In litigating breach of contract claims, litigants may focus upon a party’s motivation in terminating or allegedly breaching a contract. Plaintiff ’s counsel, hoping to paint the defendant as a bad actor, may want to introduce evidence showing the contract was breached or terminated solely for vindictive or other nefarious reasons. Defense counsel may want to reduce the dispute to dollars and cents and exclude evidence regarding why a party ultimately decided to pull the plug on the relationship. Based on these considerations, where does the law come down on introducing evidence relating to motive in terminating or breaching a contract?
“Contract law is amoral and, therefore, appropriate in a business setting in which efficiency is valued.” TruGreen Companies, L.L.C. v. Mower Bros, Inc., 2008 UT 81, 19, 199 P.3d 929, 933. Utah policy does not favor punishing a breaching party, even if the breach was intentional or unjustified. Id. “A contract party is permitted, or even encouraged, when economically efficient, to ‘buy out’ a contract by paying the plaintiff ’s actual damages.” Marcus, Stowell & Beve Gov’t Sec., Inc. v. Jefferson Inv. Corp., 797 F.2d 227, 232 (5th Cir. 1986). As explained by the Seventh Circuit:
In the law of contracts, while procuring a breach by the other party to your contract would excuse the breach, merely having a bad motive for terminating a contract would not. If a party has a legal right to terminate the contract (the clearest example is where the contract is terminable at will by either party), its motive for exercising that right is irrelevant. The party can seize on a ground for termination given it by the contract to terminate the contract for an unrelated reason. Tuf Racing Products, Inc. v. Am. Suzuki Motor Corp., 223 F.3d 585, 589 (7th Cir. 2000) (internal citations omitted).
In light of the amoral nature of contract law and the policy in favor of efficient breaches and against punishing parties for intentional or unjustified breaches, when, if ever, will the motivations of the breaching party, or pretext in its dealings with the non-breaching party be relevant or admissible? Although the answer depends in large part on the language of the contract and the factual circumstances at hand, it appears that ultimately, such evidence is relevant to the narrow question of whether there was a breach of the covenant of good faith and fair dealing and, in particular, whether considerable or unrestrained discretion was exercised for an impermissible purpose. This article addresses claims arising outside of the employment and insurance contexts, where considerations of subjective intent and pretext are core principles of whether an employer engaged in unlawful discriminatory or retaliatory conduct or whether an insurer refused payment in “bad faith” under applicable statutory provisions.
“Under the covenant of good faith and fair dealing, the parties constructively promised that they would not intentionally do anything to impair the other party’s right to receive the fruits of the contract.” Cook v. Zions First Nat. Bank, 919 P.2d 56, 60 (Utah Ct. App. 1996). “[T]he test of good faith is one of reasonableness.” Olympus Hills Shopping Ctr., Ltd. V. Smith’s Food & Drug Centers, Inc., 889 P.2d 445, 457 (Utah Ct. App. 1994). “Notwithstanding the name given the covenant, breach of the covenant of good faith and fair dealing is an objective question.” Canyon Country Store v. Bracey, 781 P.2d 414, 422 (Utah 1989). “As is true of virtually all other contractual breaches, the intention of the breaching party is immaterial.” Id.
Despite the objective standard and Utah Supreme Court’s statement that the breaching party’s intention is immaterial, at least one Utah appellate court has considered subjective intent to be relevant with respect to a claim for breach of the covenant of good faith and fair dealing. See Markham v. Bradley, 2007 UT App. 379, 34, 173 P.3d 865. In Markham, property sellers attempted to reject a contract because the buyers’ disclosures were late and deemed objectionable. Id. at 9. The contract at issue provided the sellers “with discretion to reject the contract” if the buyers’ disclosures were “not acceptable.” Id. at 22. Essentially, the contract allowed “discretion but d[id] not provide any express standard for exercising that discretion.” Id. at 21. According to the court, although an objective standard applied, evidence of subjective intent was relevant to the determination of whether the allegedly breaching party exercised its discretion for a purpose “reasonably within the contemplation of the parties,” or instead impermissibly used its discretion “for a reason outside the contemplated range” or “beyond the risks assumed by the party claiming the breach.” Id. (quoting Olympus Hills Shopping Ctr., Ltd., 889 P.2d at 451). Based on evidence before the court, the trial court concluded that the sellers had breached the covenant of good faith and fair dealing by “using [a] missed deadline and the state of the [buyers’] financial information as a pretext because they had previously changed their minds about selling the Property.” Id. As such, the sellers breached the contract by exercising their right to terminate the agreement for an improper purpose not contemplated by the parties.
Where, however, the contract does not otherwise provide unlimited discretion and termination is based upon an actual breach of the contract, a party’s pretextual reason for termination is irrelevant. In Tuf Racing Products, Inc. v. Am. Suzuki Motor Corp., 223 F.3d 585, 589 (7th Cir. 2000), the court rejected the contention that an obligation to deal in good faith entitled a party “to complain about a pretextual termination even if there is good cause for the termination.” The court noted that “the fact that there is a duty of good faith read into every contract does not justify judicial inquiry into motive.” Id. “A party can stand on his contract rights; what he cannot do is resort to opportunistic or otherwise improper behavior in an effort to worm his way out of his contractual obligations.” Id. According to the court, “[a]s a general proposition of law, it is widely held that where good cause exists, motive is immaterial to a determination of good faith performance.” Id. (quoting Dayan v. McDonald’s Corp., 125 Ill. App. 3d 972, 466 N.E.2d 958, 974 (1984)).
Contrasting Markham with Tuf Racing Products, Inc. suggests that, although intent may be analyzed to determine whether a contracting party exercised its discretion in a way that deprives another of its contractual rights (as in Markham), if actual grounds exist to terminate a contract (as in Tuf Racing Products, Inc.), it is not unlawful to be pretextual or less than forthcoming about the real reason for termination. In other words, pretext matters in determining if a contract was ultimately breached by an improper use of discretion, but is generally irrelevant if the contract was terminated because it was, in fact, breached. This conclusion is consistent with the limitations set forth in Oakwood Village LLC v. Albertsons, Inc., 2004 UT 101, 45, 104 P.3d 1226, where the court noted that the covenant of good faith and fair dealing “cannot create rights and duties inconsistent with express contractual terms;” “cannot compel a contractual party to exercise a contractual right ‘to its own detriment for the purpose of benefitting another party to the contract;’” and cannot be used “to achieve an outcome in harmony with the court’s sense of justice but inconsistent with the express terms of the applicable contract.” Id. (quoting Olympus Hills Shopping Ctr., 889 P.2d at 457 n.13).
In short, although the standard remains objective reasonableness, if the contract affords one party considerable or unrestrained discretion, the court may inquire into motive and intent to determine whether the discretion was exercised for an impermissible purpose. On the other hand, “[w]here ‘the express contract term defines and limits discretionary performance, the implied covenant has little, if any, utility,’” see Smith v. Grand Canyon Expeditions Co., 2003 UT 57, 22, 84 P.3d 1154, and any inquiry into motive for termination is significantly restricted.