's termination clause applied not just to
United but to Saucy Sisters as well, giving both parties
contractual discretion to terminate at will upon ninety days'
That Illinois law would narrowly construe the implied
covenant's effect on this contract seems unmistakable in light of
Jespersen v. Minnesota Mining and Manufacturing Co. [Fn. 35] The
Illinois Court of Appeals there emphatically rejected a claim that
the implied covenant barred termination of an at-will
distributorship contract without good cause:
[T]erminable-at-will contracts are generally
held to permit termination for any reason, good cause or not, or
for no cause at all. Mindful that every contract carries the duty
of good faith and fair dealing, as a matter of law, absent express
disavowal by the parties, the duty of good faith and fair dealing
does not override the clear right to terminate at will, since no
obligation can be implied which would be inconsistent with and
destructive of the unfettered right to terminate at will.[ [Fn. 36]]
The Illinois Supreme Court recently affirmed the decision of the
court of appeals, observing, "Both parties here enjoyed the right
to terminate the agreement at will, which means they could
terminate the agreement for any reason or no reason without
committing a breach of contract."[Fn. 37]
In sum, we conclude that the trial court was mistaken in
ruling that the implied covenant of good faith and fair dealing
might "require both United and Saucy Sisters to exercise the
discretion afforded to them by the termination clause in a manner
consistent with the reasonable expectation of both parties." Under
Illinois law, Saucy Sisters could not reasonably expect something
other than what it expressly bargained for: a contract expressly
terminable for any cause or no cause upon ninety days' notice.
Because we conclude that the court erred in submitting Saucy
Sisters' implied covenant claim to the jury, we reverse the
judgment against United. [Fn. 38] Our disposition makes it
unnecessary to consider any other arguments raised on appeal or
We AFFIRM the trial court's order granting United summary
judgment on Saucy Sisters' breach of contract claim, but REVERSE
its order denying United summary judgment on the implied covenant
claim. Accordingly, we VACATE the judgment and REMAND for entry of
judgment in favor of United.
MATTHEWS, Chief Justice, dissenting.
While I agree with the majority that Illinois law "favors
the provisions of an express no-cause contract over potentially
conflicting demands of the implied covenant [of good faith and fair
dealing],"[Fn. 1] that type of contract is not at issue in this
case. If this contract creates a right to terminate for no cause,
the right exists because of a legal inference, not because that
right is explicitly stated. I believe that a different legal
inference should be drawn: that either party could terminate the
contract for no cause if the reason for termination was consistent
with the parties' reasonable expectations. [Fn. 2]
This reading is consistent with the implied covenant of
good faith and fair dealing as expressed in section 205 of the
Restatement (Second) of Contracts: "Every contract imposes upon
each party a duty of good faith and fair dealing in its performance
and enforcement." The Supreme Court of Illinois has adopted a
similar rule: "Every contract implies good faith and fair dealing
between the parties . . . ."[Fn. 3] A review of Martindell and
the Illinois Appellate Court cases cited in the majority opinion
gives me no reason to think that Illinois law respecting the
covenant of good faith and fair dealing is inconsistent with the
Restatement's discussion of the covenant.
According to the Restatement, good faith enforcement
"emphasizes faithfulness to an agreed common purpose and consis-
tency with the justified expectations of the other party."[Fn. 4]
One type of violation recognized by the Restatement is the "abuse
of a power . . . to terminate the contract."[Fn. 5] As authority
for this comment the Restatement draws on various types of cases,
including those involving franchise terminations. [Fn. 6]
The covenant of good faith and fair dealing was discussed
in Dayan v. McDonald's Corp., [Fn. 7] a franchise termination case
involving Illinois law. The court reviewed its understanding of
Illinois law regarding the covenant in terms materially
indistinguishable from the Restatement:
As the above authorities demonstrate, the
doctrine of good faith performance imposes a limitation on the
exercise of discretion vested in one of the parties to a contract.
In describing the nature of that limitation the courts of this
state have held that a party vested with contractual discretion
must exercise that discretion reasonably and with proper motive,
and may not do so arbitrarily, capriciously, or in a manner
inconsistent with the reasonable expectations of the parties.[ [Fn.
Dayan confirms my view that the termination clause in the
present case -- since it does not state that the contract may be
canceled without cause -- should be construed to incorporate the
covenant. Quoting with approval from a Utah case which held that
the implied covenant of good faith limited the power of the
franchisor to terminate a franchise agreement without good cause
where, by its terms, the franchise was terminable upon sixty days
written notice to the franchisee, the court in Dayan stated:
when parties enter into a contract of this
character, and there is no express provision that it may be
cancelled without cause, it seems fair and reasonable to assume
that both parties entered into the arrangement in good faith,
intending that if the service is performed in a satisfactory manner
it will not be cancelled arbitrarily.[ [Fn. 9]]
The parties in this case could have agreed on a
termination provision which expressly stated that cancellation
could be on any basis whatsoever, reasonable or unreasonable, just
as they could have adopted a termination provision which required
cause. They did neither. Instead, they left the provision open to
differing interpretations. It is therefore logical to infer that
the parties intended to operate in an atmosphere of good faith and
fair dealing, and that the covenant applies.
The majority opinion dismisses the significance of Dayan
by reading into it an artificial limitation. [Fn. 10] But Dayan
gives no indication that its holding is limited to cases involving
franchises, and there is no logic to such a rule. Franchise cases
are not a special subcategory of contract law, but merely a type of
contract case that reflects an imbalance of power between
contracting parties. The Restatement of Contracts uses franchise
cases as appropriate examples to illustrate general rules of
contract law. [Fn. 11] Similarly, the "unilateral power"of the
franchisor is not a significant distinguishing element. The
problem is that the franchisee -- the economically weaker party --
must spend large amounts to begin business and then is at risk of
losing the investment based on the decision of the franchisor --
the economically stronger party. The problem is not solved by
giving the weaker party a similar power of termination. In other
words, to use the Dayan parties as an example, Dayan's
vulnerability to termination of his franchise by McDonald's is
hardly changed by giving him the power to terminate the franchise.
This is the situation in the present case. [Fn. 12]
While it would be sufficient to end the analysis here,
the following observations concerning the covenant's application to
the facts of this case seem worth making.
Determining the reasonable expectations of contracting
parties is not necessarily an easy task. Contract language must be
considered along with the parties' discussions and the purposes of
the contract. [Fn. 13] And it may be useful to ask what the
parties would have done had they considered the precise issue when
the contract was formed. The Supreme Court of Delaware addressed
this recently in DuPont v. Pressman: [Fn. 14]
The Covenant is best understood as a way
of "implying terms in the agreement." It is a way of "honoring the
reasonable expectations created by the autonomous expressions of
the contracting parties."
One method of analyzing the Covenant is
to ask what the parties likely would have done if they had
considered the issue involved. "[I]s it clear from what was
expressly agreed upon that the parties who negotiated the express
terms of the contract would have agreed to proscribe the act later
complained of . . . had they thought to negotiate with respect to
that matter?" [T]he Covenant "is a stab at approximating the terms
the parties would have negotiated had they foreseen the
circumstances that have given rise to their dispute."
Both parties knew that Saucy Sisters must undergo
expensive renovations in order to serve United. Saucy Sisters
claims a cost of $600,000. We might ask what the parties would
have done had Saucy Sisters asked United whether United could
terminate the contract either soon after start up or at any time
during the three-year term solely because a competitor offered
better terms. I think the answer would have been that United would
forego that power. Had United asserted the right to terminate to
get better terms, there likely would have been no contract. Saucy
Sisters would probably not have spent what for it was a small
fortune had United overtly reserved the right to make a better deal
during the three-year period.
Most cases invoking the obligation to
perform in good faith can be synthesized using the following
principle: a party performs in bad faith by using discretion in
performance for reasons outside the justified expectations of the
parties arising from their agreement. Distinguishing allowed from
disallowed reasons -- opportunities forgone from opportunities
preserved on entering a contract -- will often be easy. But the
distinction will be difficult in some cases. Specific disallowed
reasons may be inferred from the express contract terms in light of
the ordinary course of business and customary practice, in
accordance with the usual principles of contract interpretation.
It is not hard to infer from a fixed contract price, for example,
that the parties have forgone opportunities to take advantage of
market price fluctuations.[ [Fn. 15]]
Thus, in my view, early termination by United motivated
by a desire to contract with a competitor on better terms would
have contradicted the justified expectations of Saucy Sisters.
In light of the foregoing, I believe that summary
judgment in favor of United was therefore correctly denied.
Whether particular conduct qualifies as good faith is a question of
law for the court. [Fn. 16] But whether United in fact acted with
an impermissible motive was properly a question for the jury. [Fn.
17] No question has been raised as to whether the jury was
correctly instructed. I would therefore affirm the judgment on the
question of liability. [Fn. 18]
Section 22 of the Agreement provided that "any dispute arising
under or in connection with this Agreement, including any action in
tort, shall be governed by the laws of the State of Illinois."
See West v. City of St. Paul, 936 P.2d 136, 138 (Alaska 1997).
See Newcastle Properties, Inc. v. Shalowitz, 582 N.E.2d 1165,
1168 (Ill. App. 1991).
See id. at 1169.
Id. (quoting Village of Glenview v. Northfield Woods Water &
Util. Co., 576 N.E.2d 238 (Ill. App. 1991)).
P.A. Bergner & Co. v. Lloyds Jewelers, Inc., 492 N.E.2d 1288,
1291 (Ill. 1986).
Newcastle, 582 N.E.2d at 1169.
See Western Pioneer v. Harbor Enter., 818 P.2d 654, 656 n.3
See Smith v. State, 921 P.2d 632, 634 (Alaska 1996).
See Martindell v. Lake Shore Nat'l Bank, 154 N.E.2d 683, 690
See Echo, Inc. v. Whitson Co., 121 F.3d 1099, 1105-06 (7th
Cir. 1997); Anderson v. Burton Assocs., Ltd., 578 N.E.2d 199, 203
(Ill. App. 1991); see also Korogluyan v. Chicago Title & Trust Co.,
572 N.E.2d 1154, 1161 (Ill. App. 1991).
See Northern Trust Co. v. VIII South Mich. Assocs., 657 N.E.2d
1095, 1104 (Ill. App. 1995).
Jespersen v. Minnesota Mining & Mfg. Co., 681 N.E.2d 67, 71
(Ill. App. 1997) (citing Alderman Drugs, Inc. v. Metropolitan Life
Ins. Co., 515 N.E.2d 689 (Ill. 1987)) (emphasis added), aff'd, 700
N.E.2d 1014 (Ill. 1998). See also Digital Equip. Corp. v. Uniq
Digital Tech., Inc., 73 F.3d 756, 759-60 (7th Cir. 1996) (holding
that a termination clause allowing for termination of a
distributorship contract at the end of any year could not be
modified by the duty of good faith even though the manufacturer
relied on the contract and invested $1 million in facilitating the
needs of the contract); Gordon v. Matthew Bender & Co., 562
F. Supp. 1286, 1290 (N.D. Ill. 1983) (holding that if the implied
obligation to deal in good faith were allowed to create a cause of
action in an employment-at-will situation, it would "eviscerate the
at will doctrine altogether"); Harrison v. Sears, Roebuck & Co.,
546 N.E.2d 248, 256 (Ill. App. 1989) (holding that putting implied
restrictions on an employment-at-will contract would be
inconsistent with the express terms of the contract which allowed
for termination at any time).
Harrison, 546 N.E.2d at 256.
Gordon, 562 F. Supp. at 1290.
See Beraha v. Baxter Health Care Corp., 956 F.2d 1436, 1444-45
(7th Cir. 1992); Nichols Motorcycle Supply Inc. v. Dunlop Tire
Corp., 913 F. Supp. 1088, 1143 (N.D. Ill. 1995) (vacated in part
pursuant to settlement, September 18, 1995).
Jespersen [Fn. 39], 681 N.E.2d at 71.
604 N.E.2d 536, 539-40 (Ill. App. 1992).
Id. at 540.
So described in Hentze, the practices prohibited by the
implied covenant of good faith and fair dealing resemble the kind
of opportunistic advantage-taking this court has recognized as
impermissible under Alaska's law governing the implied covenant.
See, e.g., Mitford v. de Lasala, 666 P.2d 1000, 1007 (Alaska 1983).
And, like Illinois courts, we have recognized that this prohibition
against subjectively improper opportunism does not convert an at-
will contract into a contract requiring good cause for termination.
See Ramsey v. City of Sand Point, 936 P.2d 126, 133 (Alaska 1997).
See Jespersen, 681 N.E.2d at 71.
See Hentze, 604 N.E.2d at 540.
Id. at 539.
466 N.E.2d 958 (Ill. App. 1984).
Dissent at 2 (quoting Dayan, 466 N.E.2d at 972).
Seegmiller v. Western Men, Inc., 437 P.2d 892 (Utah 1968),
also mentioned by the dissent, fails to support the dissent's
conclusion because, like Dayan, it involves a franchise contract.
Moreover, because the franchise at issue in Seegmiller was
terminated for good cause, Seegmiller's interpretation of the good
faith covenant is dictum.
Dayan, 466 N.E.2d at 973.
Id. at 972 (emphasis added).
681 N.E.2d 67 (Ill. App. 1997), aff'd, 700 N.E.2d 1014 (Ill.
Id. at 71 (citations omitted).
700 N.E.2d at 1017.
Saucy Sisters asserts that United waived its right to appeal
the implied covenant issue by failing to object to, or propose
alternative versions of, the jury instruction concerning the
covenant. But this instruction merely paraphrased Saucy Sisters'
interpretation of Illinois law governing the implied covenant. The
trial court expressly adopted this interpretation of Illinois law
in denying United's pretrial motion for summary judgment on the
implied covenant claim and tacitly adhered to it in summarily
denying United's mid-trial motion for directed verdict on the
claim; later, the court again tacitly adhered to this
interpretation in denying United's post-trial motions for JNOV and
a new trial. Given these circumstances, United did not waive its
right to appeal by failing to object separately to the implied
covenant instruction. See Landers v. Municipality of Anchorage,
915 P.2d 614, 617 (Alaska 1996); cf. Brown v. Estate of Jonz, 591
P.2d 532, 534 (Alaska 1979).
In October 1997 the Illinois Supreme Court allowed appeal of
Jespersen; however, no decision has been issued. See Jespersen v.
Minnesota Min. and Mfg. Co., 686 N.E.2d 1162 (Ill. Oct 01, 1997)
(Table, No. 83728).
Slip Op. at 12-13.
See 3A Arthur Corbin, Corbin on Contracts sec. 654A, at 114
Martindell v. Lake Shore Nat'l Bank, 154 N.E.2d 683, 690 (Ill.
Restatement (Second) of Contracts sec. 205 cmt. a (1981).
Id. at cmt. e.
See id., Reporter's Note to sec. 205, cmt. e.
466 N.E.2d 958 (Ill. App. 1984).
Id. at 972 (citations omitted).
Id. (quoting Seegmiller v. Western Men, Inc., 437 P.2d 892
Slip Op. at 16-17.
See Restatement (Second) of Contracts sec. 205, Reporter's
to cmt. e (1981) (citing various franchise and non-franchise cases
to illustrate concept of good faith in enforcement).
The court also dismisses the rule as described by Seegmiller
as dictum. Slip Op. at 16 n.31. While it is true that the holding
in Seegmiller rested on other grounds, the language does reflect
the general rule accepted by Illinois courts.
See Steven J. Burton & Eric G. Andersen, Contractual Good
Faith: Formation, Performance, Breach, Enforcement sec. 2.3 (1995).
679 A.2d 436, 443 (Del. 1996) (citations omitted) (alteration
Burton & Anderson, supra, sec. 2.3.3 at 57.
3A Corbin on Contracts sec. 655B, at 116-17 (1999 Supp.).
United also raises a question as to whether the damage award
is consistent with Illinois law. Given my dissenting position, I
have not addressed this question.